Pennsylvania Trusts and Estates Blog

State and local governments and their agencies issue bonds in exchange for the use of the capital of individuals and corporations. The bonds obligate the state and local governments to make interest payments and to repay, at some stated time, the principal of the amount borrowed. Municipal bonds can be issued by cities, counties, redevelopment agencies, school districts, publicly owned airports, as well as other governmental entities.

Bonds are General Obligation Bonds (GO's) if they are to be paid from the general revenue and assets of the issuers. The repayment of GO's is generally supported by the issuer's taxing power; the issuer pledges its "full faith and credit." Bonds are Revenue Bonds if their repayment is restricted to certain types of revenue received by the issuer. Examples are repayment from bridge tolls or user fees at an airport.

If the bonds qualify as "tax-exempt," the interest income received by the individuals and corporations that hold the bonds is excluded from federal income taxation and usually from the income tax of the state in which they are issued. A bond that is free of federal, state and local taxes is called a "triple-tax free." Usually, since the bonds enjoy this tax preference, they pay a lower interest rate than taxable debt instruments with a similar level of risk. They are most valuable to taxpayers with relatively high marginal income tax rates. However, in the current economic picture, the yield on tax-free municipal bonds is high relative to the yield on most taxable investments, so you should seriously take a look at tax-free bonds as an investment alternative - even if you pay very little income tax.

Not all municipal bonds are tax-free, such as when they finance private activity. Also, bonds issued for some purposes are subject to the alternative minimum tax.

The tax policy behind the interest exemption was to encourage public capital facilities. Bond proceeds can be used for building schools, highways, sewage systems, and a variety of other projects. The tax exemption is limited to bonds that satisfy broadly-defined "public" purposes. Generally, bonds are considered to have a public purpose if they meet one of two tests: 1) no more than 10% of the proceeds is used directly or indirectly in a trade or business, or 2) no more than 10% of the proceeds are secured directly or indirectly by property used in a trade or business. Bonds that can't pass the test are taxable and are referred to as private activity bonds.

Taxes reduce the net income produced by bonds so you cannot compare a municipal bond yield directly to a corporate bond yield. When evaluating tax-free municipal bond investments, you must first determine the "equivalent taxable yield" of the bond. This is done by subtracting your effective tax rate from 100% and dividing the tax-free yield by the result.

Here is an example: If you are a Pennsylvania resident in the 25% federal and 3.07% state tax brackets, your combined tax rate is 28.07%. A 3% yield on a PA municipal bond is equal to earning 4.17% on a taxable investment (3% divided by (1 - 28.07%)). A PA municipal bond paying 4% will pay the same (after tax) as a taxable bond or CD paying 5.56% (4% divided by (1-28.07%)).
If you are looking at a bond from another state (e.g., you live in Pennsylvania, but the bond is issued by a New Jersey municipality), you would only take into consideration the federal tax bracket when calculating the taxable equivalent yield.

If you aren't comfortable with the math, you can go to the Securities Industry and Financial Markets Association (SIFRA) website called www.investinginbonds.com, click on calculators, and let the program do the math.

While it is true that interest on the obligations of state or local governments is exempt from federal income taxes under IRC Section 103(a), there can be some other tax consequences you should be aware of.

• Tax-exempt interest from municipal bonds is included in the calculation of the taxable portion of Social Security and Railroad Retirement benefits. In some cases, each $1.00 in tax-free bond interest can result in an additional 85 cents of taxable income, because the additional interest puts you over the limit and 85% of your social security becomes taxable.

• Tax-exempt interest from "private activity bonds" is a tax-preference for purposes of computing the Alternative Minimum Tax (AMT). If you are subject to AMT, then the interest from municipal bonds could be taxed at a rate of 26% or 28%.

• The income tax exemption is only for the interest. If you sell a municipal bond and recognize a gain, that gain is subject to tax just like the gain on the sale of any other security.

• If you buy tax free bonds with money you have borrowed on "margin", the interest paid on the loan is not deductible as investment interest.

Some municipal bonds are insured, which means that a third-party insurer has assumed the risk of the issuer's default. The bond issuer must pay a premium for this insurance, which has the practical effect of reducing the investor's yield. The value of the insurance depends on the financial strength of the insurance company.

A Grantor Retained Annuity Trust (GRAT) is an estate planning technique particularly attractive in a low interest rate environment such as we are experiencing. It allows an individual to make large gifts without paying gift tax or using any unified credit. Many families have used short-term GRATs to shift appreciation to beneficiaries with no estate or gift tax cost.

The technique is so successful that Congress has had this planning technique in its sights for a while, and it looks like the use of short-term GRATs will be curtailed soon. Legislation already passed the House July 1 and is expected to be considered soon by the Senate which would provide: (1) a GRAT must have a minimum 10 Year Term, (2) annuity payments paid back to the grantor can not decrease over the 10 year term, and (3) the remainder interest must have a value greater than zero at the time of the transfer to the GRAT.

The legislation that passed the House provides that the measure is effective for "transfers made after the date of the enactment of this Act." That means that there is still time to use this technique, but you must act quickly.

What is a GRAT?
A GRAT is an irrevocable trust. The creator of the trust, the Grantor, transfers assets to the trust. For a specified term of years, the GRAT must pay an annuity to the Grantor (hence, the "retained annuity"). At the end of the term, the balance remaining in the trust is paid to the beneficiaries. The term of the trust and the amount of the annuity are chosen to make the actuarial value of this gift to the beneficiaries very small. Here is an example:

Grantor transfers $3 million in assets to a 3-year GRAT. The asset transferred is expected to appreciate at the rate of 12% per year. To "zero out the GRAT," each year the GRAT is required to pay $1,056,523 to the Grantor. Since the Grantor can't make a gift to himself, the only gift made is the actuarial value of the remainder interest which is valued at zero. If we assume that the asset contributed to the GRAT grows at the rate of 2.8% per year (which is the current IRS §7520 rate for transfers to GRATs made this month), then at the end of the 3 year term, the Grantor would have received back all of the trust's property as annuity payments. The remaindermen would get nothing. The value of the gift that the Grantor made is thus zero.

However, if the asset in fact appreciated or earned income at the rate of 12% per year, then there would still be $649,650 remaining in the trust. This $649,650 is distributed to the beneficiaries at the end of the 3-year term completely free of gift and estate tax. The greater the growth of the assets inside the trust, the bigger the tax savings. In effect, all growth in excess of the IRS stated rate of 2.8% passes to the beneficiaries estate and gift tax free. If the Grantor can put $10 million in the GRAT the beneficiaries receive $2,165,500 free of estate tax.

