NEW YORK (Reuters) – People trying to reduce their old tax debts should not expect the “pennies on the dollar” deals promised in television advertisements of now-bankrupt tax-debt negotiation firms, but U.S. state and federal tax agencies are willing to talk.

The U.S. Internal Revenue Service is facing a growing backlog of requests for the “offer in compromise” tax-relief procedure for delinquent taxpayers, according to a Treasury Department report released last month.

At the same time, tax attorneys say more Americans are trying to find solutions of all types to their tax debts at both the federal and state levels.

In fiscal year 2011, the IRS received 59,411 new offer in compromise requests, a 28 percent increase over four years earlier, according to the report by the Treasury Inspector General for Tax Administration.

This influx of new cases caused both by the ailing economy and a simplification of the offer in compromise program comes as the IRS has cut resources to manage those requests. The backlog increased 57 percent to 36,069 in 2011 from 23,003 in 2007.

“With the economy, what has picked up in our caseload is collection matters,” says tax attorney Steve Katz of Sideman & Bancroft in San Francisco.

“Someone might have gone from a place where they had high earnings to a place where they don’t,” says Katz, who specializes in tax controversies such as such collections. “You need to persuade the IRS that their situation has really changed and that they are not hiding the money elsewhere.”

NEW YORK (Reuters) – Divorce and taxes: Two topics you’d probably rather not think about. But if you’re going through a divorce, or recently finalized one, there are going to be tax issues that crop up. After all, your financial lives have been entwined for years, and especially if you have young kids, they’re going to continue to be that way for some time.

“When I was in private practice in San Francisco, I had several divorce lawyers who would call with tax questions, and it was always, ‘I have a divorce that’s getting contentious and ugly….,’” says CBIZ MHM’s Bill Smith, managing director of the CBIZ national tax office. Beyond the ugliness, he says, “there are fundamental questions about how to write the agreement so that alimony is tax deductible, and there are a lot of issues with sales of assets that occur during a divorce.”

Once you’ve dealt with the emotional fallout of the divorce, here’s how to think about the tax issues that may come up.

1. Alimony and child support.

Generally, spousal support is taxable to the person who receives it and deductible to the person who pays it, while child support is neither taxed nor deducted, says Monica Mazzei, a family law attorney at Sideman & Bancroft in San Francisco. “Some people do not realize they have to include spousal support as income and they get taxed on it. You can agree otherwise,” she says. What Mazzei means is this: According to the tax rules, payments to your ex aren’t considered alimony if the divorce decree says that they’re not.

The result is that, especially for the first tax return after a divorce, you may need to actually look back at the settlement agreement to see what it says. “People call me and say, ‘I’m at my tax preparer’s office now, is my spousal support taxable?’ I’ll have to go to my computer and look it up,” Mazzei says. “Most people when they’re done with the divorce want to forget the details and the process.”

If you’re the one paying alimony, you don’t need to itemize to claim the deduction, but can simply take it on Form 1040. If you’re the one receiving it, you’ll likewise report it on Form 1040. And note: If you do receive alimony, you may have to pay estimated taxes.

NEW YORK (Reuters) – Julie and Brett Redden are in a hurry for the paperwork to go through for the 6-year-old girl they are planning to adopt from China.

It’s not just that they are impatient to start their lives with her as she joins an 11-year-old sister adopted from China two months ago. The Reddens are also playing a game of “beat the clock” so they can take advantage of a generous federal adoption tax credit.

They have already missed out on the refundable 2011 credit, which allowed tax savings of as much as $13,360 per child. In 2012, the credit is $12,650 and not refundable — meaning if their total tax bill is less than the amount of the credit, they will not get additional money back from the Internal Revenue Service.

But the Redden’s real worry is that the adoption will not be completed by year’s end. And unless Congress acts, that credit will expire on December 31, 2012.

“We are not rich. We are very middle-income, and we have scraped and saved and done everything humanly possible to bring these girls home,” said Julie Redden, a 31-year-old teacher in Houston.

Redden said she expects adoption costs for both girls to top $50,000, and there will be ongoing medical expenses because both have special needs — the older child is legally blind, while the younger one has cerebral palsy.

“The tax credit will be enormously helpful to pay for medical bills,” Julie says.

NEW YORK, April 24 (Reuters) – Julie and Brett Redden are in a hurry for the paperwork to go through for the 6-year-old girl they are planning to adopt from China.

It’s not just that they are impatient to start their lives with her as she joins an 11-year-old sister adopted from China two months ago. The Reddens are also playing a game of “beat the clock” so they can take advantage of a generous federal adoption tax credit.

They have already missed out on the refundable 2011 credit, which allowed tax savings of as much as $13,360 per child. In 2012, the credit is $12,650 and not refundable — meaning if their total tax bill is less than the amount of the credit, they will not get additional money back from the Internal Revenue Service.

But the Redden’s real worry is that the adoption will not be completed by year’s end. And unless Congress acts, that credit will expire on Dec. 31, 2012.

