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Practical tips: IRAs, 401(k)s, choosing the right title and more. (California Tax).

Prior columns have concentrated on California tax matters discussed--and resolved--on the Tax Talk Listserve. That aspect of the listserve has been reasonably quiet recently, but there have been lively discussions on other matters. So this month's column will concentrate on some of those practical tips that have been discussed.

Keeping One's Story Straight

This may be apocryphal, since the CPA who posted it said that she heard it from a former IRS agent, but its point is well taken.

A business claimed salary and other deductions for the wife of one of the owners. So the IRS auditor had a meeting with the family, at the business, to determine what duties the wife fulfilled there. All seemed to be going fine and it appeared that the IRS was convinced that the wife was a bona fide employee. However, as the meeting broke up, the IRS auditor heard the wife asking someone where the bathroom was.

Moral: If you claim family members as employees, be sure that they at least know their way around the building.

IRAs and Qualified Plan Early Withdrawals

Taxpayers who missed all of the jobs created by the prior tax cut, and are waiting for the new jobs that will be created by the most recent tax cut, are withdrawing funds from their IRAs and 401(k)s to survive.

Quick review: If they are under age 59.5, they will be subject to an additional penalty tax of 10 percent to the IRS and 2.5 percent to California unless their withdrawals meet the "substantial equal periodic payment" exception.

There are three qualifying methods to compute the payments: required minimum distribution; fixed amortization; and fixed annuitization. Payments computed under one of those methods must continue for five years from the first payment, or until age 59.5, whichever comes later.

Rev. Rul. 2002-62 states that taxpayers may make a one-time change from one of the above methods to another without the change being treated as a modification subject to the 10-percent penalty tax.

Blank 8109 Federal Tax Deposit Coupons

Despite what the textbooks say, situations arise where a blank 8109 coupon is needed in a hurry. It is possible to get a few for emergencies by sending a simple note requesting blank copies to: Tax Form Committee; Eastern Area Distribution Center; Rancho Cordova, CA 95743-0001.

Obtaining an EIN via the Internet

It is possible to obtain an EIN--Employer Identification Number--via the Internet

For instructions, visit the IRS website at, click on the "Business" link and in the search box that appears, enter "EIN."

File With Draft Numbers or File Late?

The following question was posted on Tax Talk: The extension is about to expire for a zero tax (because it's for the first spouse to die) Form 706. However, some information still is missing. Should the CPA release a 706 on time, with some draft numbers, and amend later, or should the CPA just wait until all the data are available since there will be no tax anyway?

The prevailing sentiment on the listserve was to file on time and amend later.

The CPA who posted the question phoned CAMICO and was advised to file on time, with estimated numbers, attaching a statement to the return, and send a CYA letter to the client.

What Title Form Should One Use?

As all CPAs know, there is an overwhelming erroneous assumption among clients that there are truckloads of questions that can be answered on a quick-and-dirty basis with just a simple phone call.

A common one is a phone call a CPA receives from a client who is at a title company, closing on the purchase of real estate, and says: "We're buying a house (or rental, etc.). Should we take it using that new title form of community property with right of survivorship?"

The proper answer is a firm ... maybe. Any verbal answer should be followed up with a written communication that the client's attorney, in light of the client's estate plan and other factors, should determine the proper title form.

Like so many things, community property with right of survivorship is another tool in the tool box that estate planning attorneys have at their disposal.

Properly used, it can be a powerful tool. Improper use results in unintended consequences.

An example of the latter when the title had been community property with right of survivorship: The spouses are separated, but not divorced. One spouse signed a codicil, leaving his community property to the children of the marriage, then died. Guess what? His community goes to the surviving spouse instead of the children.

Thanks to Tax Talk participants Elaine L. Soost, CPA; Wendy Sun, CPA; Jo Ann Hunt, CPA; Jim Counts, CPA; Johanna Sweeney Salt, CPA; Lew Wiener, ID; and Ken Kaye, JD.

Leonard W. Williams, CPA, is a Sunnyvale-based sole practitioner.

A member of CalCPA's Committee on Taxation, the A/CPA Tax Division and a former Peninsula Chapter president, you can reach Williams at
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Author:Williams, Leonard W.
Publication:California CPA
Geographic Code:1USA
Date:Jul 1, 2003
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