For this tax saving technique to work, the Grantor must survive the chosen term of 3 years. If the Grantor dies during the 3-year term, the trust is included in his or her estate. That is one of the reasons why it is preferable to do shorter term GRATs.

If the GRAT asset does not outperform the IRS §7520 interest rate (now 2.8%), then there will be no tax savings. What is the downside? Only the transaction costs of setting the GRAT up and maintaining it . (Translation: attorney fees.)

It is not necessary for the annuity to be paid in cash. Let's say the Grantor transfers stock to the GRAT, perhaps even stock in his or her closely-held business. The annuity obligation can be satisfied by transferring shares of stock back to the Grantor, valued at the time of the payment.

The Grantor can be the Trustee of the GRAT. (Caution: The Grantor should not be the trustee if stock in a closely-held corporation is transferred to the GRAT.) Payment at the end of the term of years need not be outright to the beneficiaries. There could be a continuing trust for beneficiaries. With limited trustee powers, the Grantor could even be the Trustee of the trust after the expiration of the term.

There is an additional income tax advantage. Since all of the GRAT's income is paid to the Grantor, the GRAT is a Grantor trust for income tax purposes. The Grantor pays the income tax on any income earned by the trust. This is an additional estate planning advantage because this tax payment is really for the benefit of the remainder beneficiaries and, yet, it is not treated as a gift.

Because the GRAT allows the remainder beneficiaries to receive the appreciation on all of the trust property, it produces a much better tax result than an outright gift. Other gifts either use up the exemption or cause the payment of gift tax. A properly structured GRAT can shift very significant value to beneficiaries for no tax cost at all.

The important thing is that if a GRAT would be a good planning opportunity for you, act now. The days for GRATs are numbered.

Right now, any person may prepare a federal tax return for any other person for a fee. There are no licensing requirements. Some tax return preparers, like lawyers and accountants, are licensed by their states and some are enrolled to practice before the IRS. However a very large share of tax return preparers do not pass any government or professionally mandated competency requirements before they prepare a federal tax return.

In June 2009 the IRS announced its intention to begin regulating tax return preparers. In January 2010 the IRS released a report proposing the following recommendations for its regulation of tax return preparers:

• All paid tax return preparers must have or obtain a preparer tax identification number (PTIN) and register.

• Other than those exempted, all paid tax return preparers will be tested for competency.

Who will have to obtain a PTIN and register? According to the IRS proposed regulations, by December 31, 2010, all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a federal tax return or claim for refund or who sign, or are required to sign, a federal tax return or claim for refund as paid tax return preparer must obtain a (PTIN) and, if applicable, successfully pass an examination.

Staff members who do not sign returns but assist in their preparation are considered to be tax return preparers and will have to get a PTIN.

As currently understood, only the signing tax return preparer will be required to put a preparer PTIN on a tax return under the proposed PTIN regulations, and the IRS is not expecting signing preparers to check on PTINs from other individuals who are involved in preparing a return. However, the requirement that only the signer put a PTIN on a return does not mean the IRS will not go after tax return preparers other than the signer if there are problems on a return. If another preparer is found to have provided false or insufficient information that was included in the return, the signer will have the ability to point the finger at the other individuals who worked on a return.

All federal tax return preparers, even those who already have a PTIN, will need to register in the new system which will be available on September 1, 2010. Any tax return preparer who presently has a PTIN or gets a PTIN before September 1, 2010, will still need to register and pay a fee once the new online preparer registration system becomes available. The system will ask if you already have a PTIN; and, if so, it will reassign you the same number. The fee is not waived even if you have been assigned a PTIN prior to registering.

During the tax return preparer registration process, the IRS will check to make sure that each applicant does not have a criminal background and actually pays his own taxes. Registration is good for three years. Everyone must be registered by the 2011 tax season. That means the IRS only has a few months to certify more than a million tax return preparers.

The proposed regulations as drafted allow anyone registering prior to January 1, 2011, to obtain a PTIN. However, anyone registering thereafter would first have to pass the competency examination unless he or she is exempted from taking the exam. Because the examination is not expected to be available until April 2011 at the earliest, there will be a substantial period of time during which no one will be able to get a PTIN. This provision is expected to be changed.

The IRS announced on June 15, 2010, that management consulting and outsourcing company Accenture PLC has been awarded a five-year contract to design and operate the return preparer registration program for the IRS. The company will work with the IRS to develop a system for online registration and renewal, collection of user fees and assignment of identification numbers for paid tax return preparers.

Who will be Required to Take the Competency Tests?

Only attorneys, certified public accountants, or enrolled agents who are active and in good standing with their respective licensing agencies are exempt from competency testing. There will be no grandfathering of paid tax return preparers who are not in the exempt category. The tests are expected to be ready in the spring of 2011. They will be available online and will be open book. Each tax return preparer will have to pay a fee to take the tests. It is expected that preparers will be able to take and pass the exam over the three-year transition period.

What are the Competency Tests?

There are two competency tests, but only one has to be passed to be licensed. One will cover Wage and Non-business form 1040. The second will cover Wage and Small Business form 1040. Small business will include Schedules C, E and F and various other 1040 related forms. Even if they do not prepare 1040 returns, preparers of business tax returns who are not attorneys, certified public accountants or enrolled agents will be required to pass the Wage and Small Business 1040 test. The IRS plans to add a third test with regard to business tax rules after the three-year implementation phase is completed.

U.S. Savings Bonds were created to finance World War I. They were originally called Liberty Bonds. Because U.S. Savings Bonds are issued by the federal government, you do not have to pay state tax or local tax on the interest. Two types of savings bonds that are still available are Series EE and Series I bonds.

Series EE Bonds. Series EE bonds offer tax-free accumulation of interest until the bond is redeemed or matures. They are purchased for one-half of their face value. Most Series EE bonds have a total interest-paying life that extends beyond the original maturity date, up to 30 years from issuance.

When a Series EE bond matures, whether or not it is cashed in, the accrued interest is taxable. This is a very important point. It is important to keep careful record of your bond maturity dates - not only because they won't be earning interest anymore but also because the maturity is a taxable event. When a bond is cashed in, a 1099 is issued by the bank or financial institution to the person who is cashing in the bond. No 1099 is issued when a bond matures and is not cashed. The taxpayer is on his or her own to report the accrued income on his tax return at maturity. Making a mistake on this can result in interest and penalties owed to the IRS.

