The IRS rules regarding exemptions and dependents affect many, if not most, taxpayers. Here are some facts about exemptions and dependents that should help you file your tax return this year.

Exemptions are fixed amounts that reduce the amount of your income that is subject to income tax, and they are on a per-person basis.  There are two types of exemptions- personal exemptions and exemptions for dependents. These two types of exemptions are for the same amount per person, but different rules apply in order to be able to claim the exemptions. On your 2011 tax return, you can deduct $3,700 for each exemption.

Your spouse can never be counted as your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.

You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the Social Security number of any dependent for whom you claim an exemption.

Even if someone else claims you as a dependent, you may still be required to file your own tax return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status and any special taxes you owe. Consult the IRS website or a tax professional to see if you must file.

If you are being claimed as a dependent, you cannot claim an exemption. If someone such as your parent is claiming you as a dependent, you may not claim your personal exemption on your own tax return.

Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, in order to claim someone as a dependent, he or she must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

For more information on exemptions, dependents and whether you or your dependent needs to file a tax return, see IRS Publication 501 on the IRS website.

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The Earned Income Tax Credit (EITC) is a popular tax credit for low-and moderate-income workers and working families. Approximately one in five eligible taxpayers do not claim the EITC, but many who do claim the credit do so incorrectly or are even ineligible. In order to ensure that the credit is taken by those taxpayers who do qualify, the IRS is now requiring all paid tax return preparers to file a due diligence checklist, or Form 8867, with any federal tax return that is claiming the EITC. This form is normally required to be completed and filed in a preparer’s records, but now the form must also be included with the returns.

Unlike most deductions and credits, the EITC is refundable, meaning that taxpayers can get it even if they owe no tax. For 2011 tax returns, the maximum credit is $5,751.

To make sure that eligible taxpayers receive the correct credit amount, this new reporting regulation requires preparers to file the Form 8867 with each return that claims the EITC, effective January 1, 2012. In addition, the penalty for noncompliance with the due diligence requirement has increased from $100 to $500.

More information about EITC and the due diligence requirement for tax return preparers is available on IRS.gov.

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In a word, no.

Many taxpayers find themselves in a situation where they cannot pay their tax obligations for a particular tax year.  If that’s your situation, you can opt to make monthly payments through an installment agreement if you’re not financially able to pay your tax debt immediately. You can find out more about installment agreements at http://www.irs.gov/individuals/article/0,,id=243335,00.html.

However, if you are currently paying your tax obligation through and installment agreement, any refund due to you in a future year will be applied  against the amount that you owe.

Some facts about installment agreements and refunds:

• The IRS will automatically apply the refund to the taxes owed.
• You must continue making your installment agreement payments as  scheduled and in full because your refund is not applied toward your  regular payment, and therefore any payments due under the installment  agreement must still be made in full.
• Regardless of whether you are participating in an installment  agreement or payment plan with the IRS, you may not get all of your  refund if you owe certain past-due amounts, such as federal tax, state  tax, a student loan, or child support. For more information you can  contact Financial Management Service (FMS) toll-free at 800-304-3107.

If you have any questions about installment agreements or refunds you are owed, contact a tax professional.

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The IRS routinely evaluates the standard mileage rates that are used to calculate the deductible costs of using a vehicle for business, medical, moving or charitable purposes. This evaluation is based on an annual study of the fixed and variable costs of operating an automobile, and the IRS adjusts the rates accordingly. Because the fixed and variable costs of operating a vehicle have not drastically changed since June 2011, the last time a standard mileage rate adjustment was announced, the 2012 rates will not change much.

Beginning on January 1, 2012, the standard mileage rates for the use of cars, vans, pickups or panel trucks will be:

• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven is not changing from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.

Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

If you have questions about the best way to handle miles you have driven for business, charitable, medical or moving purposes on your taxes, contact a tax professional.

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Did you know that there is an independent organization within the IRS called the Taxpayer Advocate Service (TAS)?  The TAS helps taxpayers who are going through economic difficulties such as a lack of adequate food, housing or transportation. This organization also works with individuals who are trying to resolve a problem with the IRS or who feel that the IRS system is not working properly.

The Taxpayer Advocate Service claims that it is the voice of the taxpayer at the IRS, and its services are free and tailored to meet the needs of taxpayers. Taxpayers may be eligible for TAS help if they have tried to resolve their tax issues through regular IRS channels but have gotten nowhere or they feel that IRS procedures are not working properly. They also help taxpayers whose problems are costing a great deal of money and difficulty, and that help may also include the cost of professional representation.

Individuals as well as businesses may receive help from the TAS.

The Taxpayer Advocate Service has offices in every state. Taxpayers can call 1-877-777-4778 for more information and to see if you qualify.

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If the IRS has made a determination concerning a tax issue, as a taxpayer you may turn to Appeals if you do not agree with their determination. Appeals provides taxpayers an opportunity to discuss disagreements they may have concerning the application of tax law, and the mission of Appeals is to settle tax disagreements in a fair and impartial basis and also avoid going to the Courts and a formal trial.

The following information will help you determine if you qualify to speak with Appeals:

-If you received an IRS correspondence explaining you have the right to come to Appeals to dispute an IRS decision.
AND
-You do not agree and are not signing an agreement form sent to you.

If the above are true, then you may be ready to request an Appeals conference or hearing. This page explains how to request an appeals conference or hearing.

Appeals is not applicable to you if:

-You cannot afford to pay the amount you owe and agree that you owe the amount
-The correspondence you received from the IRS was a bill and there was no mention of Appeals.

If you cannot identify the requirements, or if you do not meet the conditions for coming to Appeals as explained above, contact the person in the IRS you are working with or Customer Service for assistance at 1 (800) 829-1040.

These online videos can also help you understand what to what to expect of the Appeals process.

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Every year, the IRS announces that millions of dollars in tax refunds are lost, stolen or returned to the IRS as undeliverable. These undeliverable or stolen refund checks can be avoided altogether if taxpayers choose to have their refunds deposited directly into their bank accounts.

Taxpayers who choose direct deposit receive their refunds faster than those who choose a paper check.

Direct deposit also allows taxpayers to easily split their refunds to two or even three different checking and/or savings accounts. In order to do this, you just need to use Form 8888, Allocation of Refund (Including Savings Bond Purchases). Just follow the instructions on the form. (If you want IRS to deposit your refund into just one account, use the direct deposit line on your tax form.)

When you split refunds, you have a convenient option for managing your money because you can send some of your refund to an account for immediate use and some for future savings.

If you have any questions about direct deposit, contact a tax professional.

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Are you missing a tax refund? This video from the Internal Revenue Service explains how you can find out if you are owed a refund and how to get a missing refund.

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On November 28, 2011, the IRS announced that interest rates will remain the same beginning Jan. 1, 2012 for the calendar quarter. According to the IRS website, the interest rates will be:

• 3% for overpayments; 2% in the case of a corporation
• 3% for underpayments
• 5% for large corporate underpayments
• 1/2% for the portion of a corporate overpayment that exceeds $10,000

The 3% interest rate also applies to estimated tax underpayments for the first calendar quarter in 2012 as well as the first 15 days in April 2012.

The rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. In the case of a corporation, the underpayment rate generally is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point. Further, the federal short-term rate that applies during the third month following the taxable year also applies during the first 15 days of the fourth month following the taxable year.

These interest rates are computed from the federal short-term rate during October 2011 to take effect Nov. 1, 2011, based on daily compounding.

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