The Internal Revenue Service began its 2007 filing system with instructions on how to apply for newly enacted tax breaks and recommendations that more taxpayers give up paper and file electronically.

The agency said that it will send out 17 million tax packages this week to taxpayers who previously filed paper returns. The IRS expects to process about 136 million individual tax returns for 2006, with more than half filed electronically.

It pointed out that one major change this year will be the telephone excise tax refund. The government stopped collecting the federal excise tax on long-distance service last August and plans to provide refunds for these taxes billed after Feb. 28, 2003, and before Aug. 1, 2006.

The agency said taxpayers can avoid collecting 41 months of old phone bills by choosing standard amounts. Under standard amounts a person filing a return with one exemption can claim $30, with the amount rising to $40 for those with two exemptions, $50 for three exemptions and $60 for four or more exemptions.

Those desiring a refund based on actual amount of taxes paid should use Form 8913.

The agency also advised taxpayers on how to take advantage of tax breaks renewed by Congress in December, after the IRS had printed its forms for the 2007 filing season. The most significant of the breaks allow taxpayers to deduct state and local sales taxes instead of state income taxes and provide deductions for higher education tuition and fees and for personal expenses incurred by schoolteachers.

The IRS will mail Publication 600 to 6 million taxpayers who receive the Form 1040 package this month with instructions on claiming the sales tax deduction. The agency also advised that it will not be able to process tax returns claiming the belatedly renewed tax breaks until early February. It said that last year about 930,000 tax returns claiming the three tax breaks were filed by Feb. 1.

"As we always do, we encourage taxpayers who think they may claim these deductions to file electronically," said IRS Commissioner Mark W. Everson. "They will get their refunds faster through e-file. Even more importantly, e-file will greatly reduce the chances for making an error compared to claiming the deductions on the paper 1040."

Another change this year is that taxpayers can split refunds among up to three accounts held by U.S. financial institutions such as banks, mutual funds, brokerage firms or credit unions.

The tax agency also urged taxpayers who earn $52,000 or less to make use of Free File, a free electronic program that is a partnership between the IRS and private tax service providers. It noted that this year private sector partners have agreed to remove from their programs side offerings such Refund Anticipation Loans that offer taxpayers immediate payment of expected refunds but sometimes come with high interest rates and fees.

It noted that taxpayers, after filing returns, can track their refund through the online tool "Where's my refund?" on the IRS web site, www.irs.gov. "With all the changes taking place, this is a good year for paper filers to try e-file," Everson said. "We remind taxpayers that e-filing is fast, secure and reliable."

WASHINGTON – Beginning Jan. 1, 2007, the Internal Revenue Service will implement revised user fees for installment agreements. For eligible individuals with income at or below certain levels, the fee for entering new agreements will not increase but remain at the 2006 level.

The Office of Management and Budget has directed federal agencies to charge user fees reflecting the full cost of goods or services that convey special benefits to recipients beyond those accruing to the general public. The installment agreement user fees have not been increased since first implemented in 1995. Increases in labor and other costs of processing have increased the cost of processing installment agreements. 

User fees for entering into a non-direct debit installment agreement will increase from $43 to $105, and the fee for direct debit installment agreements will increase from $43 to $52.

Taxpayers with income at or below established levels, based on the Department of Health and Human Services poverty guidelines, can apply and be qualified to pay a reduced user fee of $43 for establishing new agreements including direct debit installments. Information about requesting the reduced user fee will be included in installment agreement acceptance letter sent to individuals.

The fee for restructured or reinstated agreements will increase from $24 to $45 regardless of income level.

Texas smokers will pay considerably more for cigarettes beginning today as a new excise tax takes effect.

The state Legislature approved the measure in May in an effort to pressure smokers to quit and to allow a break on property taxes. The tax will increase $1 from a moderate 41 cents to $1.41 a pack, placing Texas among the 15 states with the highest cigarette levies. New Jersey has the highest tax, at $2.58 a pack. The increase will push the price of a single pack of cigarettes in Texas to about $4.50.