Instead of reporting accrued interest when you redeem bonds, you can choose to report the income annually. A taxpayer may elect to report all of the accrued interest on bonds through the end of the year in which the election to switch reporting methods is made. Then, in succeeding years, the individual must report the accrued interest for each year. If this election is made, it applies to all savings bonds. An individual who owns many savings bonds cannot "pick-and-choose" which bonds the election applies to.

An executor can elect to report all the accrued interest up to the date of death on the decedent's final income tax return. Then, when an heir redeems the bonds, the only interest to report will be the interest that has accrued from the date of the decedent's death.

If the election is made the taxpayer must keep careful records. Even if the election to report annually is made, the owner will still get a 1099 for the full amount of interest when the bonds are redeemed. No one wants to pay the tax twice.

Through the Education Savings Bond Program, if you cash in your bonds and use them for qualified higher education expenses, you may be able to exclude that income from taxes. Eligible bonds include Series EE Bonds issued after December 31, 1989 and all Series I Bonds. Series HH bonds are not eligible. Qualified expenses include tuition and required fees at colleges, universities and vocational schools. Room and board and books are not included. Qualified expenses are reduced by the amount of any financial aid received in the same tax year, including the amount of other education tax breaks. There are income phaseouts on the interest exclusion, based on the year in which you redeem the bonds. For 2010, the income phaseouts are $70,100 to $85,100 for single filers and $105,100 to $135,100 for married taxpayers filing jointly.

Series I Bonds. These bonds are sold at face value and grow with inflation-indexed earnings for up to 30 years. They are purchased at face value and you can buy up to $5,000 in I bonds in any calendar year. All Series I bonds have a final maturity at 30 years from the date of issue. The current interest rate for I Bonds purchased May 1, 2010 to October 31, 2010 is 1.74%. I Savings Bonds must be at least 1 year old before they are eligible for cash-in. There is a 3-month penalty for cashing in an I Bond before it is five years old, unless a Federal Disaster is declared.

Series HH Bonds. Beginning September 1, 2004, owners can no longer reinvest matured HH bonds or exchange EE bonds for HH bonds. Existing HH Bonds will be allowed to mature.
Series HH bonds were purchased at their face amount and pay interest semi-annually. They are redeemable at face value, mature in 20 years and were issued from January 1980 to August 2004. When EE bonds were used to acquire HH bonds, the amount of accrued interest in the EE Bonds is "rolled over" into the HH bonds and is not taxable income until the HH bond is redeemed or matures. The amount of accrued E or EE interest rolled over into the H is printed on its face.

How about all those servicemen and women who were overseas on April 15? Do they have to file income tax returns?

For federal tax purposes, U.S. Armed Forces include officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, of the Army, Navy, and Air Force. The Coast Guard is included, but not the U.S. Merchant Marine nor the American Red Cross.

Combat Pay Exclusion

Soldiers deployed to Iraq, Kuwait, Afghanistan and other countries in that theater or otherwise considered to be in a combat zone, along with those countries in the Balkans, are allowed extra time to file and pay their income taxes. Click here for a list of 2009 combat xones. Soldiers will have at least 180 days after they redeploy home to file their federal tax returns, and no penalty or interest will accrued during this period.

U.S. Armed Forces civilian employees and contractors deployed to a combat zone in direct support of the military are also eligible for these tax extensions.

Soldiers also do not pay any income taxes on the wages they earn while deployed in a combat zone, nor do they pay taxes on hazardous-duty pay. For enlisted troops and warrant officers, if any part of a month is spent in a combat zone, then that entire month's wages are exempt. For officers, the exclusion is limited to the highest rate of enlisted pay.

Afghanistan has been considered a combat zone since Sept. 19, 2001. Jordan, Pakistan, Tajikistan, Kyrgystan and Uzbekistan have also been designated as areas in direct support of the military operation for Enduring Freedom. Kuwait was declared a combat zone in 1991 along with the Persian Gulf, the Red Sea, Gulf of Oman, Gulf of Aden Iraq, Saudi Arabia, Oman, Bahrain, Qatar and the United Arab Emirates. That designation has never been lifted. Bosnia and Herzegovina, Croatia, Macedonia and Kosovo are considered hazardous duty areas and soldiers serving there receive the same deferral on their taxes as those in combat zones.
If you're serving in a designated combat zone or hazardous duty area, much of your military pay and reimbursements will be exempt from federal tax.

To determine exactly what compensation or benefits are taxable and what are exempt, see IRS Publication 3, Armed Forces Tax Guide (see http://www.unclefed.com/IRS-Forms/2002/p3.pdf or call 1-800-829-3676)

For enlisted troops and warrant officers, if any part of a month is spent in a combat zone, then that entire month's wages are exempt. For officers, the exclusion is limited to the highest rate of enlisted pay. There are also automatically later deadlines for filing tax returns, paying taxes, submitting refund claims or taking other actions with the IRS. The basic extension period is 180 days, but it might be lengthened depending upon when in the tax season you were shipped to a combat zone.

You don't have to be in a combat zone for IRS relief rules to apply. If you are deployed to a region in support of but not directly involved in combat, you also receive the 180-day (or more) extensions. In addition, the deadline for the IRS to take certain actions, such as tax collection and examination of your returns, is extended and no penalties or interest will be imposed for not filing or paying taxes during this time.

The extension of time to file also applies to spouses of military members deployed to combat zones. On the other hand, if a family is owed tax refunds and wants to get money back immediately, the spouse back home can file tax returns on behalf of the deployed soldier.

What about Pennsylvania?

Military pay earned by PA residents is fully taxable unless received while on federal active duty or federal active duty for training outside Pennsylvania. Income received by a PA resident for military service performed inside Pennsylvania, even if on federal active duty or federal active duty for training, is fully taxable as compensation.

Income received for military service outside Pennsylvania while on active duty as a member of the Armed Forces of the United States is not taxable as compensation. You may deduct such income if included in your W-2 form. Therefore, when completing your PA income tax return, do not include military pay earned outside of Pennsylvania on Line 1a. of yourPA return. Attach a copy of your orders to the copy of your W-2 along with an explanation of the amount of income excluded from Line 1a.

