Tax Day isn’t anyone’s favorite holiday. Whether you own a corporation or started your first part-time job last year, the April deadline is stressful for the entire U.S. population. But if you’ve filed your taxes on time this spring (by April 17), it’s time to celebrate. Here’s how you can kick back and relax at the end of this tax season:
1) Put your tax documents in hibernation: Time for those W-2s and receipts to catch some Zzzs in a secure place. Don’t throw them away, though: you may need to reference them if the IRS alerts you of mistakes that need to be corrected on your tax return, or if the IRS audits you.
2) Thank your tax preparer: Give a shout-out to anyone who helped you file this tax season, including CPAs or even your spouse. This is their busiest season, after all. Tax professionals can help beyond the preparation by reviewing amended returns, protecting against audits, and addressing back taxes.
3) Look for your tax refund to hit your bank account: Expecting a federal tax refund? The average federal tax refund is $2,895, which could mean it’s time to get those new shoes you’ve been eyeing. Your bank statement will show the extra cash typically within 21 days of your filing date. You can check with the IRS “Where’s My Refund?” tool for more information on your expected refund.
4) Have a glass of wine: Sit back and relax – you’ve earned it. #Cheers
Not celebrating this Tax Day because of owed back taxes? Tax Defense Network can help find the best solution for your situation and negotiate with the IRS on your behalf. It’s easy and free to get started. Call to speak with a tax analyst for your no-cost, no-commitment consultation today at 877-588-1098.
If you haven’t figured it out from every U.S. adult sweating profusely over their W-2s, receipts, and calculators, April 17 is Tax Day this year. But what does it take to get Tax Day right?
Here are six things to do before the April 17 deadline rolls around:
- File your taxes: Tax Day is all about – you guessed it – having your taxes filed to the IRS and your state. Ensure you’ve received all paperwork needed to complete tax returns, including W-2s from employers, social security information, and more. Enlist the help of a tax preparer to make sure you’re in compliance with IRS and state requirements.
- Fund your IRA or Roth IRA: You still have time to contribute to your retirement accounts for deduction write-offs – woohoo! After the April tax deadline, you won’t be able to take advantage of this benefit for the 2017 tax year.
- Businesses: File your Q1 estimated taxes for 2018: April’s Tax Day is a double whammy for business owners as Q1 estimated tax payments and individual tax returns are due. You don’t want to start off the year on the wrong foot with the IRS – they’ll remember your compliance if you ever need future tax debt resolution.
- File for an extension if you need it: No way you’re getting your tax forms submitted by Tax Day? You can apply for a filing extension that will give you two extra months to get things taken care of. If you don’t file for a needed extension, you’ll be on the hook for Failure to File penalty plus interest. And remember: There is no such thing as an extension on paying tax debt.
- Request an IRS payment plan if you can’t pay: Financial hardship may prevent you from affording tax payments this year. If this is the case, request an IRS payment plan to get the ball rolling and avoid things from getting worse. If no effort is made on your part to resolve the problem, the IRS will begin to charge penalties and interest on the amount owed, even if there are no collection actions like liens and levies.
- Get help from a tax professional: Make a sincere effort to get tax debt resolution and the IRS will cut you some slack. Get help from a tax relief company like Tax Defense Network who can work with the IRS on your behalf, helping you learn your options for getting taxes back on track.
So, are you ready for Tax Day?
Call Tax Defense Network for a free consultation on filing returns, resolving tax issues, or handling business taxes at 877-588-1098.
No matter where you live in the U.S., you have to pay taxes (sorry). But the type and amount you pay do depend on where you live. Now, taxpayers in high-cost areas who’ve enjoyed cushy itemized deductions for state and local taxes (SALT) may not catch a break anymore.
To itemize or not to itemize? It depends.
Taxpayers have two options for tax deductions: itemize or take the standard set by the IRS. This year’s tax season has no restriction on the total amount of SALT deductions you can have, but that will all change starting next year. The Tax Cuts and Jobs Act (TCJA) will cap taxpayer’s combined state property, income, and sales tax to the following deduction limits:
- Single filers: $10,000
- Married filing jointly: $10,000
- Married filing separately: $5,000
The high-income household shift to standardized deductions
A third of filers pick itemizing over standard deductions, according to the IRS. And of those itemizers, 95 percent choose to deduct their SALT. Most of the SALT-deducting taxpayers live in high-cost states such as New York, California, Oregon, and New Jersey, where property taxes alone can easily exceed the $10,000 threshold. So why the cap?
