In this issue...
Thanks to the large capacity of CD-ROMs, we are offering a new end-of-season product that will consolidate three years of Tax Preparer and its manuals onto a single CD-ROM. It will be regularly priced at $199, but if you updated your Tax Preparer this year we want to introduce this product to you for $69. Heres what youll get:
To order this new product, use the special order form, or just call us at (858) 454-0121. (CAUTION: This product requires Windows 95 or later. See the order form for other requirements and recommendations.)
Why a paper Form 8453-OL is usually required. While the publicity behind the IRSs e-file program touts the benefits of a paperless return, most taxpayers must still file a paper Form 8453-OL (or 8453) and attachments. The paper form includes a "Declaration of Taxpayer" which the taxpayer(s) must sign and mail to the IRS in lieu of a signed Form 1040 once the e-file return is accepted by the IRS.
Electronic signature eliminates the paper. Under a pilot program initiated last year by the IRS, many taxpayers who prepare and e-file their own return can file electronically without filing a paper Form 8453-OL. (Unfortunately, no such pilot program exists for professionally prepared returns.) If you filed your own return last year using computer-generated forms like ours, you may have received a postcard from the IRS explaining the pilot program and issuing an e-file Customer Number (ECN) to you (and your spouse, if married). If you received such a postcard from the IRS, you can participate in the IRS pilot program and can use Tax Preparer 2000 to do so.
How to enter "electronic signature" in Tax Preparer. Tax Preparer 2000 supports the pilot program through two entries on the first screen of its Form 8453-OL, under the banner "For IRS ECN Pilot Program." In accordance with IRS rules, you must personally enter your ECN number on the line "Your ECN signature (00000)" and, if married filing jointly, your spouse must personally enter her ECN number on the line "Spouse ECN signature (00000)". You must do this before you transmit the return to the IRS so that the ECN numbers are a part of the electronic return. As long as your return would not otherwise require paper attachments other than Forms 8453-OL, W-2, W-2G, or 1099-R, you will not have to file any paper as long as the IRS accepts your e-file return (as acknowledged by the IRS within 48 hours).
It just gets worse. Roth IRAs caused a great deal of consternation for the IRS when they were first available in tax year 1998, and the complexities only got worse in tax year 1999. However, the complexities are hidden in IRS Pub. 590 and the instructions for Forms 8606 and 5329. The forms themselves hardly reveal the changes. We have therefore expended a great deal of effort to automate these two forms so that your efforts in preparing them are minimized. However, for our automation to work you must follow our instructions carefully. Here are some highlights of areas that have caused some confusion.
Let translate do the work for carryovers. If you converted a traditional IRA to a Roth IRA in tax year 1998, and properly completed Form 8606 for that year, you were given the option of paying the resulting tax all at once or spreading it over 4 years. If you chose the latter (the normal default), only one-quarter of the taxable amount was reported on the 1998 return, and the remaining three quarters is carried over to the following three years. The IRS handles this on the current Form 8606 through lines 20a through 20c of the new form. Inconsistent instructions can cause some people to skip this section of Form 8606 and omit the required carryover. However, it is all handled automatically by Tax Preparer 2000 as long as you started the return with a translation of the prior-year return (with tax year retained at 1998). Various amounts from the 1998 Form 8606 will appear on screen 5 of our Form 8606 and will be used in Part III of the form, including lines 18a, 20a, 20b, and 23. The taxable amount for the current year (once again one-quarter of the full amount for most taxpayers) will then be included in line 27 of Form 8606, in spite of some IRS instructions to the contrary. It will also be reflected in the total tax at line 15b of Form 1040.
Complete Pension (Form 1099-R) Worksheets for Form 1040 before Form 8606. If the taxpayer received a 1099-R for any kind of IRA, you must report its information on our worksheet for line 15a before attempting to complete Form 8606. Whether the amount is nontaxable or not, all information must be provided on the worksheets. No distinction is made among the many types of IRAs that now exist. In fact, you must identify any IRA by a Yes answer to line 7 (IRA/SEP distribution) even if box 7 is not checked on the 1099-R from the payer. (The IRS now instructs payers to check the box only for traditional IRAs, but our software requires a Yes answer here for all IRAs.) You will identify the kind of IRA (and whether it is a conversion) on the first screen of Form 8606, not here.
Conversions are not contributions! An important distinction is made between amounts deposited in a Roth IRA from a traditional IRA and all other amounts deposited. The former are called conversions and the latter are called contributions, and each is subject to different tax rules. It is therefore very important that you enter only cash contributions on lines 18a (for 1998) and 18b (for 1999) of Form 8606. Amounts stemming from traditional IRAs are instead entered first on the Pension Worksheets (noted previously) as distributions from traditional IRAs, then identified on the first screen of our Form 8606 as "Traditional IRA converted to Roth IRA;" the amount will then properly appear on line 14a of Form 8606.
Why a penalty? Most preparers seem surprised when our software assesses a 10% penalty on withdrawals ("distributions") from a Roth IRA. They are, of course, accustomed to the fact that withdrawals from traditional IRAs are normally subject to this penalty only when made before age 59-1/2. But Roth IRAs are different. The IRS form and instructions are not clear on this point, largely because the IRS did not expand Part I of Form 5329 to explicitly handle Roth IRAs. However, the fact is that a withdrawal from a Roth IRA within 5 years of its creation is subject to penalty with few exceptions, irrespective of the age of the taxpayer. If the entire Roth IRA stems from a conversion, the entire distribution is usually subject to a 10% penalty. Otherwise only the earnings may be subject to the penalty. (The software automatically generates Form 5329 and assesses the penalty when it applies. Nevertheless, you may be able to eliminate or reduce the penalty by claiming an exception detailed on pages 2-277 and 2-278 of Tax Forms Guide 2000.)
No entries required on Schedule EIC. Thanks to a major redesign of our handling of the Earned Income Credit, you are no longer required to supply additional child or income information on Schedule EIC. The computation of the credit and the printing of the schedule are now fully automatic based on information available elsewhere in the return. However, some of you have overlooked the new entries that are relevant to a proper computation of the credit.
but watch these entries. Because the IRS instructions for Form 1040 dont tell the whole story, it is easy to overlook the impact of some entries for the return. Weve detailed the related entries in the shaded box on page 1-7 of the current Tax Forms Guide, but they bear highlighting here:
You may be surprised to get a credit. The Earned Income Credit is limited to taxpayers with investment income up to $2,350, but whats included in that income changed last year. It no longer includes long-term gains on Form 4797. As a result, more taxpayers are eligible for the credit than in the past. Although the IRS often overlooked this change and sent erroneous notices to some taxpayers who used Tax Preparer last year, the IRS has now changed its instructions in Pub. 590 to agree with our computation!
Due diligence satisfied without Form 8867. Paid preparers should note that the software satisfies the due diligence requirements by including all information in Form 8867. See page 2-133 and 2-134 for details.
Dont forget our web page for even more help. On our home page (www.howardsoft.com) youll find: