IRS's 2011 data provides clues 

What are the chances of being audited? Of the 140,837,499 total individual income tax returns with a filing requirement, 1,564,690 were audited. This works out to roughly 1.1%, the same as the rate for the previous year. Of the total number of individual income tax returns audited in 2011, 483,574 (30.9%) were for returns with an earned income tax credit (EITC) claim, a slight increase from the 473,999 (30%) of all audited returns for 2010.

Sacramento accountant and auburn accountant: islip + company, tax return preparation experts with offices in sacramento and auburn california, watching out for our clients taxes and your taxes both IRS tax and FTB tax.

Only 25% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That's higher than the 21.7% figure for the previous year. The 75% balance of the audits were correspondence audits, down from 77.1% for the previous year.  

The data provides valuable information about how many tax returns IRS audits and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2010 and audited in 2011 to returns filed in calendar year 2009 and audited in 2010.

The well informed make better decisions...Let islip + company be your tax calculator helping you to maximize your tax returns, islip + company will find every legal item and deduct it...

Following are selected audit rates for individuals not claiming the EITC:  

• For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 4.3% of returns were audited in 2011, down from 4.7% in 2010.

• For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.8% of returns were audited in 2011, an increase from 3.3% in 2010.

• Of the returns showing farm (Schedule F) income, .6% were audited in 2011 versus .4% in 2010.
• For returns showing total positive income of $200,000 to $1 million, 3.2% of returns not showing business activity were audited, and 3.6% of returns showing business activity were audited. The audit rate for such returns was higher than the 2.5% and 2.9% respective rates for the previous year.
• For2011, the audit rate for returns with total positive income of $1 million or more was 12.5%, close to forty nine percent higher than the 8.4% rate for 2010.
• For all corporate returns other than Form 1120S, 1.5%, versus 1.4% for the year before.
• For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.6%; $1–$5 million, 1.9%; and $5–10 million, 2.6%. For 2010, the percentages were, respectively, 1.4%, 1.7%; and 3%.
• For large corporations with returns showing total assets of $10 million or more, the overall audit rate was 17.6%, up from 16.6% for 2010. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 13.3% for those with total assets of $10–$50 million (slight decrease from 13.4% for 2010); 17.4% for those with $250–$500 million (versus 16.1% for 2010); 50.5% for those with $5–20 billion (up from 45.3% for 2010), and 95.6% for those with $20 billion or more (down from 98% for 2010).
• For partnership and S corporation returns, the audit rate was .4%, the same as for the year before.

IRS's “other” activities 

Number of returns filed.

Number of partnership returns filed (Form 1065) increased by 1.9%, and

Number of S corporation returns (Form 1120S) grew by .8%.

Number of C or other corporation returns dropped by 1.8%.  

Number of individual income tax returns increased by 1.7%,

the legal minimum tax is the maximum you will pay at islip + company...cpas in sacramento and cpas in auburn

Number of estate tax returns filed in FY 2011 plunged by 62.1%, reflecting recent tax law changes. (The estate tax was temporarily repealed for deaths in calendar year 2010 before being reinstated retroactively with a $5-million exemption as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. As a result of this legislation, estates of 2010 decedents could elect to file either Form 706, due Sept. 19, 2011, or Form 8939 (allocation of increase in basis for property acquired from a decedent), due Jan. 17, 2012.)

Math errors on individual returns. Of the roughly 6.6 million math error notices that IRS sent out relating to the 2010 return, 49.5% were attributable to the making work pay credit (MWPC), which was a refundable tax credit based on earned income and was available to taxpayers in 2009 and 2010.  

Of the total math error notices, 14.1% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax), 7.2% related to exemption number/amount, 6.1% related to the EITC, 6.2% related to the standard/itemized deduction(s), and 2.2% related to the child tax credit.

Penalties. In 2011, IRS assessed 28.75 million civil penalties against individual taxpayers, up from 27.1 million civil penalties assessed in the previous year. Of the 2011 assessments, the “top three” penalties in percentage terms were 58.6% for failure to pay, 25.6% for underpayment of estimated tax, and 13% for delinquency. On the business side, there were a total of 1,080,027 civil penalty assessments (down from 1,145,931 for the year before), and the “top three” penalties in percentage terms were 55% for delinquency, 24% for failure to pay, and 18.4% for estimated tax.  

Offers-in-compromise. In FY 2011, 59,000 offers-in-compromise were received by IRS (versus 57,000 for FY 2010), and 20,000 were accepted (14,000 for the year before).  

Criminal cases. IRS initiated 4,720 criminal investigations in FY 2011. There were 3,410 referrals for prosecution and 2,350 convictions. Of those sentenced, 81.7% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2010, IRS initiated 4,706 criminal investigations, there were 3,034 referrals for prosecution, and there were 2,184 convictions. Of those sentenced, 81.5% were incarcerated.