The SALT itemization cap is meant to encourage taxpayers to use the standard deduction, which sits at:
- Single filers: $12,000
- Head of household: $18,000
- Married filing jointly: $24,000
This is meant to simplify tax preparation as people opt to take the standard. But residents of costly states knew this would be bad for their wallets, and some tried to pre-pay 2018 property taxes before 2017 came to a close. Unfortunately, it doesn’t work that way, and the IRS already added a rule against prepayment.
When it comes down to it, it won’t be worth itemizing your SALT deductions next year unless you’re able to diversify them. Ask your tax preparer if taking the standard is in your best interest and how you can prepare to handle additional tax reform changes.
Need more tax help? Call us for a free, confidential consultation today at 877-588-1098.
2010 brought us the iPhone 4, a first Super Bowl win for the Saints, and Lee DeWyze’s claim to fame on American Idol. And while these things promised a new hope, we’re more than happy to have moved on. The same goes for changes to Affordable Care Act (ACA), aka Obamacare, thanks to tax reform.
Say “No” to Paying Big Money for No Coverage
Tax reform through the Tax Cuts and Jobs Act of 2017 is flipping a major downside for many Americans – the big ol’ penalty for no health coverage.
Enacted by Congress in 2010, Obamacare required every American to have health coverage or an exemption due to low income or other factors. To no one’s surprise, not everyone could (or wanted to) meet this requirement due to the high cost of healthcare. As a result, the IRS reports 4 million Americans paid penalties for having no coverage in 2016, and at least 5.6 million paid the penalty for the 2015 tax year.
The penalties for 2017 and 2018 filings can amount up to $695 per individual or 2.5 percent of household income (up to $2,085). Moral of the story: Not paying for healthcare means you still have to pay something.
Looking Forward to a Penalty-free 2019
Tax reform promises millions of Americans a freedom from monstrous no-healthcare penalty fees, but don’t drop your provider quite yet. The changes won’t take effect until the 2019 tax year. Knowing the implications of The Act can help you calculate tax liability and plan for your year.
A tax professional like those at Tax Defense Network can guide you through how these changes could affect you, and what to do to avoid penalties in the future.
Tax season is (quickly) coming to a close – have you filed yet?
Taxpayers have until April 17, 2018 to file their tax return, but waiting until the last minute can make post-deadline season a nightmare. Even when complying with tax laws, having less time to prepare and file the return can create serious beef with the IRS. Here are five reasons to file your taxes sooner than later this season:
- Prevent ID theft: Identity theft is real, and the IRS can’t shield every taxpayer from falling prey. Once a fraudulent tax return in your name reaches the IRS, they may accept it. To minimize the risk of a criminal taking your identity and money, file your return as early in the season as possible. The IRS won’t accept any other return filed in your name by scammers.
- Get an early tax refund: The IRS issued more than $426 billion in refunds for the 2016 fiscal year – and in this case, the early bird gets the worm. The sooner you file, the sooner you get your refund money and can spend it. Hello, new shoes.
- Avoid IRS penalties: If you file your tax return a few days before the April deadline, your yearly tax duty isn’t necessarily over. The IRS may send you a notice that you owe more than you paid, usually due to mistakes on your tax forms. If you have to file an amended return and miss the filing deadline, the IRS begins to charge penalties and interest on the taxes due. And learning you owe more – and then even more – is no fun.
- Make fewer mistakes: With adequate time to prepare and review your tax return, you minimize the chance of errors (and penalties). If you’re filing in a rush, you could miss a credit or deduction that could save you hundreds in taxes. Simple errors can also lead to an audit.
- Have more time for expert help: The longer you wait, the narrower your filing options become. Many of the CPAs in your area may be already booked, leaving you with fewer choices. And doing it alone can sometimes seem impossible.
Avoid the stress of late filing by working with a tax professional you trust, as soon as you can. The team at Tax Defense Network can file even the most complicated of returns, getting you the help you need in a timely manner.
Across the country, CPAs are crunching (and crunching, and crunching) numbers to assess how their clients can benefit from the new tax reform law. And for business owners, becoming a pass-through entity is even more enticing than ever.
What Are Pass-through Organizations?
Nearly 95 percent of businesses in the U.S. are pass-through organizations, and for a good reason. The structure is designed to reduce double taxation, or taxing a business both at a corporate level and on the owners’ level.
Instead of a twofold hit, company profits (and losses) are sent straight to owners or shareholders without a pit stop at the corporate level. Business owners then file and pay taxes through their individual returns (not corporate returns). Sole proprietorships, partnerships, and S corporations all enjoy this no-double-taxation life.