“We are not rich. We are very middle-income, and we have scraped and saved and done everything humanly possible to bring these girls home,” said Julie Redden, a 31-year-old teacher in Houston.

Redden said she expects adoption costs for both girls to top $50,000, and there will be ongoing medical expenses because both have special needs — the older child is legally blind, while the younger one has cerebral palsy.

“The tax credit will be enormously helpful to pay for medical bills,” Julie says.

NEW YORK, April 16 (Reuters) – Were you one of the many who were wooed by a gold exchange-traded fund (ETF) in 2011? Did another commodity ETF catch your eye (and your money)? Now that it’s the season to calculate your capital gains and losses for tax purposes, you could be in for a major headache. And if you’re thinking of loading up on these shares now, be aware that you could be buying yourself that tax headache for a future tax season.

ETFs, for the most part, offer tax advantages over traditional mutual funds because they tend not to distribute taxable capital gains as frequently. When investors sell stock or bond ETF shares, the resulting gains and losses are typically straightforward to calculate. Long-term gains from a stock ETF are taxed at a maximum rate of 15 percent, just as they would be if they came from a mutual fund or from selling shares of individual companies.

But when you own ETFs holding precious metals, oil or other commodities, taxes can get more complex – and the tax hit may be a lot higher than you expect.

“It’s going to surprise people,” says Michael Iachini, managing director of ETF Research at Charles Schwab Investment Advisory.

Here’s what you need to know:

METAL ETFs

Gold, silver and other metals are considered collectibles like art or stamps for tax purposes, which means they are taxed at the special collectibles tax rate of 28 percent. (That’s the long-term rate; short-term gains are taxed at income-tax rates just like other short-term capital gains.)

NEW YORK (Reuters) – It’s one of the worst tax time scenarios: You discover while doing your taxes — or you just know without even doing them —that you owe taxes, and you don’t have the cash. What should you do?

You may be tempted to ignore the problem. Don’t do it. The worst thing you can do is put off filing your return because you’re afraid of the bill. The Internal Revenue Service (IRS) penalties for not filing are more punitive than the ones for not paying.

The failure-to-file penalty runs to 5.0 percent a month that your return is late, up to 25 percent, with a minimum penalty of $135. The failure-to-pay penalty is just a fraction of that, at 0.5 percent a month of the unpaid tax at April 17, and even that is cut in half for taxpayers who set up a formal installment plan with the IRS. Either way, you’ll also owe interest, currently at a modest 3.0 percent a year.

Consider the case of a taxpayer who owes $2,000 and won’t have the money until the end of June. If she files a return or an extension by April 17, the total penalties and interest due would be just $43, according to an analysis run by The Tax Institute at H&R Blockfor Thomson Reuters.

But if she puts off filing until June 30, and pays then, those penalties and interest would multiply to $314, said H&R Block. The longer this taxpayer waits to file, the more those fees would balloon.

“That’s a lot of money for late filing,” says Allison Shipley, a partner at PricewaterhouseCoopers in Miami. “And, in my experience with clients who have had a difference with the IRS, they tend to be more lenient if you’ve always filed your returns on time.”

So the first step to consider if you’re not ready to file is the simplest: File for a six-month extension, using Form 4868. As long as you’ve paid 90 percent of the taxes you owe by April 17, you will not owe the late-payment penalty. You will, however, still owe interest on any unpaid taxes.

NEW YORK, April 10 (Reuters) – It’s one of the worst tax time scenarios: You discover while doing your taxes – or you just know without even doing them -that you owe taxes, and you don’t have the cash. What should you do?

You may be tempted to ignore the problem. Don’t do it. The worst thing you can do is put off filing your return because you’re afraid of the bill. The Internal Revenue Service (IRS) penalties for not filing are more punitive than the ones for not paying.

The failure-to-file penalty runs to 5.0 percent a month that your return is late, up to 25 percent, with a minimum penalty of $135. The failure-to-pay penalty is just a fraction of that, at 0.5 percent a month of the unpaid tax at April 17, and even that is cut in half for taxpayers who set up a formal installment plan with the IRS. Either way, you’ll also owe interest, currently at a modest 3.0 percent a year.

Consider the case of a taxpayer who owes $2,000 and won’t have the money until the end of June. If she files a return or an extension by April 17, the total penalties and interest due would be just $43, according to an analysis run by the The Tax Institute at H&R Block for Thomson Reuters.

But if she puts off filing until June 30, and pays then, those penalties and interest would multiply to $314, said H&R Block. The longer this taxpayer waits to file, the more those fees would balloon.

“That’s a lot of money for late filing,” says Allison Shipley, a partner at PricewaterhouseCoopers in Miami. “And, in my experience with clients who have had a difference with the IRS, they tend to be more lenient if you’ve always filed your returns on time.”