PA reservists and National Guard members ordered to active duty for training pursuant to Title 10 or Title 32 of the U.S. Code are on federal active duty. When performing active duty service outside Pennsylvania, such military pay received is not taxable.

For more information see https://revenue-pa.custhelp.com

Soldiers and Sailors Civil Relief Act

This federal statute can help servicemen and women stop a civil legal action ( not a criminal action) and avoid default judgments if they cannot attend court due to military obligations. Civil actions that can be stopped include (but are not limited to) bankruptcy, foreclosure, and divorce proceedings. It also provides some other relief provisions including protection from lease termination in certain circumstances, limiting the interest rate on certain debts, and protection from some state taxes.

Federal soldiers' relief acts date back to the Civil War. The policy behind Congress' passage of these acts was two-fold: (1) it wanted service members to fight the war without worrying about problems that might arise at home, and (2) most of the soldiers and sailors were not well paid, so it was difficult for them to honor pre-service debts such as mortgages or other credit.

Our current Soldiers and Sailors Relief Act is circa 1940 and has been effective since then. It is a very powerful protection for service men and women.

Starting January 1, 2010, there are two important tax changes regarding Long Term Care: 1) distributions from life insurance policies and annuities which have long-term care features are tax-free when used to pay long-term care costs, and 2) both life insurance and annuities can be exchanged tax-free for tax qualified long term care insurance.

If you have an existing annuity contract or life insurance policy and want long-term care insurance, you have several choices. You can either partially or fully exchange the old policy and use the proceeds to purchase a stand-alone long-term care insurance policy. Or you can fully exchange the old policy for a new hybrid insurance or annuity contract that also includes long-term care features so that you will then be able to withdraw money tax-free as long as it is being used to pay for long-term care.

In general, when a financial asset is sold or liquidated, the owner realizes a gain or loss which is subject to income taxation. If you sell you shares of stock in X company and buy shares in Z company, you must recognize a gain or loss on the sale of X company stock. Not so if, instead, your investment was insurance or an annuity. Some assets get special treatment, and insurance is one of them.

Section 1035 of the Internal Revenue Code permits a taxpayer to exchange a life insurance policy for a new life insurance policy or annuity contract, or to exchange an existing annuity contract to another annuity contract without incurring any taxable gains. If there is a gain on the exchange, the gain is carried over to the new policy or contract; and the tax is deferred.

Section 1035 applies to non-qualified annuities and life insurance policies when transferred to a new policy of equal or greater value. A non-qualified annuity is one purchased with after-tax dollars or pursuant to a 1035 exchange. (Moving from one qualified annuity to another is a rollover of qualified funds like an IRA or 403(b) rollover. A 1035 exchange is not needed to defer taxes in that case.)

Why would you want to do an exchange? There are various reasons why you might exchange an old life insurance or annuity policy for a new one. You might be seeking a higher rate of return than what your existing annuity policy offers, you may wish different features to be included in the contract, or you may wish to establish a different type of investment. In the case of life insurance, you may simply wish to transfer the existing cash value to a paid up policy so you can avoid ongoing premium payments.

It is possible to fully surrender the life insurance or annuity contract and purchase a long-tern care product. However, not all companies, or states, offer a single pay Long Term Care Insurance (LTCI) product. The other approach is to make premium payments on the LTCI using a series of partial exchanges. This option is only available for annuities. No partial exchanges of life insurance contracts are permitted.

If you have a life insurance policy that you wish to use to fund LTCI, one alternative may be to exchange the life insurance policy for an annuity, and then do partial exchanges from the annuity to fund long term care insurance premiums. Another alternative may be to exchange the life insurance policy for a linked benefit product, such as a life insurance policy that permits withdrawals for long term care costs.

When using Section 1035, it is of the utmost importance that neither the insured nor the agent transfer the value between the old and new contracts. The old contract (or right to surrender a portion of the contract, for partial exchanges) must be assigned to the new receiving carrier, who then surrenders the contract (or requests partial surrender) to the old carrier using approved forms indicating an intent to perform a 1035 exchange. The old carrier sends the new carrier the cash value directly. If this process is not followed, the tax-free exchange will fail; and a taxable distribution to the contract owner is the result.

Exchanges may not be beneficial for everyone. Before exchanging any policies, make sure your current policy or annuity contract doesn't have a death benefit or other benefit that you don't want to give up. Also, there may be surrender charges for exchanging an existing annuity. Make sure you get competent tax advice before proceeding.

"The trade of the petty usurer is hated with most reason: it makes a profit from currency itself, instead of making it from the process which currency was meant to serve. Their common characteristic is obviously their sordid avarice." -- Aristotle

If you have your income tax return filed at a paid professional tax preparation service, and your tax return shows a refund; you will probably be offered a refund anticipation loan. Just say "no."

Refund anticipation loans ("RALs") are extremely high-cost bank loans secured by the taxpayer's expected refund -- loans that last until the actual IRS refund repays the loan. RALs are aggressively marketed by income-tax preparation companies. They advertise "Instant Refunds" or "Quick Cash" for their cash-strapped customers who need money in a hurry, and disguise the fact that they are selling advance loans on anticipated tax refunds.

How does a RAL work? Additional fees are charged by the tax preparation service to arrange a short-term bank loan for the taxpayer and to open a bank account. The bank who makes the loan charges finance charges. Your refund is paid to the bank to pay off the loan.

But you can get your refund almost as quickly without any fees or interest charges. If you e-file your taxes with the IRS and have your money deposited directly into your bank account, you can generally get your refund in fewer than ten days. There's no fee for e-filing, and you don't have to pay any interest. The IRS began accepting e-filed tax returns for 2009 on January 15.

Kimberly Lankford reported in Kiplinger's Personal Finance that the effective annual percentage rate for refund-anticipation loans can range from about 50% (for a $10,000 loan) up to nearly 500% (for a $300 loan) when you include interest charges and refund account fees.

Here is an example from Kelley Philips Erb's article for walletpop.com: Taxpayer is expecting a refund of about $800. She goes to a franchise tax preparation service where she is charged $200 for return preparation. They offer her a RAL, telling her that without it she could wait up to 12 weeks to get her refund. (This is not true.) She paid a $75 processing fee, a $60 service fee, and $50 in bank fees. Combined with the $200 preparation fee, she paid nearly $385. Instead of getting $800 in 20 days, she got about $400 the next day. That's crazy.

Supporters of the practice say the loans allow people access to funds immediately in cases of an emergency such as overdue medical bills, credit payments, and other debts while they wait for the IRS to process their income tax return.