Tax Reform Wins: How Business Owners Can Save Money
2018 is looking up for business owners all over the board. Through the new bill, pass-through entities can deduct 20 percent of the business income that is passed to their individual return. This makes it a great option for low- to mid-income businesses (single-filing threshold is set at $157,500 and the joint-filing threshold at $315,000).
Pass-through structure not in your cards? C Corporations will catch a break with the new tax bill, with a cutting the corporate tax rate cut from 35 percent to 21 percent. A tax professional can help calculate your breaks if you’re above the 20-percent deduction threshold, or if your business is under a different tax classification.
Not every situation has a cookie-cutter solution when it comes to business taxes. If you’re a business owner, a tax professional can also help you decide on the most cost-efficient business entity and what tax reform means for you.
Learn more about taxes for businesses at BizSolutionsNetwork.com.
If you’re a business owner, you know taxes are a part of the gig. And for S Corporations and Partnerships, the spring tax deadline is even earlier than for most (hint: it’s soon). Let’s unpack what these business entities need to know for filing by March 15.
- Filing the correct forms: S Corporations file taxes using Form 1120S while Partnerships file Form 1065. Spouses who own an unincorporated business that is not treated as a Qualified Joint Venture also file Form 1065. File a Schedule K-1 of your designated return to report on information for each partner/shareholder, including the income, losses, deductions, and credits. This information is reported on your separate, individual tax returns.
- When Partnerships don’t have to file: If there was no income or expenses for the Partnership, you don’t need to submit Form 1065.
- Avoiding the Failure to File penalty: We get it – sometimes, it can be hard to hit those tax deadlines. By filing on time by March 15, you can avoid penalties and interests later down the road. The IRS will issue a “Failure to File” penalty of $200 for each month the return is late.
- Applying for an extension: Don’t panic if you’re not ready to file. You can submit a completed Form 7004 by March 15 to request a six-month extension of your business taxes (putting the due date at Sept. 17). Note that this will not extend your time to issue Schedule K-1s.
- Filing electronically: Filing electronically is preferred by the IRS. In fact, Partnerships with more than 100 partners are required to e-file their forms. The same goes for S Corporations with $10 million or more in total assets or that file at least 250 returns a year.
- Dodging an IRS audit: Just like filing individual taxes, businesses must ensure their returns are accurate to avoid audits and penalties. If you do find yourself or your business in a rut with IRS issues, a tax professional can help solve it.
- Asking for help: If you need help preparing your return or figuring out your tax-related documentation, it’s easy to get help from a tax preparer. These professionals can help file any type of tax forms and meet quickly approaching deadlines.
And if you run into issues later? Tax professionals like the team at Tax Defense Network can work with the IRS on your behalf to resolve issues and find agreements that work for you and your business.
Learn more about business taxes at our new BizSolutionsNetwork.com
An anticipated tax return brings hopes of finally replacing that ugly bathroom wallpaper or booking your spring beach vacation. But what if something – or someone – steals that away from you?
Victims of identity theft usually don’t become aware of the problem until it’s too late. Tax ID theft is no different. Using a stolen identity, scammers can file fraudulent tax returns and pocket big tax refunds.
How Are Identities Stolen?
Identity thieves most commonly use phishing to gather private and personal information by sending false electronic communications (emails or phone calls) from a seemingly legitimate source. The catch? Financial institutions and government agencies never ask you for personal information such as your social security number or password over emails and phone calls. If the IRS wants additional information about a tax return you filed, you’ll see a letter in the mail.
If you fall victim to phishing via email or provide your information to a scammer over the phone, the trouble won’t stop there. Your confidential information could be shared to a network of thieves committing fraud.
Discovering Tax ID Theft
Yikes – the scammers got you. How do you know? You become aware that somebody has stolen your tax-related ID when:
- The IRS sends you a notice regarding the changes in your tax return that you never made
- The IRS informs you about the claiming of false credits and/or deductions on your return
- The IRS informs you about the wrong income figure on your return
- Your tax refund does not reach you
Thanks to the IRS Security Summit effort, which enforced better security measures to prevent fraud, incidents in 2017 decreased. But a government initiative won’t stop cybercriminals who are on the prowl. The IRS recently issued a scam alert urging taxpayers to watch out for erroneous refunds and fake calls to return money to a collection agency.
Pro tip: Treat your personal and financial information like cash – don’t leave it lying around.
