jainen

>>does she have to include the Federal 1040X?<< What, are you running low on paper? Just attach the whole federal file-- the X plus a new 1040, new schedule A if AGI affects it, and anything else new. You don't want them looking too close to see if something might be missing.

>> I had the info on the W-2 and failed to ask him for back-up-<< One of the nice things about our business is that it doesn't cost us anything to offer this kind of superior customer service. You don't have to admit the error. Just punch out the forms and put them in a nice folder. The IRS will back down and you'll end up looking like a hero. For those who still aren't convinced, look at the national chains. They built their market share partly on the promise that they won't charge extra to handle routine IRS inquiries like this, including amending a return if they prepared the original. The value to the client is far more than the cost to the preparer.

>>I told him it would cost more for me to amend than he would save in taxes<< I don't mean to tell you how to run your own practice, but I would put this one in the category of preparer error and not charge for amending state and federal.

>>whether this is even a "real" tax return<< Do a complete return with filing status and everything; at least that starts the statute. I'm paranoid about the guv'mint and I think they want to identify non-filers for reasons other than tax administration.

>>if there's no difference is there any reason to amend the CA return to add the CA SchD/3885A?<< If you don't amend it, when the client gets the FTB letter he will complain, "I thought you already took care of this!" California allows "mini-ISO" treatment for certain NQ options granted before 2002.

>>he can't tell the IRS that it's a second home<< I agree. He should amend 2003 through 2006 to remove the second home. (If he can afford a yacht he's probably in Schedule A phaseout anyway, and investment interest avoids that.) This is the professional approach, because you can charge fees of more than $500 for all those X's. Not to mention all the fees for representing him at audit.

>>Does this sound correct?<< You have some serious issues of confidentiality and conflict of interest, but assuming you can work your way through them you might want to review the EIC tables.

>>more depressing thoughts<< Depressing? Personally, I was RELIEVED. All this time, I thought it was my fault.

>>He gets the exemption for the child, and thus he should qualify for the CTC?<< Like EIC and HoH, CTC and the rebate are based on a qualifying child. The toddler does not pass the relationship test and so is not a qualifying child. Assuming the natural mother has no filing requirement, your client can probably claim the child's exemption under the different rules for a qualifying relative.

>>she is a full time student MAYBE<< Full time just means at least one day in each of five months. A lot of students graduate at age 22, and by the time April 15th of the following year comes around, they've put it all behind them and no longer consider themselves a qualifying child.

>>Is she considered a resident of NC the whole year?<< What are the rules in your state? Every place is different, but I would guess that N.C. presumes she is still a resident because she has not moved anywhere else. If she wants to be considered a resident of Florida, she will need to take proactive steps such as getting new driver and professional licenses, mailing address, banking, church and other business and personal contacts. Besides getting all those new contacts in Florida, she has to close out all the old ones in N.C. (Of course, she can keep her same tax preparer!)

>>I can nominee the int and div's but not sure how to get the cg's off the return?<< Do you mean to say that the court went back in time to allocate INCOME received prior to the divorce? Usually the court is only dividing marital PROPERTY held on the specific date. In what way did she receive the income as his nominee? I don't think you can add that title later. Are you sure the other party has agreed to cover this part of his ex-wife's taxes? If it wasn't in the final decree, you are asking for trouble to unilaterally expand the judge's order to cover a prior year. And by "in the final decree," I don't mean they referenced the end of year balance, but that they specifically agreed to what you are trying to do.

>>If the atty's don't come to a conclusion<< It is not up to the attorneys (unless they decide to prepare the tax returns). It is up to YOU to follow the tax code. On this point, the intent of Congress could not be clearer -- they addressed the issue all by itself, and passed a new law that says court decrees and agreements are irrelevant unless they are covered by Form 8332. If your client doesn't want to sign it, nobody can make her.

>>each got half of the value in final decree<< That does not mean each had a 50% interest BEFORE the lovers started swapping assets and accusations. Unless you have some other evidence, if the statements do not show joint ownership you can conclude that the 2006 income should be allocated to only one person.

>>Does the IRS match bank account names to tax returns?<< No, but the bank matches account names to payees. When the bank rejects a deposit, the IRS is supposed to reissue as a paper check. Unfortunately, that can take many months. Meanwhile, your client will surely forget that the whole scheme was his own idea, and blame YOU for screwing up the refund that he needed as soon as possible. So don't screw it up.