The IRS Data can be viewed at http://www.irs.gov/pub/irs-soi/11databk.pdf.

for sacrament tax help and expertise for your tax returns This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Form W-3c must be included with Form W-2c even if only correcting a name or SSN

The Social Security Administration (SSA) is reminding employers that they should file a Form W-2c, Corrected Wage and Tax Statement, and a Form W-3c, Transmittal of Corrected Wage and Tax Statements, as soon as possible after discovering an error on a previously submitted W-2 form. Form W-3c must be filed whenever an employer files a Form W-2c, even if the employer is only filing one Form W-2c to correct an employee's name or Social Security number (SSN). A copy of Form W-2c should also be provided to the employee as soon as possible.

Employers filing their W-2c forms electronically must prepare their files in accordance with the specifications in SSA Publication EFW2C, Specifications for Filing Forms W-2c Electronically. Alternatively, employers may file electronically using the SSA's free W-2c Online service. W-2c Online allows employers to complete up to five W-2c forms on the SSA's website per submission, with a limit of 50 saved/unsubmitted reports. W-2c Online allows employers to print out copies of the forms for their employees. No special paper or software is needed. An employer filing W-2c forms electronically in accordance with the specifications in SSA Publication EFW2C does not need to send the SSA a paper W-3c form. Form W-3c will be generated automatically if the employer files its Forms W-2c electronically on the SSA website. See http://www.ssa.gov/employer/pub.htm#SSAIRS for more information.

see payroll accountants in sacramento and payroll accountants in auburn: islip + company, payroll tax return preparation experts with offices in sacramento and auburn california, watching out for our clients payroll taxes and your payroll taxes both IRS payroll tax and EDD payroll tax.  The well informed make better decisions...Let islip + company be your payroll tax calculator helping you to maximize your payroll tax returns, islip + company will find every legal item and help you report properly.  ask quick payroll tax questions   This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Four Things to Know About Bartering

In today’s economy, sacramento and auburn california small business owners sometimes save money through bartering to get products or services they need. The IRS wants to remind small business owners that the fair market value of property or services received through barter is taxable income.

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. However, the fair market value of the goods and services exchanged must be reported as income by both parties.

Here are four facts on bartering :

1. Organized barter exchanges A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet-based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.

2. Barter income Barter dollars or trade dollars are identical to real dollars for tax reporting purposes. If you conduct any direct barter – barter for another’s products or services – you must report the fair market value of the products or services you received on your tax return.

3. Tax implications of bartering Income from bartering is taxable in the year it is performed. Bartering may result in liabilities for income tax, self-employment tax, employment tax or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

4. How to report The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations or Form 1120-S for Small Business Corporations.

For more information, call islip + company, cpas 916-488-1900.

islip + company, cpas sacramento tax preparation experts and  also auburn california preparation experts

Taxation of Foreclosures

It has been some time since the real estate industry, on a large-scale basis, has had to deal with foreclosures, deeds in lieu of foreclosure, short sales and other distress sales of real property. Unfortunately, distress sales of real property, resulting from a convergence of tightening credit, falling property values, and the consequences of prior lending practices, are all too common currently and do not appear likely to end any time soon.

Seemingly adding insult to injury, owners of real property facing a distress sale, and generally already under financial strain, may be unpleasantly surprised to learn that two types of taxable income can result from a foreclosure, deed in lieu of foreclosure, or short sale: capital gains

and forgiveness of debt (cancellation of debt) income. Both types of income can trigger unexpected taxes for the owner.

This article discusses the income tax consequences to the borrower in the event of foreclosure, the event the borrower simply transfers title to the lender (deed in lieu of foreclosure), and if the borrower sells the property to another in a short sale in which a lender accepts less than the balance due on the loan as payment in full.

Are foreclosures, deeds in lieu of foreclosure, and short sales subject to federal tax income taxation?

A         Yes. However, the income is taxed differently depending on several factors, including whether there was a foreclosure, a deed in lieu of foreclosure given to the lender, or a short sale (a sale where the lender agrees to reduce the amount owed in order to facilitate a sale), and whether the underlying debt is "recourse" (the borrower is personally liable for the debt) or "nonrecourse" (the borrower is not personally liable for the debt).

TAXATION OF FORECLOSURES OR DEEDS IN LIEU OF FORECLOSURE

What is the difference between a foreclosure and a deed in lieu of foreclosure?