What to Do if You Fall Victim to Tax Fraud
If you think someone has used your social security number for a tax refund or the IRS sends you a notice indicating a problem, contact Tax Defense Network immediately. Specialists will work with you to get your tax return filed, claim any due refunds, and protect your IRS account from identity thieves in the future.
Don’t let tax fraud steal your dreams by destroying your financial goals.
It’s tax season. Did you just shiver?
Filing tax returns on your own can be – to put it lightly – a nightmare. Luckily, you can hire a tax preparer to do it all for you.
A tax professional will not only take care of the calculations and administrative tasks needed for filing a return on time, but is well-versed in tax reform laws, ways to catch tax breaks, and deadlines. Sounds great – but it can be easy to fall for the lofty promises of fraudulent preparers and compromise your financial information. Check for these six qualities to make sure your tax pro is qualified and the best for you:
1. A Preparer Tax Identification Number (PTIN): Anyone who prepares or assists in preparing federal tax returns for compensation is required to have a valid Preparer Tax Identification Number (PTIN). A PTIN helps to track a return preparer in case of fraud, so make this a priority on your checklist.
2. Qualifications and creds: Don’t know where to look for a tax pro? Qualified tax preparers with a PTIN can be found in the IRS Directory of Federal Tax Return Preparers. In this directory, you can also search through professional credentials (e.g. Enrolled Agents and Attorneys) or those who have obtained an Annual Filing Season Program Record of Completion from the IRS.
3. A good track record: Even if you choose from the IRS directory, check the preparer’s background, history, and reputation before moving forward. Here are some reputable sites to do conduct that research:
4. Fee structure (and amounts): Scammers often base their service fee on a percentage of the client’s refund. To increase their fee, they manipulate information on your tax return for a bigger refund. That spells trouble for you down the road with the IRS. Avoid return preparers who use this refund-based rate or charge a hidden fee after being hired. Trust your instincts – if it seems too good to be true, it is. By signing the tax return, you take full responsibility for the information reported.
5. Reliable review process: Your tax preparer must include their PTIN and sign the return before handing it over to you. It’s important that you review your tax return for accuracy and alert the preparer of any possible mistakes. Only sign your return when you are happy with the information reported. If you’re expecting a refund, check the routing and bank account number on the completed return to ensure that it’ll go directly to your bank account (and not the preparer’s).
6. E-filing option: For safe processing of your tax return, make sure the preparer offers e-filing, or the ability to submit online. This will help to limit your exposure to identity theft, as the IRS will alert you if a second return has been filing under your SSN.
Now that you know where to start, it’s time to get hiring and filing. The team at Tax Defense Network knows how to process even the most complicated of individual and business tax returns. All you have to do is provide the appropriate documentation and financial information to your dedicated preparer while we do all the heavy lifting.
Get started today with a free consultation – call 877-588-1098
You Don’t Want to Miss Tax Forms
Like most Americans this time of year, you’re probably camped out by the mailbox waiting for your W-2 to come. Ok, maybe that’s a bit extreme – but you’re expecting them.
If you are missing tax forms like W-2s or 1099s, the IRS might ask you to amend your return and file again (and who wants to do that?). Usually, W-2 and 1099 forms should reach the recipients by the end of January. It’s up to you to see where your documents are, if missing.
Your Employer’s Responsibility: Sending You W-2 or 1099
Every employer must send employees a Form W-2. If you’re an independent contractor, you won’t get a W-2, but a Form 1099-MISC (if you made $600 or more on services rendered). But like many business obligations, it can fall through the cracks.
Your W-2 or 1099 is needed to calculate tax liability based on income received. You may also need Form 1099 if you received income from interest or dividends, selling stock, or other sources. Types of 1099s include Form 1099-C Cancellation of Debt and Form 1099-MISC Miscellaneous Income. When you file, ensure you attach all documents to your return.
What to Do if You Didn’t Receive Your W-2
- Contact your employer to inquire if they sent your W-2, and request them to do so if they haven’t.
- Contact the IRS at (800) 829-1040 if you do not receive your W-2 by February 14. You can also request an extension if the tax filing deadline is closing in.
- You can also file Form 4852 Substitute for Form W-2 if you didn’t receive your W-2 from your employer. On this form, you can estimate your total tax liability and include it with your tax return.
- Got your W-2 after filing Form 4852? Then you’ll need to report any discrepancies on Form 1040X, Amended U.S. Individual Income Tax Return.
If You Didn’t Get 1099 Forms
- Contact the 1099 source (e.g. your bank if you did not receive your form 1099-INT for interest income)
- Independent contractors won’t necessarily get Form 1099 if they didn’t earn $600 or more from a payer. It’s important to keep good records of income and payers.