Opponents of RALs say that the profit motive of the lender results in RALs being issued too often to low-income individuals who are made to believe the wait for their refund is longer than it really is, who do not realize they are taking a loan, do not understand the high interest rates charged by the loan (often exceeding 100% APR), and who do not actually need the funds immediately. The Consumer Federation of America and the National Consumer Law Center, say that Refund Anticipation Loans are controversial because, like payday loans, RALs are high-profit, low-risk loans marketed to the working poor.

In 2002, H&R Block settled a lawsuit brought by the New York City Department of Consumer Affairs for predatory lending practices with regard to RALs and the Earned Income Tax Credit.
In 2006, the California Attorney General sued H&R Block over its refund anticipation loan business, citing effective annualized interest rates that exceeded 500%, including fees. The suit claimed H&R Block falsely portrayed the nature of the loans, advertising "cash, cold, green, in your hand, out the door."

The IRS is also concerned that RALs are linked to tax fraud. Since the fees for the RAL are linked to the amount of the refund, preparers are incented to inflate refund claims inappropriately. A 2006 Government Accountability Office investigation found inflated refunds for 6 out of 19 paid preparers they tested. Repeated sanctions were imposed against Jackson Hewitt for engaging in deceptive, misleading and even criminal conduct, including a $5 million settlement with the California Attorney General over false and deceptive marketing of RALs and a 2007 enforcement action by the U.S. Department of Justice against five Hewitt franchisees for engaging in a tax fraud schemes that falsely claimed $70 million in refunds.

If you decide to go ahead with a RAL, make sure you read the fine print and understand exactly what your are paying for what service. The loan is a private arrangement. It is not offered by or through the IRS. Be careful.

It is likely that taxes at all levels will increase to pay for the massive spending that has taken place. Taxing governments should be wary of raising taxes too far, too fast. According to 2007 IRS statistics the top 1% of U.S. Taxpayers paid 40.4% of federal individual income taxes. At some point, further increases of tax burden on the same individuals will affect behavior. As taxpayers react to tax increases, they may leave a state or even a country for more tax friendly environments.

The Wall Street Journal ran an editorial in May 2009 describing the situation in Maryland. In 2008 Maryland enacted a "millionaire's tax." The legislature increased the marginal income tax rate to 6.25% on incomes of more than $1 million. Since cities like Baltimore and Bethesda also impose income taxes, the state and local combined rates could be as high as 9.45%. The millionaire's tax was estimated to bring in an additional $328 million in revenue over three years to the state coffers. In 2008 roughly 3,000 income tax returns with a million or more dollars of reported income were filed by Maryland residents. In 2009, there were only 2,000. The revenue from this groups of taxpayers was down $100 million (not up as predicted). The net result is that state of Maryland actually collected less tax from the millionaires by raising the tax rate, instead of the increase they projected. The WSJ surmises that Maryland's millionaire population fell by a third. They changed which state they claim as their legal residence. That's why the legislation is referred to as the "Get Out of Maryland Tax Act."

Rochester New York billionaire Tom Golisano made a highly publicized move to Naples, Florida because of high taxes in New York State. Golisano said the new New York State budget would result in his paying $5 million in income tax to New York State. In Florida he will pay zero income tax. Read his piece on "Why I'm Leaving New York."

Toronto attorneys Lesperance & Associates, who advise wealthy U.S. citizens on the "how to" of expatriation, have created a video called "Flight of the Golden Geese." It is about Goldie, a goose who lays golden eggs. (You can see it here.) In the video, Goldie alone was covering over 40% of the cost of the farm. The farmer said he needed more eggs. Goldie responded that the other animals should contribute, as well. The other animals called Goldie names - greedy, disloyal, selfish and disloyal to the farm. The Farmer said "Let's vote on it. Everybody in favor of Goldie giving more eggs raise your hoof, paw, or wing." What happened to the goose who laid the golden eggs? She left the farm, flying to another country where she didn't have to give up so many of her golden eggs to the farmer. As did Goldie, some individuals will choose to move to lower-tax countries.

Concerned about crushing estate, capital gains, and income taxes as well as personal security risks and the threat of litigation in the U.S.; wealthy U.S. citizens are looking at other countries. Other U.S. citizens who we would not classify as "wealthy" are looking to move to lower-tax jurisdictions as well. It is happening at such a rate that Congress enacted the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "HEART Act") which contains provisions to deter high net worth U.S. citizens or long term residents from avoiding payment of U.S. taxes by imposing an immediate exit tax on both the U.S. and foreign assets of individuals who relinquish their citizenship or who give up their green cards. How wealthy? The exit tax applies if you meet on of these three criteria: (1) for the period of five taxable years ending before the year of expatriation the individual has an average annual income tax liability of at least $145,000, (2) a net worth at the date of expatriation of at least $2 million, or (3) the individual would have failed to satisfy all applicable U.S. tax obligations for the five tax years before the year of expatriation.

Before you decide to take flight, there are things to consider. What about your health insurance? Medicare only pays in the U.S. - will your supplemental coverage cover you in the country where you are relocating? Will you be able to get the immigration status you need in the new country Will your retirement income support the lifestyle you want in the new country? What are the estate tax considerations?

Likewise, taxing authorities should consider the ability of geese who lay golden eggs to assume ever-increasing tax burdens.

Congratulations to Doug Smith on the opening of the Central Pennsylvania Federal Tax Clinic (CPFTC). The clinic is located at 601 South Queen Street, Lancaster, PA 17608-0599. Get more information at www.pataxhelp.org or call Doug Smith at (717) 299-7388 X3911.

Enelly Betancourt, staff writer for the Lancaster Newspapers reports:

Low-income taxpayers can receive free legal assistance or advice at a new taxpayer clinic.

The new Community Action Program clinic helps taxpayers who have tax controversies with the Internal Revenue Service.

It also informs individuals who have a limited English proficiency about their rights and responsibilities under federal tax law.

The clinic, at CAP's 601 S. Queen St. headquarters, is open Monday through Friday from 9 a.m. to 5 p.m.

Appointments are required.

"We currently provide income-tax preparation services, but there is a tremendous need in the area of tax controversy assistance," Mark Esterbrook, CAP's chief executive officer, said.

The clinic's primary goal is to prevent additional hardship among the working poor by ensuring that low-income taxpayers always have a source of free legal assistance.