The state comptroller's office has estimated the tax increase will generate $700 million a year, enabling a reduction in property taxes.

Iowans are being warned about stepped up scams in email that may look like they're from the Internal Revenue Service. IRS spokesman Christopher Miller says the schemes have been around for months but they've picked up again in recent weeks.

Miller says the fraudulent e-mails are designed to trick the recipients into disclosing personal and financial information, usually credit card numbers, PINS, Social Security numbers and account numbers, which could be used to steal their identity and financial assets. Identity theft is a growing crime that's costing tens of thousands of Americans millions of dollars.

Miller says the agency's investigators have identified about a hundred different e-mail scams involving the IRS, many with similarities. The language of the e-mails is typically the same, saying after the latest calculations, they've determined the person is due a tax refund of 63dollars and 80cents -- which Miller says is significant because many of the scams use that same total. Miller says the tax collection agency never makes it a practice to email Iowans to ask for this sort of information.

Miller says the IRS typically uses regular mail or sometimes phone calls but they make sure to verify the individual they're talking to by using information only they would know. He says they've seen a recent rise in complaints about these bogus emails and taxpayers in Iowa who want to make sure they're not ignoring the real thing -do- have an alternative.

A podiatrist is appealing his federal-court conviction and two-year prison sentence for tax evasion, but a federal judge says the doctor must still report to prison on Jan. 5.

Dr. Clifford B. Marston of Gassville operated Sunshine Foot Clinics at Mountain Home and Harrison. The 57-year-old was convicted in May of tax evasion and filing false income tax returns.

Marston was sentenced to 26 months in prison and ordered to pay about $300,000 in restitution and fines.

U.S. District Judge Jimm Larry Hendren denied a request from Marston to remain free on bond while his appeal proceeds, and ordered him to report to prison on Jan. 5.

Marston filed a notice of appeal in federal court at Harrison on Dec. 22. He said last year that the IRS had misapplied regulations and he believed that most Americans do not have taxable income.

WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law changes made last summer by the Pension Protection Act.

The new law offers older owners of individual retirement accounts a new way to give to charity. It also includes rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.

New Tax Break for IRA Owners

An IRA owner, age 70 ½ or over, can directly transfer tax-free, up to $100,000 per year to an eligible charitable organization. This option is available in tax years 2006 and 2007. Eligible IRA owners can take advantage of this provision, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.

Not all charities are eligible under this provision. For example, donor-advised funds and supporting organizations are not eligible recipients.

Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.

Rules for Clothing and Household Items

To be deductible, clothing and household items donated to charity after Aug. 17, 2006, must be in good used condition or better. However, a taxpayer may claim a deduction of more than $500 for any single item, regardless of its condition, if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. A bank record includes canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity and the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

Prior law allowed taxpayers to back up their donations of money with personal bank registers, diaries or notes made around the time of the donation. Those types of records are no longer sufficient.

This provision applies to contributions made in taxable years beginning after Aug. 17, 2006. For taxpayers that file returns on a calendar-year basis, including most individuals, the new provision applies to contributions made beginning in 2007.

The new law does not change the prior-law requirement that a taxpayer get an acknowledgement from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.

To help taxpayers plan their holiday-season and year-end donations, the IRS offers the following additional reminders:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2006. This is true even if the credit-card bill isn’t paid until next year. Also, checks count for 2006 as long as they are mailed this year.
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found on IRS.gov under, “Search for Charities.” In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.
• For individuals, only taxpayers who itemize their deductions on Schedule A can claim a deduction for charitable contributions. This deduction is not available to people who choose the standard deduction, including anyone who files a short form (1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceeds the standard deduction. Use the 2006 Schedule A, available now on IRS.gov, to determine whether itemizing is better than claiming the standard deduction.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes a description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes a description of the property and its condition.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return. See IRS Publication 526, Charitable Contributions, for more information.

Under the Internal Revenue Code, 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.  Generally, in the case of a corporation, the underpayment rate 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.

The interest rates announced today are computed from the federal short-term rate based on daily compounding determined during October 2006.