If you have trouble obtaining your W-2s or 1099s, you can instead order a wage and income transcript from the IRS. This will reflect any W-2 or 1099 income plus other information reported.
Misreporting or underreporting income can trigger an IRS review, potentially leaving you with additional tax, penalties, and interest. If you’re dealing with the effects of missing tax documents, it’s not too late to set things straight. Talk to a tax professional to make sure this tax season won’t surprise you.
As sales tax revenues continue to downward spiral, the online sales community is destined to become a piggy bank for the government. A recent decision by Amazon triggered what could be a nationwide wave of state sales tax changes – and it will expose sellers who haven’t been keeping up.
Amazon Is Handing Over Data to the State
Amid pressure from the Mass. government, Amazon announced this week that it will hand over precious third-party seller data to the state’s tax officials. The data will expose uncompliant online sellers, allowing Mass. to go after uncollected sales tax – and we can expect that the rest of the country will soon follow suit.
Changing the Way of Sales Tax
Amazon (like most online retailers) does not charge, collect, or remit sales tax for third-party sellers. Instead, Amazon charges sellers to put their items in Amazon’s store but doesn’t add sales tax when the items are brought to check out. This process leaves individual sellers to fend for themselves.
States weren’t always able to require businesses to collect and remit sales tax unless that business had “sufficient physical presence” (i.e. office presence or a majority of their business conducted in that state). In fact, the issue hasn’t been heard in the Supreme Court since 1993 – well before the digital sales era.
This year, the US Supreme Court has decided to review South Dakota v. Wayfair, which will determine if online-only sellers without a store will need to collect state sales tax on transactions with its state residents. This decision is monumental for the entire online sales space.
The Impact on Online Sellers
An estimated 90 percent of online businesses don’t comply with current sales tax collection and remission laws. For these sellers, there’s no more hiding. Amazon’s compliance with Mass.’s request will likely trigger similar requests from other states. Soon, the states where your clients live will have your data – and come after what’s missing.
State tax departments will likely hire more auditors and target sellers who have fallen short of their tax obligations. Even for those who are currently in compliance, you’ll have to monitor sales across all states if the Court adopts an “economic presence” test to ensure you’re compliant. As you can imagine, things can get out of hand (and unorganized) quickly. Even low-volume sellers may need to hire a tax compliance manager.
Online Seller? Here’s What You Should Do
Assess state tax requirements for your situation: Each state has different nexus rules. For starters, keep an eye out on which states are requesting data and where Amazon is releasing it. From there, you’ll need to take inventory of where you do business – and not just where your office is. For instance, consider your business locations, gross sales, or even the state where you have a third-party warehouse.
Make a plan: The good news is the government can’t hold you responsible for tax on old sales as proscribed by new legal standards. This means your current sales tax obligations will be reconciled against current state laws, even if the Court sets a new standard across all 50 states. You’re not off the hook, though – every online seller needs a sales tax compliance plan moving forward.
Get help from a tax professional: While there are software tools to help with nexus, a tax professional can help with determining where you’re required to collect sales tax and whether you need to file or amend returns. Working with a tool or getting help up front can prevent problems in the future, like owing a debt or being audited, and a competent tax professional can help get you the right setup for your specific business. If you receive a letter from any state regarding unremitted sales tax, a tax professional can also help you through both the audit and a debt resolution.
The experts at Tax Defense Network have been helping online sellers and all types of businesses with sales tax compliance since 2007. We have offices nationwide and offer affordable payment plans to help sellers on any budget.
Get ahead of the curve before it hits – and hurts – your online sales and business as a whole.
Traveling around the world is already hard enough – and now for those with tax debt, it’s going to be even harder. Starting this month, the IRS is enforcing procedures that will put your passport at risk if you have “seriously delinquent tax debts.”
Why Your Passport Can Be Revoked
Though the law behind this plan has been in place for over two years, the IRS is now ready to implement and enforce the policy. The 2015 Fixing America’s Surface Transportation (FAST) Act states that the IRS can send notice to states to deny, limit, or revoke your passport if you owe delinquent taxes.
Under the FAST Act, an individual has “seriously delinquent” liability if:
- The debt has been assessed,
- Is over $50,000 in back taxes, penalties and interest, and
- A lien has been filed to secure the liability or a levy has been issued to recover the liability due.