So the first step to consider if you’re not ready to file is the simplest: File for a six-month extension, using Form 4868. As long as you’ve paid 90 percent of the taxes you owe by April 17, you will not owe the late-payment penalty. You will, however, still owe interest on any unpaid taxes.

NEW YORK (Reuters) – About 11 million homeowners owe more than their homes are worth, according to real estate data firm CoreLogic, and while taxes may not be the first thing they think about in deciding what to do, all the various options have tax consequences.

Until the end of this year, at least, there is a tax break for homeowners who negotiate debt reduction with their lenders.

Some of these “underwater” owners may qualify for principal reduction through the massive mortgage foreclosure settlement announced in February. Others may pursue short sales, in which the home is sold for less than the bank is owed, or wind up in foreclosure.

But those whose lenders cancel their debt would ordinarily face the tax man, because cancellation of debt, including mortgage reduction, is generally taxable. That means if you get your mortgage reduced by $100,000 and you’re in the 28 percent tax bracket, you’d owe $28,000 in federal taxes on the “income” you received when your debt was forgiven.

Typically, the only way to avoid those taxes is to declare bankruptcy or to claim insolvency, which does not require a bankruptcy filing but still requires that your debts outweigh your assets. Being foreclosed in a state like California, which has “non-recourse” rules that prohibit lenders from coming after you for extra cash after they’ve taken your house, also exempts one from taxes.

A special federal tax break to help ailing homeowners, put in place in 2007, allows them to exclude up to $2 million in forgiven mortgage debt from their income. To qualify, that debt has to be for your primary home — sorry, no vacation homes or investment properties.

With the tax break slated to expire in nine months, if you’re currently sinking under the weight of your home, there’s a reason to move quickly. No one can accurately foresee whether the provision will be renewed by Congress, and dealing with underwater real estate takes time.

NEW YORK, April 2 (Reuters) – About 11 million U.S. homeowners owe more than their homes are worth, according to real estate data firm CoreLogic, and while taxes may not be the first thing they think about in deciding what to do, all the various options have tax consequences.

Until the end of this year, at least, there is a tax break for homeowners who negotiate debt reduction with their lenders.

Some of these “underwater” owners may qualify for principal reduction through the massive mortgage foreclosure settlement announced in February. Others may pursue short sales, in which the home is sold for less than the bank is owed, or wind up in foreclosure.

But those whose lenders cancel their debt would ordinarily face the tax man, because cancellation of debt, including mortgage reduction, is generally taxable. That means if you get your mortgage reduced by $100,000 and you’re in the 28 percent tax bracket, you’d owe $28,000 in federal taxes on the “income” you received when your debt was forgiven.

Typically, the only way to avoid those taxes is to declare bankruptcy or to claim insolvency, which does not require a bankruptcy filing but still requires that your debts outweigh your assets. Being foreclosed in a state like California, which has “non-recourse” rules that prohibit lenders from coming after you for extra cash after they’ve taken your house, also exempts one from taxes.

A special federal tax break to help ailing homeowners, put in place in 2007, allows them to exclude up to $2 million in forgiven mortgage debt from their income. To qualify, that debt has to be for your primary home – sorry, no vacation homes or investment properties.

With the tax break slated to expire in nine months, if you’re currently sinking under the weight of your home, there’s a reason to move quickly. No one can accurately foresee whether the provision will be renewed by Congress, and dealing with underwater real estate takes time.

NEW YORK (Reuters) – To Roth or not to Roth? As it turns out, you can sort of have it both ways.

You can convert a traditional Individual Retirement Account (IRA) — with taxes deferred on the deposits and income tax paid on the withdrawals in retirement — to a Roth, where instead taxes are paid up-front and no income taxes will be due again. And if it doesn’t work out for you in terms of the tax burden or losses in the account, you can change your mind, because of some generous do-over clauses.

Ever since restrictions on conversions changed two years ago — allowing higher-income individuals the choice — there has been a flurry of Roth conversion activity, and still lots of hand-wringing over the decision to go for it or not. Seems a lot of people still just can’t imagine paying taxes earlier than they have to — now, as opposed to when they turn 70-1/2 and have to start taking money out of the accounts.

“It becomes a bit of a counter-intuitive analysis,” says Marc Minker, a managing director at tax and accounting firm CBIZ MHM. “Most taxpayers say, ‘I don’t want to write a big check.’”

With around $4 trillion in IRA assets, and only a small portion of that money in Roths, there may be a lot of people facing these decisions. If you’re among them, here are six key issues to consider:

1. Convert only if you can pay the tax bill from outside your retirement accounts, otherwise, you’re just eating away at your savings. Depending on your tax rate and what assets you’re converting, that tax hit could be a third of the account’s value or higher.

How big that bill will be depends on whether your IRAs were funded with deductible contributions, non-deductible ones or a combination. If you only own IRAs funded with non-deductible contributions, then you’ll owe taxes on the earnings only (because you paid tax on the deposits already), and if you have only deductible contributions then you’ll owe taxes on the full amount you convert that was contributed on a pre-tax basis.