"We understand that this is the first clinic of its kind between Philadelphia and Pittsburgh," Brian Sweigart, CAP communications officer, said.

Named manager of the new CAP clinic is Douglas Smith. He is one of two lawyers nationwide named public service fellows by the American Bar Association's Section of Taxation. His two-year ABA fellowship covers his salary and benefits.

Smith previously was in private practice as a tax and estate planning attorney.

Also helping to fund the clinic will be an IRS Low Income Taxpayer Clinic grant, in an amount that's yet to be determined, Sweigart said.

For information or to request an appointment, call 299-7388, ext. 3911.

Many loans among family members are interest free. Be careful. If you loan money to a relative or friend, there may be income and/or gift tax consequences if there is no interest or if the interest is below the market rate.

For loans of $10,000 or less, you don't have to worry about any of this. Such a loan may carry little or no interest, and there are no income tax consequences or reporting requirements.

For loans of $10,001 to $100,000 (all loans between the borrower and lender are added together for this threshold), the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. If the borrower's net investment income is less than $1,000, it is deemed to be zero.

What does the borrower's net investment income have to do with it? One of the purposes of these rules is to prevent taxpayers from shifting income to kids or other family members who are in lower tax brackets. For example, Dad loans his 19 year old Son $100,000. Son invests it, receives interest, dividends, and capital gain income which Son reports on his own 1040 and pays no income tax. Then Son repays the $100,000 to Dad. The effect of this has been (1) Dad has made a gift to Son of the income and (2) the income has been taxed at lower brackets, in fact, at zero.

If, on the other hand, Dad lends Son $100,000 to buy a house, or to pay for college, and Son uses the loan proceeds for the intended purpose, then there has been no income-shifting. No income is being generated by the loaned funds. Interest will be imputed to this type of gift loan only to the extent that the son has investment income.

The IRS publishes applicable federal rates (AFRs) monthly. There are interest rates for short, mid, and long-term loans. Short-term rates are for demand loans and term loans of 3 years or less; mid-term is for 3-9 years; and long-term is over 9 years. For example, the short-term AFRs for January 2010 are short-term 0.57%, mid-term 2.45%, and long-term 4.11%.

For demand loans, the difference between the interest calculated using the stated rate and the applicable federal rate is generally treated as income to the lender and a gift from the lender to the borrower on December 31 of each year that the loan is outstanding. A demand loan is payable in full at any time on the lender's demand.

For term loans, a lender who makes a below market rate (BMR) loan is treated as having made a gift of the difference between the amount of the loan and the present value of all the scheduled payments, using the applicable federal rate on the date the loan is made. When making a term loan it is usually best to state an interest rate. The Lender may forgive interest payments as they come due. The forgiveness of the interest is a gift and the lender must, nevertheless, include the amount of the interest in income.

The Lender can forgive $13,000 of interest and principal payments using the annual gift tax exclusion. If the loan is from a married couple to a married couple, maybe Mom and Dad to Son and Daughter-in-law, up to $52,000 (4 x $13,000) in interest and principal payments could be forgiven each year with no gift tax consequences. Mom and Dad have interest income to report on their 1040. Son and Daughter-in-law are treated as having paid interest. If the loan was used by Son and Daughter-in-law to buy a home, and if the loan is secured by a mortgage on the home, the interest will be deductible for them as interest on their primary residence mortgage.

For any of these arrangements, make sure the terms are in writing. This accomplishes two things: (1) the terms of the arrangements are clear to the lender, the borrower, and other family members and (2) the loan documentation can stop the IRS from claiming that the transfer of cash was a gift. This is very important. Without written documentation that the transfer is a loan, the IRS can argue that there was no loan at all; it was just a gift. Plus, if the borrower can't make good on the loan, you would need to have this documentation in order to deduct it as a non-business bad debt.

Undocumented loans can become particularly contentious when the lender dies. Documentation establishes whether the loan is to be repaid to the estate or was a lifetime gift. Many times, a family lender, especially to children or grandchildren, does not expect a loan to be repaid after the lender's death. If this is so, it is necessary for the lender to state in his or her will that the balance of principal and accrued interest on the loan is forgiven. Otherwise, the loan will have to be repaid, or will be a set-off against the borrower's distributive share of the estate. Simple documentation can avoid this set-up for a sibling fight and the expense and time that usually ensues.

Starting January 1, 2010 there are many tax changes to deal with. Many tax breaks are phased out. The changes below are the current state of the law. It is always possibly for Congress to act to extend or replace disappearing provisions. The House passed a bill that extended many of these provisions, but the Senate was unable to schedule a vote on it. The Senate has been tied in knots over the health care bill.

Roth IRA Conversions

Starting in 2010 the income cap for converting a traditonal IRA to a Roth IRA is eliminated. Now anyone can do a Roth conversion. If the conversion is done in 2010, taxpayers can spread the income tax attributable to it over two years: 2011 and 2012. Note that while the income cap is removed for purposes of qualifying for the conversion of a traditional IRA to a Roth IRA, there remains an income cap on regular contributions to a Roth IRA. The income phase-out begins at $167,000 for joint filers.

New Vehicle Sales Tax

Individuals will no longer be able to take an itemized deduction or increase the standard deduction for the sales tax on the purchase of a new motor vehicle. Vehicles had to be purchased after February 16, 2009 and before January 1, 2010 to qualify for the deduction.

No More Sales Tax Deduction

The choice to deduct state sales tax payments instead of deducting state and local income taxes is gone. This provision was very important for taxpayers in states like Florida where there is no income tax.

No Phase-outs for Personal Exemptions and Itemized Deductions

In 2010 there will be no phase out of deductions and exemptions for higher income taxpayers. This will greatly benefit high earners.

Teachers' Deduction

The $250 deduction for teachers who buy classroom supplies with their own money is eliminated.

Tuition and Fees

The $4,000 deduction for college tuition and fees expires after 2009. This deduction was permitted "above the line", meaning it could be taken even if the taxpayers didn't itemize.

Contribution to Charity from IRAs

IRA owners older than 70½ who make contributions from their IRAs directly to charity will no longer be able to exclude these withdrawals from income.

No More Property Tax Deduction

Non-itemizers will no longer be able to deduct up to $1000 in property taxes paid. This provision had been a help to home-owners who had no mortgage so that there was no interest deduction to help make itemization worthwhile.