A         A foreclosure refers either to a trustee's sale foreclosure (not a judicial proceeding) or to a judicial foreclosure (a judicial proceeding). A deed in lieu of foreclosure means that the lender has agreed to accept title to the property and the borrower transfers title to the lender rather than waiting until the lender forecloses on the property. A deed in lieu of foreclosure is not a special instrument. It is simply a conveyance of the property to the lender by grant deed or quitclaim deed; and, in exchange, the lender cancels the promissory note secured by the real property. In this way the lender can avoid the foreclosure process to regain title to the property

However, a borrower cannot simply transfer title to the lender without the lender's permission. Because some lenders have refused to negotiate and accept the deed in lieu of foreclosure, some creative homeowners have quitclaimed the property to the lender anyway, and have recorded the instrument without the lender's permission.

In 1993, the California legislature passed a statute to protect lenders from involuntary (and invalid) transfers of real property to the lender. The lender must record a "notice of nonacceptance of a recorded deed" in the county where the real property is located. Redelivering a grant of the real property back to the original homeowner (e.g., borrower) does not legally retransfer the title. (Cal. Civ. Code § 1058.5.)

A lender may not want to take a deed in lieu of foreclosure because taking title in this manner does not extinguish any junior liens. A foreclosure by a senior lienholder essentially wipes out all junior liens.

How does the owner receive "income" from a foreclosure or a deed in lieu of foreclosure?

A         A foreclosure proceeding, whether through a trustee sale or judicial foreclosure, and a deed in lieu of foreclosure given to the lender are treated the same as a sale for income tax purposes. The foreclosure or deed in lieu of foreclosure is reported on the taxpayer's tax return as a sale or exchange in the year the foreclosure is finalized or the deed in lieu of foreclosure is given to the lender.

In a foreclosure or deed in lieu of foreclosure, the owner can receive "capital gain or loss" as in any other sale of real property (i.e., be subject to capital gains taxation or receive a credit for a capital loss). Additionally, the owner can receive "forgiveness of debt" income. This is also referred to as "cancellation of debt" income. Whether the owner is subject to taxation on this income may depend on whether the debt is "recourse" or "nonrecourse." If the debt is a recourse debt, the owner may be deemed to have received taxable income in the amount of debt that is forgiven by the lender (except in certain situations discussed below where the owner will not be taxed). If the debt is nonrecourse debt, there is no taxable income from forgiveness (or cancellation) of debt, but the owner may be still be subject to capital gains taxation.

What is "nonrecourse" debt?

A         Under California law, a debt is considered "nonrecourse" when a loan is made under either one of the following two circumstances:

(1) When the loan is made to purchase a one-to-four unit property and the borrower intends to occupy at least one of the units, or

(2) When the seller carries back financing for all or a portion of the purchase price of any real property.

In the event of default by the borrower, the lender, or financing seller, is restricted to recovering the property with no right to proceed against the borrower for any deficiency should the property be worth less than the loan amount.

What is "recourse" debt?

A         Under California law, a "recourse" debt is one in which neither of the two exemptions in Question 4 occurs.

Examples of recourse debt are refinances of existing mortgages, home improvement loans, equity lines of credit, and loans other than seller financing, securing a debt for purchase of property that is not an owner-occupied one-to-four unit property. The lender is not limited to taking the property back and the borrower may be personally liable on the debt. If the lender chooses to foreclose using a trustee's sale, then the lender waives the right to go after the borrower for the deficiency despite the fact that the loan was a recourse debt. In order to go after a deficiency judgment, the lender must go through a judicial foreclosure process.

How is the amount realized (taxable income) calculated for a "recourse" debt in a foreclosure?

A         If the debt is recourse debt, meaning the owner may be personally liable for the debt, the amount realized is calculated in a two-step approach.

First, you take the difference between the Fair Market Value (FMV) of the property (usually the sales proceeds at the judicial foreclosure or trustee's sale) and the Adjusted Basis in the property. Generally, the Adjusted Basis consists of the purchase price of the property plus any capital improvements (less depreciation, if the property is investment property). This difference is the capital gain or loss. If the FMV exceeds the amount of the Adjusted Basis, then the borrower has realized a capital gain at the time of the transfer (foreclosure). If the Adjusted Basis exceeds the FMV, then the borrower has a capital loss.

Second, you take the difference between the amount of the cancelled debt (e.g., unpaid loan amount) and the sales proceeds at the foreclosure (FMV). This is the forgiveness of debt (cancellation of debt) income and it is treated by the IRS as ordinary income despite the fact that the borrower has received no cash at the time of the foreclosure.

However, if the cancelled debt amount is considered "qualified principal residence indebtedness" pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, there will be no taxation on this forgiveness of debt (cancellation of debt) income. See Question 9 for a definition of "qualified principal residence indebtedness."

Example One:

The unpaid balance of the loan is                                       $300,000;

The FMV of the property is                                                 $250,000;

The taxpayer's adjusted basis in the property is                 $200,000.