Though this amount of debt may seem hard to accumulate, one mistake or ill-advised taxable event can land you there quickly. In the same way, failing to plan for your self-employment income or defaulting on a secured loan can cause the debt to pile up. Fortunately, there are ways to prevent your passport from revocation, even if you meet the criteria above.
How to Avoid and Resolve Losing Your Passport
Passport revoked? It’s not the end of your travels – the IRS and State Departments are able to reinstate your passport if it has been suspended, but only if you’ve paid back your debt or made plans to do so.
Your passport will not be revoked under the following exceptions:
- You are already in a formal repayment plan
- An element of your account is pending appeal
- You have requested other administrative relief (e.g. innocent spouse relief; identity theft)
If you received a notice of passport revocation before you established a formal resolution with the IRS, you can resolve it – but it won’t be overnight. Paying your debt back in full is the quickest way to release your liens and get your passport back, but that might not be an option for you.
Resolve the Issue with Professional Help
You can enter into an installment agreement with the IRS, which can take 30 days or longer to process. A successful Offer in Compromise will also allow your passport to be reinstated; however, this can be a very lengthy and in-depth procedure with strict guidelines. Unfortunately, Currently Not Collectible status (proof of hardship and inability to pay your debt), will not grant you the passport back.
Tax professionals like the team at Tax Defense Network know how to deal with the IRS and State on your behalf, quickly showing proof that you’re getting help. We will help you find the best resolution to your tax debt situation so you can avoid aggressive IRS actions and get your life (and travels) back on track.
For questions on the IRS’s passport policy or any notices you receive, speak to a Tax Solutions Analyst to learn more at (877) 588-1098.
Cryptocurrency investments, such as Bitcoin, are on the rise. You see it on the news and in your digital feeds. The IRS sees this money as taxable and is pursuing investors who are dodging paying taxes.
What is Bitcoin?
In short, virtual currency is like real money, but as a digital representation. The most well-known include Bitcoin, which is virtual currency used to pay for goods or services or to be held as an investment. Bitcoin operates on a peer-to-peer exchange system, in which many computers are used to track and log details of every transaction. As a form of cryptocurrency, banks are left out of the mix, allowing users to remain anonymous in their transactions.
Bitcoin hasn’t always been worth so much. The cryptocurrency was created in 2009 when creator Satoshi Nakamoto mined the first block on the chain worth $.000076 per Bitcoin. That current price has come a long way, worth$17,552.67 per Bitcoin as of December 15, 2017.
This year, the IRS went after Coinbase, Inc., a large “digital wallet” company that allows users to buy, sell, and transfer Bitcoin. When the court ruled that IRS could gather data on all 14,355 Coinbase, Inc. customers, the agency discovered only 800-900 of those customers were reporting virtual currency gains on their taxes. The moral of the story? Just because your money is virtual, like Bitcoin, doesn’t mean it’s free from taxes – or from the eyes of the IRS.
Along with any currency, no matter how “virtual,” comes financial responsibility — and that includes reporting income to the correct agencies. After Bitcoin’s value hike in 2014, the IRS decided Bitcoin is to be treated as either a capital asset or item of inventory.
Bitcoin transfers are considered a “taxable event” and are subject to self-employment tax (if used as compensation for a service). Compensation of over $600 (.035 Bitcoin) is subject to the same reporting standards as any other self-employment payment, which means that the payer is required to report the payment to the IRS, and to the payee on Form 1099-MISC. The IRS will have the potential to assess large penalties on top of even larger taxes due for unreported income, particularly over a $20,000 threshold. Taxpayers: Be aware that just because your transaction is below the threshold, that doesn’t exclude you from your reporting requirement. The IRS can – and will – track an increased number of transactions through voluntary reporting and court orders to disclose transaction details.
Proper tax planning is key
Complying and properly reporting on all taxes – including Bitcoin – will allow you to avoid the severe penalties that come with under-reporting. Be proactive in your financial planning regarding digital currency to ensure you’re reporting transactions in the most beneficial way for you, avoiding unnecessary tax liability. Tax Defense Network is the go-to expert for tax filing, including cryptocurrency like Bitcoin Call now to discuss how to keep your cash from your cryptocurrency investments with a free consultation.
When you apply for a payment plan, including certain types of Installment Agreements, Offer in Compromise, or Currently Not Collectible status, the IRS asks you for a financial statement, Form 433-A. This form provides information about your total income and assets. The IRS uses this information to determine your ability to pay.
When reviewing how much you can pay, the IRS takes into account:
- Any assets that you can take a loan against,
- Any asset such as your car, boat, or house that you can sell to pay the tax debt, and
- Property that is yours but is held by someone else such as funds in bank accounts, retirement accounts, etc.