Alternative Minimum Tax Exemptions Reduced

The Alterative Minimum Tax exemption levels fall back to $45,000 for married filing jointly and $33,750 for singles an heads of household. (In 2009 the exemption was $70,950 for married filing jointly and 46,700 for singles and heads of household.) Some commentators say that as many as 1 in 5 taxpayers will be subject to the AMT in 2010.

No Exclusion for Unemployment

The first $2400 of unemployment benefits will no longer be tax-free.

Energy Credit Reduced

The 30% tax credit for the cost of energy-saving home improvements is reduced to 19% and is capped at $500.

Section 179 Expensing

The maximum amount of equipment that can be expensed (instead of depreciated) is reduced to $135,000 to $250,000. Businesses can no longer claim 50% bonus depreciation on assets placed in service in 2010.

Income Tax on Dividends

For taxpayers in brackets higher than 15%, qualified dividends are taxed at a maximum rate of 15% through December 31, 2010. For taxpayers in the 10% and 15% brackets, qualified dividends are taxed at 0% through December 31, 2010. The provisions sunsets on December 31, 2010, and dividend taxation reverts to former 2002 rates.

Mileage Reimbursement

The mileage rates effective January 1, 2010 are 50 cents for business, 16½ cents for medical and 14 cents for charitable purposes.

Home Buyers Credit

If you used the Home Buyers Credit in 2008, you must start paying it back in 2010. The qualification period for first-time home buyers to purchase a home and qualify for the credit continues through May 1, 2010.

Contributions to Retirement Accounts

Remember you have until April 15, 2010 to contribute to a traditional or a Roth IRA. If you have Keogh or SEP and you get a filing extension for your 2009 return until October 5, 2010, you have until that date to make contributions.

No Estate Tax

The federal estate tax is repealed for individuals who die in 2010.

Wild Cards

If the Senate and House eventually hammer out a health care bill that becomes law, there are various provisions in the current legislation on how to pay for it. The House bill includes a 5.4% surtax on high earners and would curtail flexible spending accounts. The Senate bill includes a 40% surtax on high-end employer-sponsored health plans - that provide health coverage valued at more than $8,500 for individuals and $23,000 for families (they call them "Cadillac plans") and increases the Medicare payroll tax. Hold onto your wallet.

The American Recovery and Reinvestment Act of 2009, enacted in February 2009, included among its provisions a new education credit, The American Opportunity Tax Credit.

As it was originally proposed by President Obama, the Act would have provided a $4,000 credit in exchange for 100 hours of community service. That didn't make it to the final version, although the Act does direct the education secretary and the treasury secretary to conduct a feasibility study on requiring community service in order to get the tax credit.

The American Opportunity Tax Credit that was enacted is available in 2009 and 2010 and is an expansion and re-naming of the existing Hope credit. It makes the former Hope credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax, and allows the credit to be claimed for four post-secondary education years instead of two. However, the American Opportunity Tax Credit is for amounts paid in 2009 and 2010 only. You may be eligible for the lifetime learning credit for any tuition and fees required for enrollment you pay after 2010.

The maximum annual American Opportunity Tax Credit is $2,500 per student. That is a $700 increase from the previous Hope credit.

You can claim the American Opportunity Tax Credit if you pay qualified tuition and related expenses for an eligible student who is either yourself, your spouse, or a dependent for whom you claim an exemption on your federal tax return. You cannot claim the American Opportunity Tax Credit if your tax filing status is married filing separately. Students must attend school at least half-time.

Eligible educational institutions are any college, university, vocational school or other post secondary educational institution eligible to participate in student aid programs administered by the United States Department of Education.

Up to $2,500 of the cost of qualified tuition and related expenses paid during the taxable year qualify for the credit. The credit is student-based, meaning that the credit may be claimed for each eligible student (for example, if a family has two students in college) rather than just one per tax return.

The term "qualified tuition and related expenses" has been expanded to include expenditures for "course materials." For the purpose of this credit, "course materials" means books, supplies and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. The cost of a computer would qualify for the credit if the computer is needed for enrollment or attendance at the educational institution. Expenses such as insurance, medical expenses, room and board, transportation, or similar personal, living, or family expenses are not included.

The amount of the credit is calculated as 100 percent of the first $2,000 of tuition, fees and course materials, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year. If the amount of the American opportunity tax credit for which you're eligible is more than your tax liability, the amount of the credit that is more than your tax liability is refundable to you, up to a maximum refund of 40 percent of the amount of the credit for which you are eligible.

You can't claim the American Opportunity or Lifetime Learning credits for any expenses that were paid from the tax-free portion of a distribution from a 529 plan or a Coverdell Education Savings Account. The credit also can't be claimed for payments made from tax-free scholarships and fellowships, Pell grants, employer-provided tuition reimbursement, Veteran's educational assistance, or other tax-free educational assistance.

Though the income limits are higher than under the existing Hope and Lifetime Learning Credits, this credit also phases out. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. A taxpayer whose modified adjusted gross income is greater than $90,000 ($180,000 for joint filers) cannot benefit from this credit.

A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid. However, you must choose whether to take a tax deduction or receive a tax credit. You may not claim the tuition and fees tax deduction in the same year that you claim the American opportunity tax credit or the lifetime learning credit. You also cannot claim the tuition and fees tax deduction if anyone else claims the American opportunity tax credit or the lifetime learning credit for you in the same year. Though the credit will usually result in greater tax savings, taxpayers should calculate the effect of both on the tax return to see which is most beneficial -- the tax credit or the deduction.

The credit is claimed using Form 8863, attached to Form 1040 or 1040A. For more information, see IRS Publication 970, Tax Benefits for Education at www.irs.gov.

BUT Beware of Bed Buffaloes!
Read the Wandering Tax Pro's OI VEY! AN UPDATE ON MY LAST POST

Is your retirement plan invested in your employer's company stock? If so, there is a tax strategy available to you that is often overlooked.

Normally, all withdrawals from a retirement plan are taxed as ordinary income, at ordinary income tax rates. However, if you take distribution of your employer's company stock from your retirement plan and hold it in a taxable investment account, you may be able to significantly reduce taxes on plan distributions. This strategy is called the Net Unrealized Appreciation ("NUA") approach. It is authorized by Section 402(e)4 of the Internal Revenue Code.