Assume the lender forecloses and will forgive the underlying debt.

Step one:

FMV ($250,000) less taxpayer’s adjusted basis ($200,000)

results in capital gains for the taxpayer.

FMV                                        $250,000

Less Adjusted Basis               $200,000

Capital Gains                           $ 50,000

Step two:

Amount of cancelled debt (amount owed on $300,000 loan) less FMV ($250,000)

is ordinary income to the taxpayer.

Amount Owed                        $300,000

Less FMV                               $250,000

Ordinary Income                     $ 50,000

Note: If a lender chooses to foreclose through a trustee's sale and is barred from obtaining a deficiency judgment by the one action rule under California Code of Civil Procedure Section 580d, it is likely the IRS will still consider that the underlying debt as a recourse debt and it will be subject to debt forgiveness income. (See Rev. Rul. 90-16.)

However, there may be no taxation of this income under The Mortgage Forgiveness Debt Relief Act of 2007.

RECOURSE DEBT

Example Two:

If the FMV at the foreclosure sale is more than what the lender is owed, there will be no forgiveness of debt and, thus, no ordinary income to the taxpayer.

The unpaid balance of the recourse debt is        $300,000

The FMV of the property is                                  $400,000

The taxpayer's adjusted basis in the property is $200,000

Step one:

FMV ($400,000) less taxpayer's adjusted basis ($200,000)

results in capital gains for the taxpayer.

FMV                                                                     $400,000

Less Adjusted Basis                                            $200,000

Capital Gains                                                       $200,000

Step two:

The debt is fully paid (since the FMV of $400,000 exceeds the unpaid loan amount of $300,000) resulting in no forgiveness of debt.

How is the amount realized (taxable income) calculated for a "nonrecourse" debt in a foreclosure?

A         If the debt is nonrecourse, meaning the owner is not personally liable for any deficiency (beyond the value of the property), the amount realized is the difference between the greater of:

(i) the FMV or (ii) the entire outstanding debt; and the adjusted basis of the property.

This amount is treated as capital gains and there is no taxation for forgiveness of debt income.

Even though the adjusted basis might exceed the FMV and the outstanding debt, generally no capital loss would be allowed because nearly all nonrecourse debt is associated with a principal residence. (Capital losses are applicable only to investment property.)

NONRECOURSE DEBT

Example:

The unpaid balance of the loan is                                                $300,000;

The FMV of the property is                                                          $250,000;

The taxpayer's adjusted basis in the property is                          $200,000.

Greater of FMV ($250,000) or entire unpaid debt ($300,000)

minus taxpayer’s adjusted basis ($200,000) results in capital gains to the taxpayer.

Greater of  FMV                    ($250,000)

OR

Unpaid Debt                         ($300,000)

Greater of the above             $300,000

Less Adjusted Basis              $200,000

Capital Gains                        $100,000

A         A deed in lieu of foreclosure is treated as a sale and taxed just like a foreclosure. See Questions 6 and 7 above.

Islip + Company CPAs, We Make Things Less Taxing offering personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing.

"It's not just about the numbers... it's what's behind the numbers that counts".

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Short Sales

In the over aggressive housing market of the past lenders are made loans in amounts that have become too difficult for borrowers to repay. Some of these borrowers arenot be able to fulfill their mortgage obligations.

When a borrower is no longer in a position to make the mortgage payments, is facing foreclosure and the current market value of the property--including escrow costs--is less than the loan on the property, the borrower may consider a short sale.

This saves the lender the expenses of foreclosure proceedings and from having another REO property on its books.

From the borrower's perspective, the short sale prevents having the foreclosure on the borrower's credit history, and releases the borrower from an obligation that he or she can no longer afford.

In essence, a short sale is a sale transaction subject to a lender's approval in which the lender consents to a sale of the security interest for less than what is owed on the note and accepts the proceeds in full satisfaction of the loan amount.

A short sale requires much paperwork and preparation on behalf of the borrower.

Typically, before applying for a short sale, the seller must have a ready buyer and all the paper work prepared to present to the lender. The buyer of the property must also be prepared for a protracted time period to conclude the purchase of the property.

I. Lender's Options Upon Borrower's Loan Default

Q1. What options does a lender have on a debt secured by California real property if the borrower does not make the payments on the loan?

There are two types of "foreclosures" available to a lender: a trustee's sale and a judicial foreclosure. Technically, a trustee's sale is not a "foreclosure" but the term has been used for both a trustee's sale as well as a judicial foreclosure.

For certain loans, a lender has no choice and must conduct a trustee's sale. With a trustee's sale, a lender cannot go after a deficiency judgment. A deficiency occurs when the current market value of the property is less than the loan on the property. See Questions 3 and 4 for more details.