The information you will need to include on Form 433-A includes:
- Your checking, savings, online (e.g. PayPal) financial accounts
- Your stored value cards (e.g. payroll card, child benefit card)
- Stock, bonds, mutual funds, and other investments
- Available credit on credit cards
- Your gross monthly wages and/or salaries without deductions, or net business income
- Any real estate, vehicles, and personal assets
- Current market value of your assets
Self-employed individuals also need to share with the IRS their business bank accounts and business assets.
As the IRS has to leave you enough for you to meet allowable living expenses, they also need to review your specific financial needs. Therefore, on Form 433-A, you will need to include your necessary total living expenses. These will include expenses on:
- Food, clothing and miscellaneous
- Housing and utilities
- Vehicle ownership and operation
- Public transportation
- Health insurance
- Out-of-pocket health care costs
- Court ordered payments
- Current year taxes
- Secured debts
- Other expenses such as student loans, unsecured debts, and tuition fee.
Total Monthly National Standards for Food, Clothing and Misc.
Based on your financial statement, the IRS determines your ability to pay and decides whether to approve your application for a payment plan or not. Under the Fresh Start, the IRS may not ask for a financial statement if you owe $50,000 or less in tax debt and apply for an Installment Agreement. For tax debts that are greater than $50,000, and to request a tax debt reduction, you will need to provide the IRS with a financial statement (Form 433-F).
The end of the year is the appropriate time to make financial adjustments to lower your tax bill for the year. Making adjustments in income can make a greater difference in bringing down the tax liability, as taxes on income are charged at the considerable rate of 28% for income groups $90,751 – $189,300, and 35% for income groups $411,501 – $413,200 for 2015.
Deferring income is a tax strategy to lower your annual tax bill. Only taxpayers that expect their tax bracket to remain the same or drop down to a lower bracket should defer income. If the income bracket is expected to rise, they may be able to advance the receipt of income to 2016 to pay taxes in the lower bracket.
Income is taxed in the year in which it is received. If you are due a bonus or a payment in December 2017, you can postpone receiving it in 2018 to avoid paying taxes on it this year.
Employees have certain restrictions when it comes to deferring income, as they cannot postpone the receipt of their paychecks. However, if they have income from other sources that can be postponed, they may consider deferring it to early next year.
The self-employed, freelancers and consultants have more room to maneuver. For these individuals, delaying billing until the beginning of 2018 is a smart way to lower income tax.
Those who are planning to sell assets can avoid paying tax on capital gains by deferring the sale or the receiving of capital gains to next year.
Additionally, taxpayers may take distributions from an IRA at the beginning of the next year rather than this year, if their type of IRA charges taxes at the time of withdrawal. Those who save in a Roth IRA can withdraw anytime without having to pay taxes at the time of withdrawal. However, those with a traditional IRA can avoid paying income tax on a withdrawal if they hold off until 2016.
If you expect your income to increase next year, you may defer your deductions. You can postpone paying bills for expenses such as medical costs, property tax and charitable contributions. Consider all your expenses that are tax deductible that have also not yet been paid.
Small adjustments eventually lead to big savings. By using tax strategies such as deferring income, taxpayers can pay less in taxes to the IRS each year.
Whether it is paying your current taxes or handling back taxes, the IRS provides various payment options. Even though electronic payment transfers are becoming popular, you may choose the method that works best for you. Here are the methods you can use to make tax payments to the IRS:
IRS Direct Pay
For making payments to the IRS as an average taxpayer, one easy method is IRS Direct Pay. It can be used for filing individual tax bills or making estimated tax payments directly from your bank account (checking or savings) to the IRS. This feature has the added advantage of being free of charge. To use Direct Pay, you need to have a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN).
As soon as you make a payment using Direct Pay, you get a confirmation notification that it has been submitted. The bank account information you provide is not stored in the IRS systems.
Electronic Federal Tax Payment System (EFTPS)
Another secure payment method offered by the government is the EFTPS. Both businesses and individual taxpayers can use EFTPS to pay their taxes. To access the EFTPS website, you must have a secure Internet browser with 128-bit encryption. To log on, you must have the following three items:
- EIN or SSN
- EFTPS Personal Identification Number
- Internet Password
Using EFTPS, you can make income tax payments, employment tax payments, and estimated and excise tax payments. The site is available 24/7 and can be accessed via computer or smart phone. Additionally, you can schedule payments for up to 365 days in advance.