NUA is the difference between the cost basis of the stock inside the plan and the stock's current market price on the distribution date. Using the NUA approach, only the cost basis of shares is subject to tax at the time of the distribution from the qualified plan. The difference between the basis and the fair market value--the net unrealized appreciation--is taxed at long-term capital gains rates only when the stock is sold, regardless of the holding period. This can be a better result than rolling the stock into an IRA where all of its value will eventually be taxed as ordinary income when it is distributed to you or to your beneficiaries.

When the stock is sold, NUA is treated as a long-term capital gain, even if it is sold immediately after distribution. Any appreciation of the employer stock that occurs after it is distributed will be considered a short-term capital gain if the employer stock is held for less than one year. If the stock is held for at least one year after the transfer, it is then characterized as a long-term capital gain.

If you never sell the shares of stock with the NUA, when your beneficiaries sell the stock they inherit, they will owe long-term capital gain tax on the unrealized appreciation portion of any gain. However, since the stock receives step-up in cost basis on your death, any additional appreciation between the date of distribution and the date of your death is never subjected to income tax.

If you take the NUA approach, the shares of company stock are outside the plan and not in an IRA. They are in a regular investment account. There are no minimum distribution requirements. The higher your income tax bracket and the more the stock has appreciated, the more you may benefit from this strategy.

If you are considering this technique, ask your plan administrator for the cost basis of various lots of employer stock in your plan. It makes sense to take out shares with the lowest cost basis. You don't have to take out all the shares. You can rollover part of the shares - choosing the ones with a higher cost basis to rollover. The special NUA treatment is lost for shares that are rolled over into an IRA.

Unfortunately, many retirees and advisors assume that rolling a retirement plan distribution into an IRA is the only option available. On the surface, this seems like the standard operating procedure, but it could cost thousands of dollars in additional taxes that could have been avoided.

In order to use the NUA approach, the employee must elect a lump-sum, in-kind distribution from the plan (a complete distribution of all plan assets in a single calendar year). A lump-sum distribution can be received on the employee's death, on the employee's attaining age 59 l/2, on the employee's separation from service, or on the employee's becoming disabled. If there is company stock in your retirement plan when you die - your spouse or other beneficiaries can use the NUA strategy.

With capital gains rate at an historical low, the increased use of company stock in retirement plans, and the long-term gains of the stock market, using the NU approach makes good sense for many plan participants.

On March 23, 2009 the IRS announced a new voluntary disclosure program for undeclared foreign accounts. The "amnesty" program is open for six months, closing on September 23, 2009. For qualifying taxpayers who come forward and report their undisclosed foreign bank accounts and pay back taxes for six years plus interest and some penalty, the IRS agrees not to bring criminal charges or assess the 75% fraud penalty.

IRS Commissioner Douglas H. Shulman said, "offshore accounts harbor billions of dollars, and people should take notice that the secrecy surrounding these deals is rapidly fading."

On June 30, 2008 a federal court authorized the IRS to serve a "John Doe" civil summons on UBS, demanding the names of approximately U.S. clients who hold off-shore bank accounts. On February 18, 2009, UBS entered into a Deferred Prosecution Agreement with the Department of Justice and agreed to pay $780 million to the U.S. and to disclose the names of between 250-300 of its U.S. clients who had maintained secret accounts at UBS. Now the IRS has sued to enforce the earlier John Doe summons seeking the disclosures of the owners of about 52,000 UBS Swiss accounts. It is estimated that these accounts hold some $17.9 billion in assets. The 52,000 accounts are just at one bank in one country. No one knows how many other accounts in other jurisdictions and financial institutions are unreported.

In addition, UBS has notified many of its U.S. clients that their secret bank accounts will be terminated. Closing the accounts is going to put the account holders in a tight spot. They have two choices: 1) transfer the money to banks in other "bank secrecy" jurisdictions which would create a paper trail discoverable by the IRS, or 2) repatriate the funds to the U.S and come clean with the IRS.

It is not illegal to have a foreign bank account in a bank secrecy jurisdiction (Switzerland, Liechtenstein and the Cayman Islands come to mind). What is illegal is failing to disclose the accounts and failing to report the income and pay income tax. In addition to disclosing the existence of the accounts on your 1040 and reporting the income, Foreign Bank Account Reports ("FBARs") must be filed by any U.S. taxpayer who has signatory or other authority over a foreign account or accounts that have a combined value of more than $10,000 at any time during the calendar year.

For taxpayers who "come clean" under the voluntary disclosure program, they will have to 1) pay back taxes due on the undisclosed assets for the last six years; 2) pay interest on the back taxes; and 3) pay a 20% accuracy penalty or a 25% delinquency penalty for each tax year at issue.

While this may seem like a tough position, it is far less than what these taxpayers will face if they are discovered by the IRS. Most importantly, the IRS will not pursue charges of criminal tax evasion against taxpayers who voluntarily disclose their offshore assets under this new policy. There is no guarantee of no criminal prosecution, but it is a mitigating circumstance in whether or not the IRS will recommend prosecution and, obviously, the amnesty program is not going to work unless the IRS sticks to its announced policy.

In addition, the IRS will not pursue other penalties against participating taxpayers, such as the fraud penalty of 75% of the unpaid tax or the statutory penalty for willful failure to file an FBAR, which is the greater of $100,000 or 50% of the foreign account balance. Both of these penalties apply annually to undisclosed accounts and assets during the relevant tax years.

Since a taxpayer's name may be discovered by the enforcement of the "John Doe" summons against UBS or in Congressional Hearings, it would be prudent for affected taxpayers to begin the process of determining whether the voluntary disclosure policy is available and appropriate for their particular circumstances. As IRS Commissioner Shulman forewarned, "having the IRS find you could mean a much heavier price than coming forward on your own."

Before making a voluntary disclosure, each case should be considered by a qualified tax advisor, giving consideration to the particular circumstances of each case. Voluntary disclosure is not a guarantee of no criminal prosecution. Experts recommend that the taxpayer's attorney contact the local IRS district office. Without disclosing the taxpayer's name, the attorney should explain the facts and circumstances to the IRS to determine if the IRS will agree not to prosecute. This disclosure should only be done with a high-level IRS official or counsel.

Taxpayers with offshore noncompliance should take advantage of the amnesty and come forward. The situation is going to get worse, not better.

See Greg Herman-Giddens' post on the North Carolina Estate Planning Blog:

Deductibility of Estate Planning Legal Fees which sets forth the general rule that all legal fees for estate planning are not deductible for income tax purposes. They are only deducible to the extent that they represent tax advice (that is fess in connection with the determination, collection, or refund of any tax).