The lender may also be able to pursue "guarantors" of the debt who have signed written guarantee agreements (not including the borrowers).

Q 2. What other options may the lender consider instead of foreclosure when the borrower is delinquent?

A Depending on the situation, a lender may consider one of the following:

Loan Workout: Basically, a loan workout is any resolution of a problem loan between the lender and borrower that modifies the original loan agreement. Some of these options include forbearance (e.g. forgiving a portion of the debt or late charges); deferment; renegotiating interest rate, monthly payment amount, principal amount, maturity date; or the enforcement an acceleration clause in the loan.

Deed in Lieu of Foreclosure: After the borrower is in default, the borrower voluntarily delivers title to the lender for consideration and the lender accepts the conveyance of the property in full satisfaction of the mortgage debt. Using this method, the lender saves the costs of foreclosure and the borrower avoids having a notice of default on his/her records.

Short Sale: A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan. A lender may accept a short sale when the borrower is in severe financial straits and market conditions make a short sale the best choice to mitigate the lender's damages. Like a deed in lieu of foreclosure, this saves the lender the costs of foreclosure and the borrower avoids having a foreclosure on his or her credit report.

Short Payoff: With a short payoff, the lender accepts less than the remaining mortgage amount as full payment of the loan. The property need not be sold.

*Note: Some lenders do not differentiate between a short sale and a short payoff.

Q 3. What is a deficiency judgment?

A A deficiency judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the security, whichever is greater, in a judicial foreclosure. A lender may obtain a deficiency judgment only with a judicial foreclosure. With a trustee's sale foreclosure, the lender cannot go after a deficiency judgment. See Question 4 for more details.

Q4. Can a real estate lender obtain a deficiency judgment against a defaulting borrower following foreclosure?

A It depends. California has "anti-deficiency statutes" that protect certain borrowers from deficiency judgments. Under those circumstances, a lender would opt for a trustee's sale foreclosure which is quicker and less expensive than a judicial foreclosure. A trustee's sale foreclosure does not involve the courts. Generally, there are five situations in which a deficiency judgment is prohibited:

1        Purchase Money. If the loan is obtained to purchase a residential 1-4 unit dwelling all or part of which is owner occupied and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. This loan is entitled to "purchase money" protection. (Cal. Code Civ. Proc. § 580b.) Note, however, that should the buyer refinance the home, the new loan is no longer "purchase money." Thus, the buyer would lose the protection against a deficiency judgment in the event of a default.

2        Seller Carryback. If the purchase money loan for any type of real property is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower/buyer. (Cal. Code Civ. Proc. § 580b.)

3        Trustee's Sale. A lender may not pursue a deficiency judgment against the borrower should the lender opt to foreclose by a trustee's sale foreclosure (a non-judicial action). (Cal. Code Civ. Proc. § 580d.)

4        3 Month Time Limit. An action for a deficiency judgment must be brought within 3 months from the time of judicially-ordered sale. (Cal. Code Civ. Proc. § 580a.)

5        Fair Value Limitations. A deficiency judgment is limited by the difference between the amount of the indebtedness and the fair market value of the property, unless the actual sale price exceeds that value. (Cal. Code Civ. Proc. §§ 580a, 726 (b).)

When a deficiency judgment is permitted, the lender may obtain one only following a judicial foreclosure, or when the security has become valueless (such as when security for a second trust deed loan is wiped out when the first trust deed lender completes its foreclosure). Holders of a junior deed of trust (second, third, etc.) should note that if the "wiped-out" junior lien is not purchase money or seller carryback, then the junior lien holder may sue on the note and the borrower on the junior loan may be personally liable. (Roseleaf Corp. v. Chierighino, 59 Cal. 2d 35 (1963).)

Q5. Can a lender avoid the foreclosure process and just sue the borrower on the note (La, treat it as an unsecured note)?

A No. A lender cannot sue on a debt secured by a mortgage or trust deed except for a judicial foreclosure. This is called the "one action rule" or "one form of action rule." (Cal. Code Civ. Proc. § 726.) One exception to this rule is if the security for the loan has become "valueless" after the lender's security interest was recorded (e.g., a "wiped out" junior lien holder). In this case, the lender can sue directly on the debt (note) unless the borrower's loan falls into category 1) or 2) in Question 4.

Q6. Why would a lender agree to accept a short sale?

A Lenders may have ample incentive to negotiate a short sale with a distressed borrower. For example, should the lender take back a property pursuant to a foreclosure sale, the lender would become responsible for a variety of costs, including property maintenance, utilities, HOA fees, and might risk destruction of the property by vandalism. Furthermore, lender-owned properties (REO) may take a long time to sell, in part because so many REO properties are now for sale.

A lender will typically evaluate the financial situation of the borrower as well as current market conditions to determine whether or not to agree to a short sale. It is really a business decision for the lender to determine whether it would receive more money by accepting the short sale, or completing a foreclosure, reselling the property, and pursuing personal liability (i.e., deficiency judgment against the borrower and/or claims against guarantors, for loans on which those remedies are available.)

Islip + Company CPAs offer personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing.

"It's not just about the numbers... it's what's behind the numbers that counts".

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

II. Effect On Borrowers of Short Sales

Q7.    Does a short sale adversely affect a defaulting borrower's credit rating?

A Yes. Lenders will report the short sale as being settled for less than the full balance. This would show up on the borrower's credit report as a negative mark for seven years. (Cal. Civ. Code

§ 1785.13.)

Q8. Suppose the borrower is late with his/her mortgage payments, causing the lender to begin the foreclosure process by filing a notice of default. Before the foreclosure sale occurs, the borrower pays the lender what is owed on the note. Could these activities appear on the borrower's credit report?

A Yes. The lender can report to a credit bureau receipt of any payments made 30, 60, 90 or more days after their due date. This may appear on a borrower's credit report as a "foreclosure in process," "foreclosure proceedings," "current was 30," or in some other way. Any such terms, or other similar reporting comments, harm that individual's overall credit rating.

Q9. Is the method by which lenders report a short sale a negotiable item?

A Typically, no. The short sale is usually reported to credit reporting agencies as settled for less than the full balance. However, a borrower may try to negotiate this at the time the short sale is being arranged.

Q10. Are there any special risks to borrowers when negotiating a short sale with their lender?

A Yes. In particular, Realtors who assist borrowers should be aware and warn their clients of one particular risk. If the borrower was less than completely honest when using the stated income method in applying for the loan, this information may become apparent to the lender when the documentation listed in Question 17 (such as tax returns and paycheck stubs) are submitted to the lender in the application for short sale approval. This may put the borrower at great risk of potential liability for their dishonesty.

Are there any tax effects of a short sale?

A Yes. The tax implications for the borrower could be so significant that a short sale would not be in the borrower's best interest. Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.

Generally speaking, any relief of indebtedness from a short sale, regardless of whether the loan is a recourse or nonrecourse loan, is taxed as ordinary income. There are, however, some exceptions to this rule that may benefit a taxpayer involved in a short sale. For more information on the tax implications of short sales, see the CAR legal article, Taxation of Foreclosures, Deeds in Lieu of Foreclosure, and Short Sales.

III. Short Sale Application Process and Other Issues

Q11 What is the process for applying for a short sale?

A It is always in the best interest of the borrower to keep the lender informed. If the borrower is in default of the loan and is contemplating a short sale, it would be best for the borrower to let the lender know before the foreclosure proceedings are well under way. The lender may or may not grant more time to the borrower to find a buyer. In general, the process goes as follows:

Q12 What documentation will a lender typically require?

A Lenders will typically require a distressed borrower to furnish a variety of documents, which could include the following:

• Pay the balance due on your current-year tax return.
• Make an extension payment (form FTB 3519).
• Make an estimated tax payment(Form 540-ES).
• Pay any amount owed for prior years.
• Pay any bill you receive from us that includes an insert about credit card payments.

Complete your payment information and have it on hand when you are ready to make your payment. You can pay online or by phone:

• Online: www.officialpayments.com

THIS COMPANY IS A FOR PROFIT THIRD PARTY - NOT THE FTB

THEY ARE THE ONLY OPTION LISTED ON THE FTB WEB SITE.  WHY?

• Toll-free: 800.272.9829

Frequently Asked Questions

• Is there a fee?

  Yes. "Official Payments Corporation" charges a convenience fee for this service. The fee is based on the amount of your tax payment as follows:

  • 2.5% of the tax amount charged (rounded to the nearest cent)
  • Minimum fee: $1
  • Example of fee:

    Tax Payment = $753.56
    Convenience Fee = $18.84

  Official Payments Corporation will tell you your fee before you complete your credit card transaction. You can decide whether or not to complete the transaction at that time.

Islip + Company CPAs offer personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing.

"It's not just about the numbers... it's what's behind the numbers that counts".

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

• When will my payment be effective?

  Your payment is effective on the date you charge it.

• What if I change my mind after I made the charge?

  If you pay your taxes by credit card and later reverse the credit card transaction, you may be subject to penalties, interest, and other fees imposed by the Franchise Tax Board for nonpayment or late payment of taxes. If you overpay, we will issue you a refund.

PLEASE NOTE: IT IS NOT FREE.

YOU MUST GO THROUGH A THIRD PARTY.

THE IRS DOES NOT ADMINISTRATE THIS PROGRAM, MEANING YOU'RE ON YOUR OWN

HOWEVER THERE ARE BENEFITS IF YOU CAN HANDLE THE FEE$.

Features and Benefits of Paying via Credit or Debit Card:

• It's convenient - taxpayers can e-file or paper- file early and make a payment by credit or debit card later, to delay out-of-pocket expenses. Payments can be made by phone, Internet or when e-filing.
• It's safe and secure - standard, commercial card networks are used. The IRS does not receive or store card numbers.
• These electronic tax payment options are available through service providers.
• There is a fee charged by service providers. Fees are based on the amount of the payment and may vary by service provider (see table below).
• Payment information will not be disclosed for any reason other than processing the transaction authorized by the taxpayer.
• A confirmation number is provided at the end of the phone or Internet transaction.
• The "United States Treasury Tax Payment" is included on the card statement as further proof of payment. The convenience fee will be included on the statement as a "Tax Payment Convenience Fee" (or similar transaction).
• If enrolled in such a program, taxpayers may earn miles, points, rewards or money back from the credit card issuer.

¹ The ATM/Debit card must be a Visa Debit Card, or a NYCE, Pulse or Star Debit Card.
² Flat fee per transaction. 
³ Contact the service provider to receive up-to-date information regarding fees.  The minimum convenience fee is $3.89 for L2G and RBS, and $3.95 for OPC.

¹ Contact the contracted service provider for up-to-date information regarding fees.  The minimum convenience fee is $3.95 for OPC, and $3.89 for RBS.
² Contact the registered service provider for up-to-date information regarding fees.  The minimum convenience fee is $1.25.

• Generally, taxpayers can make a payment through the above-named service providers using an American Express® Card, Discover® Card, MasterCard® or Visa® card.  Taxpayers can visit the service provider's web site for payment method options.
• To make a payment of $100,000 or greater through the Link2Gov Corporation, taxpayers should call Link2Gov at 1-888-729-1040.
• To make a payment of  $100,000 or greater through the Official Payments Corporation (OPC), taxpayers should call OPC's Special Services Unit at 1-888-889-7228.
• To make a payment of $500,000 or greater through RBS WorldPay, Inc., taxpayers should call RBS WorldPay at 1-888-877-0450.
• For more information, or to make a payment, taxpayers should contact the service providers.

• Individual e-file Partners for Electronic Payment provides a description of the service providers' products and special offers.

For more information, refer to the related links at the end of this article.

Credit or Debit Card Convenience Fees

• Taxpayers will be informed of the convenience fee amount before the payment is authorized. This fee is in addition to any charges, such as interest, that may be assessed by the credit card issuer. Taxpayers must agree to the terms and conditions of the payment including acceptance of the convenience fee before the transaction is completed.
• The Taxpayer Relief Act of 1997 authorizes the Treasury to accept these payments for federal taxes but prohibits the IRS from paying a fee or consideration to service providers for processing these transactions.
• In order to provide taxpayers this option, IRS has entered into non-monetary contracts and agreements with service providers.
• The service providers act in the capacity of  merchants and are necessary intermediaries in transaction processing. The service providers validate card numbers and expiration dates, obtain authorization from the card issuers and issue confirmation numbers to taxpayers at the end of the payment transaction. The service providers forward tax payment information to the IRS for posting to taxpayer accounts.
• The IRS does not receive or charge any fees for card payments. Additionally, the IRS cannot pay or reimburse any convenience fee to taxpayers. Convenience fees are charged by the service providers.  The fee is a deductible business and individual expense.  For an individual expense, taxpayers may deduct the fee as a miscellaneous itemized deduction subject to the 2% limit on Form 1040, Schedule A (see Publication 529).

Islip + Company CPAs offer personalized service to help you with these issues.

Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.

With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing.

"It's not just about the numbers... it's what's behind the numbers that counts".

Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

How to Make a Payment

• The integrated e-file and e-pay credit card option is available through a number of tax preparation software products and tax professionals. For additional information about e-filing and paying all at once (including convenience fees and accepted credit cards), taxpayers can refer to tax preparation software or a tax professional.
• When paying through tax preparation software, users will be prompted to enter the necessary credit card information.
• Pay by phone and Internet options are available through service providers.
• When paying by phone, a recorded script will prompt taxpayers through the call.
• When paying by Internet, taxpayers will be prompted to complete the necessary entry fields.

The following information is needed in order to complete a card payment:

Facts You Need to Know:

• Payments must be made electronically through tax preparation software, a tax professional or a card payment service provider via phone or Internet.
• Cards should not be forwarded to the IRS with the return or form.
• Account numbers should not be written on the return or form.
• The payment date will be the date the charge is authorized.
• Taxpayers can make partial payments by phone or Internet if the tax preparation software being used allows this.
• Multiple payments cannot be made through tax preparation software.
• Taxpayers who e-file and e-pay should re-file rejected returns promptly in order to ensure timely payment.  Otherwise, the payment may have to be re-authorized through the card issuer.
• Federal tax deposits cannot be made through these options. Amounts not properly deposited may be subject to a 10% penalty for failure to deposit through an authorized financial institution or EFTPS.  It is the responsibility of the employer to ensure that all taxes are paid or deposited correctly and on time.  Please refer to Publication 15 (Circular E), Employer's Tax Guide for additional information explaining the requirements for paying employment taxes.
• The IRS does not issue an immediate release of a Federal Tax Lien when a credit or debit card payment is made to full pay the tax liability.  Please refer to Publication 1468 for the recommended payment option when an immediate release is necessary.

Cancellations, Errors and Questions:

• Generally, payments cannot be cancelled.
• Taxpayers can call the card issuer or service provider's customer service number to report problems such as unauthorized charges or concerns regarding payment errors.
• Taxpayers can contact the IRS at 1-800-829-1040 to report problems concerning the amount of tax owed or any other matter concerning the tax return.
• Taxpayers can also write to the IRS office where the return would be mailed regarding income tax payment concerns. The impacted taxpayer's SSN or EIN, payment tax year, and payment method should be included.
• In the event the service provider fails to forward the tax payment to the Treasury, the taxpayer will be responsible for the tax payment and for any penalties and interest.
• Voluntary or estimated payments such as Form 4868 and Form 1040-ES payments that result in an overpayment will be resolved through normal administrative procedures.
• In most instances, the Treasury will refund an overpayment to taxpayers once the return is received and processed. An overpayment may be used to settle or offset an existing debt on the taxpayer's account.

If Charlie Sheen tries to deduct his hookers from his taxable income, he won't be stretching the preposterous. 

A retired Brooklyn lawyer deducted prostitutes, massages, pornography and other sex-related activities were claimed as "medical expenses. The lawyers disallowed deductions included $40,588 for "therapeutic sex," $70,776 for "massage therapy to relieve osteoarthritis and enhance erectile function through frequent orgasms" not to mention $2,173 for "pornography to enhance sexual performance in lieu of taking Viagra."

Patronizing a prostitute, the tax court somberly noted, is illegal in New York. Neither the lawyer nor any other taxpayer can claim a deduction for an illegal treatment (no matter how "therapeutic"). The court, however, did affirm the lawyer's right to deduct $6,308 in doctor visits, prescription drugs and other medically-justified services.

Every tax season has its "over the top" deductions. Lately:

Thong underwear. An Ohio TV news anchor claimed as her work-related deductions teeth whitening, manicures, pedicures, gym fees, clothing, dry cleaning, self defenses classes, subscriptions to Glamour and Cosmopolitan, and lingerie--including thongs--some of it purchased from Victoria's Secret. Her claimed deductions came to $167,356 in all. The U.S. Tax Court ruled against her, judging them to be personal expenses.

No mater how funny they sound,  sometimes these deductions are legit.

The IRS, for example, has permitted a farmers to deduct the depreciation of ostriches. The cost of Navajo healing ceremonies likewise are deductable, provided they have been prescribed for a medical purpose or to alleviate a medical condition. A professional bodybuilder may deduct the cost of his gym membership.

Ordinary and necessary business expenses are deductilbe against income.  Who is to say what is "ordinary". Do you want the IRS to define "ordinary"?  It may be a very narrow definition of ordinary.  Do you want Charlie Sheen to define "ordinary"?  It may be xxx.

Islip + Company CPAs offer personalized service to help you with these issues.  Since 1958, we have successfully worked with the IRS and the FTB helping our clients stay in compliance of the tax laws and pay the minimum amount due.  With Offices in Sacramento and Auburn as well as internet we are able to deliver premium service nearly anywhere...without premium pricing. "It's not just about the numbers... it's what's behind the numbers that counts". Give us a call or send us an email 916-488-1900 Sacramento, 530-746-3020 Auburn or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Stripper Chesty Love was permitted to deduct the cost of her breast implants, which were determined by the IRS to meet the test of being "ordinary and necessary" for her work.

Tax Payers claim "over the top" deductions because it's a form of protest, or because they believe, mistakenly, that their own notions of equity match the IRS's. In the last category he puts the female TV anchor, whose own personal test of something's being business-deductable was to ask herself (according to her own account): Would I be buying this if I didn't have to wear it to work?

The IRS determined that the clothing, while appropriate to the workplace, was not inappropriate for the anchor's personal use, and, as such, ought to be treated as a personal expense.

So Charlie can deduct his Hookers' as independent contractors as long as their professional service provided is not illegal and necessary for Charlie Sheen's business purpose.