Greetings,

This tax tip issue is going to be long. I apologize, but I felt is was extremely important to inform you about the Tax Amnesty program for the State of California that begins on February 1st and runs through March 31, 2005. Please read the information, and if it applies to you, contact me as soon as possible.

Here's the bad news for everyone. Because the amnesty period runs during the busiest part of tax season, it may be necessary to file extensions for some clients. Unfortunately, those taxpayers that take advantage of the amnesty program will have to take priority. Hopefully this won't be a problem, but I want to let everyone know now.

I'm also including a tip about retirement plan contributions.

Don't forget, there's an e-organizer available for anyone that wants to try to fill in their information online. Please let me know if you are interested.

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Two IRA rules change in 2005

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Individual retirement accounts (IRAs) are an excellent way to save for retirement and reduce your tax bill. Two rules on IRAs change this year, and that could be very good news for you.

Change #1:
The maximum amount you can contribute to an IRA for 2005 increases to $4,000, up from the 2004 limit of $3,000. If you’re 50 years old or older, you can put up to $4,500 in an IRA this year, up from $3,500 for 2004.

Change #2:
This change will make it easier for those over age 70½ to convert their regular IRAs to a Roth IRA. As you may know, to qualify to convert a regular IRA to a Roth IRA, your adjusted gross income cannot exceed $100,000, and this limit applies whether you are single or married. Effective January 1, 2005, the required annual minimum distribution from your IRAs won’t be included when determining whether your income exceeds the $100,000 threshold. That’s good news if you've wanted to switch to a Roth but haven’t been able to because of the income limit.

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Tax Amnesty

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Amnesty is a tool for the State of California to collect tax. It is not necessarily a program for the benefit of taxpayers. Why do I say that? You could unknowingly be subject to amnesty and not even know it. If you do not apply for amnesty, you will be subject to the increased penalties once the amnesty period ends. Here are some examples:

• You forgot to report some income that you received a 1099 for in 2002. The IRS sends you a letter in June 2005 (after the amnesty period is over) asking for additional tax on the income. You do some research and find out that they are correct. You pay the Federal tax. For the State of California you file an amended return. Because this return was for a year prior to January 1, 2003, you should have applied for amnesty. You will not only have to pay the tax due but the interest will be subject to an additional 50% penalty. In addition, the accuracy related penalty will be 40%.

• You are currently being audited for 2001 by the IRS, or you find out that you will be audited for 2001 by the IRS. Since the audit will still be in process during the amnesty period, you don’t know if you will owe additional tax or not. Since the year in question would be subject to the amnesty program, you may owe additional penalties to the state.

• In 2002 you bought some equipment for your company from out of state and did not pay any use tax to the Board of Equalization.

• You failed to file a 1986 California tax return. Yes, the Franchise Tax Board has gone back and notified taxpayers of missing returns that could be included in amnesty. Do you still have all of your 1986 information? If you don’t and have to file a return, you’re in trouble.

The State of California Tax Amnesty program begins on February 1, 2005 and goes through March 31, 2005. The amnesty program is for taxpayers who have done any of the following:

• Failed to file income tax returns or sales tax returns

• Underreported income on a previously filed income or sales tax return

• Failed to pay any taxes previously assessed

Those taxpayers that take advantage of amnesty will be forgiven all civil and criminal penalties for taxable years or reporting periods prior to January 1, 2003.

The program applies to individual and corporate franchise and income tax liabilities and all sales and use tax liabilities. Taxpayers that wish to participate in the amnesty program must file an application with the Franchise Tax Board or Board of Equalization, signed under penalty of perjury, electing to participate in the program, and must do the following prior to the conclusion of the amnesty period:

• Either file a completed original tax return for any (and all) tax reporting periods for which the taxpayer has failed to file a return, or file an amended tax return for any tax reporting period for which the taxpayer has underreported his or her tax liability; and, pay in full the taxes and interest due for each reporting period for which amnesty is requested.

• Enter into an installment payment agreement in which all past due taxes and interest will be paid by June 30, 2006.

• Timely file FTB returns and pay all FTB taxes, penalties, and fees for the 2005, 2006 taxable years free of the imposition of any collection cost recovery fee. The taxpayer may request an installment agreement for 2005 & 2006.

For taxpayers that are eligible, but choose not to participate in the program the penalties will be steep. After the amnesty period is over, an additional 50% penalty will be added to the interest owed. In addition, the accuracy related penalty will increase from 20% to 40%.

Taxpayers who are the subject of a criminal investigation for unpaid or underpaid taxes, or against whom a court proceeding has already been initiated cannot use the amnesty program. Furthermore, the amnesty program cannot be used for taxpayers who have a tax liability attributable to a tax shelter.

Taxpayers that participate in amnesty give up the right to appeal or to file a claim for refund of amnesty related payments.

Once you file the application for amnesty, the returns must be filed by May 31, 2005.

Please note, because the amnesty period runs during the busiest period of tax season it is imperative that you notify me IMMEDIATELY if you need to take advantage of the program.

Linda