Your tax questions answered

It's an annual rite of passage that almost every taxpayer goes through: Interpreting the latest and greatest IRS rules. Of course, that leads to lots of tax questions.

Luckily, we have the answers. Below tax blogger and attorney Kelly Phillips Erb tackles some of your top tax questions.

If someone owes the IRS back taxes how do you notify the IRS that this person has passed away?

The Personal Representative for the deceased person's estate (in many cases, the Executor) should file a final income tax return for the decedent with the word "Deceased" after their name in the name and address section of the final return. The date of death should also be written across the top of the final return.

The decedent's final return is due on April 15 of the year following death, regardless of when the person died. So, if the person died on January 15, 2009, or on December 10, 2009, the decedent's final income tax return is due on April 15, 2010.

Unfortunately, it's wrong to assume that the tax liability will "die" along with the taxpayer. Depending on the age and type of tax, the Personal Representative may need to pay the tax debts out of the estate. Additionally, any federal tax liens filed against the property will remain with the property.

This will be the first time I will owe money to the IRS. How do I go about paying them back?

In a perfect world, you would write a check or money order made payable to the US Treasury for the entire amount and mail it with your tax return using a payment voucher.

You can also pay by credit or debit card. To do so, use one of the following service providers authorized by the IRS:

Link2Gov Corporation
1-888-PAY-1040TM (1-888-729-1040)
1-888-658-5465 (Customer Service)

RBS WorldPay, Inc.
1-888-9-PAY-TAXTM (1-888-972-9829)
1-877-517-4881 (Customer Service)

Official Payments Corporation
1-888-UPAY-TAXTM (1-888-872-9829)
1-877-754-4413 (Customer Service)

You will be assessed a convenience charge by the provider; the fees vary from one provider to the next. On the plus side, if you itemize, you can deduct the fee on your Schedule A as a miscellaneous expense on your 2010 return.

If you can't pay the entire amount by check, money order or credit card due to hardship, you can request up to a six-month extension.To request an extension, you'll need to file a form 1127 by April 15. Even if your request is granted, keep in mind that the IRS is going to charge you interest. And if you fail to pay the entire amount by the revised due date, you'll be subject to penalties on top of that interest.

To help you better afford the whole lump sum, you can also request an installment payment plan with the IRS, which would allow you to pay the amount due, plus interest over the course of up to 60 months. Penalties may also apply. To request an installment plan, you'll need to file a form 9465 or apply online.

I owe money to the IRS and I set up a payment plan. Will I be able to file my taxes as usual and get a refund or will the amount be deducted from the amount I owe?

If you have an outstanding balance with the IRS, they will generally keep any refund that you may be due under the Treasury Offset Program. This includes tax debts, child support arrears and student loan defaults. This is true even if you are participating in an installment plan.

You should have received a debt notice from the IRS in the mail. If the notice is returned as undeliverable, an attempt is made to find a "good" address. However, whether or not a current mailing address is found, the law requires that efforts be made to collect the amount owed.

So, you can pretty much count on your refund being retained by the IRS this year. The amount of the refund will be applied towards your balance and will reduce the amount that you'll need to pay as a result of your installment plan. Once you've paid off the entire balance remaining, you'll begin receiving your refunds again.

Vanguard distributed funds from my Rollover IRA that I did not want done. I had the transactions reversed. It was taken out on December 30, 2009 and returned on January 4, 2010. How do I report this on this year's taxes without being taxed as a distribution for 2009?

Hopefully, Vanguard will adjust its records to show that the distribution was not taxable. If you receive a form 1099-R for the distribution that is not coded correctly, give Vanguard a call and ask that they issue an amended 1099-R. It is the responsibility of the issuer to ensure that the 1099 is correct.

If they refuse, contact the IRS (you can call them at 1-800-829-1040) and advise them that the 1099 is not correct. Have your name, address, Social Security Number, and payment information and the name, address, and phone number of the payer handy when you call. The IRS will contact the issuer and take steps to resolve the matter on their end. For more information about the process, check out this prior post.

I've moved since I filed my taxes last year. I didn't receive a tax form in the mail. How do I let the IRS know that my address is changed?

The IRS will not, as a rule, be sending out tax forms in the mail. If you need a tax form, you can order a paper tax form by calling 1-800-829-3676. You can also use fill-in forms or software to file your return. Click here for more information about free filing options.

That said, if your address has changed, you need to notify the IRS, or else the IRS will use the last address they have on file. The easiest way to do this during tax season is to update your address directly on your 2009 return. The IRS will note the change when they process your return.

To change your address with the IRS without filing a return, you should complete a form 8822. Instructions for completing and mailing the form are included with the form.

I received about $400 from freelance work. Do I have to report it since it's under $600?

Absolutely. You have to report all income that you receive, regardless of the amount.

The $600 limit that you're thinking of refers to the amount at which you must file a form 1099. Even if you don't receive a form 1099, you are required to report the income. If you fail to do so, you could be subject to an underpayment penalty, plus interest.

My grandmother gave me a gift of $20,000 last year. Since it's more than $13,000, where do I report it on my tax return?

You're confusing two tax rules.

A gift is subject to gift tax if it's above the annual exclusion amount. For 2009 (and 2010) this amount equals $13,000. This means that you can gift up to $13,000 per person during the year and pay no gift tax -- it doesn't matter if it's one person or 1,000 people. So long as each person receives $13,000 or less, there's no gift tax payable.

In your case, the amount is over the annual exclusion, so a gift tax return will need to be filed. But it's the donor that bears the responsibility of filing the return and paying any tax due -- so that's up to your grandmother, not you.

While you don't have to report gifts that you receive on your own income tax return, you are responsible for reporting any associated income. So the $20,000 is tax free to you. If you had invested it and it threw off dividends of, say, $200, you would report the dividends -- just as normal.

So, no tax consequences to you. And be sure tell your grandmother "thank you."

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