>>devide the whole amount by 5 and then you divide it by 6<< Depreciation is no problem because MACRS uses mid-month from the date placed in service. For other expenses such as utilities and mortgage interest, show the amounts paid for the months of business use; Form 8829 will apply the percentage correctly. Other interest not allocated to the business months should be entered directly on Schedule A.

>>Is there a place on line where the court decision can be read?<< This has been the law of the land a very long time -- since 1980. Tax Court publishes its decisions at www.ustaxcourt.gov, but not that far back. You can find the opinion in any legal or tax research database by subscription, or at your local county law library for free.

>>opening CA 540NR I don't find the way to tell he program who was the non resident<< For California, use the 540NR with Form CA(540NR). (The CA stands for Calif. Adjustments). That will not only show residency status, but break out the non-California income as well. Don't just take the clients' word about residency, though. You are going to need to determine it under each state's separate rules.

>>that would all be seen "on camera?"<< Why should a camera make any difference? We all have to present a nice appearance at work. I mean, why would a tax preparer like myself need to wear shoes and a shirt, if not to meet the standards of my office? (Okay, bad example--there are at least 25 excess reasons why I need to wear a shirt.) In the court case I cited, the taxpayer also tried to deduct his suits which had to be a certain color. But it wasn't a costume; he didn't take it off when he left the set. It was just an ordinary thing in that regards. Maybe not his personal preference, but not that closely tied to job performance. MSSP guides are for the IRS's administrative use; they have no value outside an audit. (Remember that under Circular 230 we are not allowed to base our position on how something might be treated in audit.) Still, they provide a certain orientation to interpreting the code. The document HVKen found said concerning live performers, "The single most common audit adjustment is disallowance of personal expenses.... The fact that a taxpayer may derive a peripheral business benefit from an expense does not convert a personal expense to a business deduction."

>>as long as the child doesn't provide more than 50% for his own support<< I also answered the original question about EIC and HoH yesterday. Time to move on. On this question of support, in a case like this it's important to note that although the custodial mother can claim the child regardless of the source of support, the absent parent can only use Form 8332 if one or both of the PARENTS provide more than half. If, for example, mother and child live with grandma or get welfare, there is no possible way for the absent parent to take the exemption. Doesn't matter what anybody agreed to, or even what the court ordered.

>>I want to know if ALL her non resident income is taxable, or can it be apportioned?<< Like other states, California requires a non-resident to report ALL her world-wide income and calculate the potential tax on that. Then it takes the percentage of the whole tax that is represented by the California source income. Since she has only a net loss from the rental, she will probably not owe any California tax. The only really tricky part is that the rental loss must be refigured using California law. That's probably the same anyway, but there could be differences in depreciation or other expenses. p.s. California is pretty aggressive about enforcing residency rules. Since she still owns real estate in California, you should help her document that she is in fact no longer residing or domiciled in California. Just being a resident of another state is not nearly enough proof for that purpose.

>>it is solely for the purpose of her profession?<< Not a chance--this has already been to court many times. In Hynes v. Commissioner, 74 TC 1266, a TV news announcer claimed haircuts were required under his contract to maintain high standards of appearance. The legal ruling was that "expenses for one's grooming were inherently personal in nature."

>>agreements are binding and original poster said "My client has an agreement with x that he can claim child as a dependant<< No, agreements are NOT binding. Tax law is binding. Even if there is a court order giving the exemption to the absent parent, he can't prevent the mother from claiming her child if she is eligible under Section 152. He can ask the judge for whatever sanctions, but as long as the custodial parent refuses to sign Form 8332 or equivalent then the absent parent has NO legal grounds for taking the child's exemption on his federal return. Even back in divorce court, the guy probably won't prevail. The decree may say he can take the exemption but it does not make the mother responsible for the accuracy of his return, nor does it require her to sign tax forms as part of his return.

>>do the IRS tiebreaker rules apply<< The tiebreaker rules are for relatives who live with the child, not separated parents. In accordance with her decree, your client should provide Form 8332 to the absent father for the years he gets the dependent, without making assumptions about his tax return. The form is only for the exemption and child tax credit. It does not affect her eligibility for EIC or Head of Household status.

>>the rule is that you have to prorate it<< Form 8829 is designed to prevent you from getting excess deductions. You must take the prorated mortgage and taxes first; you can only claim other expenses if that doesn't use up all the net income. The other side of that is that you can claim the mortgage and taxes as a business expense even IF there isn't any income.