Payment by Check or Money Order
If you choose to pay via mail, then you can make your check, money order or cashier’s check payable to the U.S. Treasury. Include your name, address, SSN, daytime phone number, tax period and the tax notice or form number on your method of payment. Remember not to affix your check or money order to other documents.
Payment by Debit or Credit Card
To process payments made by debit or credit cards, the IRS uses standard service providers and business/commercial card networks. A processing fee is charged, which may be tax deductible. The fee varies depending on the service provider used. The IRS does not charge any fee for the transfer or the processing of the payment.
Filing your return is sometimes not your only contact with the IRS for the year. If the tax agency finds errors on your return that lead to a tax assessment, they will send Notice CP14 for collection. Usually, taxpayers receive this notice within four weeks from the time of the processing of their return.
Notice CP14 is the first contact the IRS makes to collect taxes past due. If the notice is ignored or payment is not made, the IRS sends additional notices and can employ collection actions such as a lien or a levy to collect the taxes due. To resolve the issue, taxpayers may follow these steps:
Review the Notice
The first thing to do when receiving Notice CP14 is to know why you received it. The notice includes the following:
- The tax year for which taxes are due
- The date on which the notice was issued
- Your Social Security Number
- IRS phone number
- Tax amount owed
- Payments and credits
- Penalties charged on taxes owed
- The final amount due to be paid
- The deadline for paying the amount owed
The notice also includes information on payment options, penalties, and interest.
Determine If the IRS is Correct
Before agreeing or disagreeing with the notice, check to see if your return had errors that led to the assessment of taxes due. If you find errors, you will need to pay the amount owed before the payment deadline in order to avoid further penalties and interest.
If you do not identify errors or find that the amount owed is greater or less than what the IRS determined, you can call the IRS on the phone number indicated on the notice. An IRS representative will assist you in resolving the issue.
You can make the payment using IRS Direct Pay, a service that allows you to electronically pay your taxes directly from your savings or checking account. Alternatively, you may pay by credit or debit card.
If you cannot pay the full tax owed, either send a request to the IRS to receive up to 120 days to pay, or set up an Installment Agreement. An Installment Agreement allows taxpayers to pay their tax bill in fixed monthly installments. For tax bills of up to $50,000, the IRS allows Streamlined Installment Agreements. For larger debt amounts, it is advisable to seek assistance from a tax professional before sending a request for an Installment Agreement.
Taxes have a long and storied history in the United States. In fact, the taxes levied by the British Empire on the American colonies were at the heart of the grievances that led the colonists to declare independence over 225 years ago. It was taxes and the British Empire’s methods of enforcing these taxes and regaining control of the colonies that ultimately gave birth to a new nation.
Below are four of the taxes that lead early Americans to stand up and say “No taxation without representation!”
The Sugar Act was an effort to both regulate trade and raise revenue in the colonies. The act technically reduced taxes on sugar, but was more strictly enforced than prior taxes. The act expanded the powers of custom officials to prosecute smugglers and required ship captains to maintain details manifests of cargo. The act also restricted the export of certain goods to locations other than Britain.
The new duties caused significantly reduced trade and the colonial economy went into a decline. This led to the revolt when the Stamp Tax was passed.
The Stamp Act was passed in 1765, and was charged on any kind of printed paper. No printed paper remained untouched by tax. Every newspaper, legal document, ship’s papers, and even playing cards were taxed. The colonies feared that the Parliament would impose any tax at will if this tax were allowed to continue.
Despite revolts, the act was repealed only when the cost of collecting the stamp tax grew more than the revenue it generated. With the repealing of the Stamp Act, Parliament passed the Declaratory Act where it stated that it had the right to impose any law in the colonies.
After repealing the Stamp Act, Charles Townshend, Chancellor of the Exchequer, mistakenly believed that the American colonists would not object to an indirect tax on imports, rather than a direct tax on goods. A series of bills were passed and became known as the Townshend Acts. The purpose of these taxes was to have greater control over the colonies, establishing the British Empire’s right to tax the colonies and to raise revenue for the salaries of governors and other officials loyal to the British Empire.
Both the colonies and the British merchants disliked this tax because the revenue generated was paid to the agents enforcing the tax. Due to this, this tax too was repealed.
The Tea Act was passed to allow the British East India Company to directly ship its tea to North America without paying the duty on exporst. This upset the colonial merchants, as now the Company could sell tea at much lower prices, cutting out competition from smugglers.
When the duty-free tea reached Boston harbor, it provoked the Boston Tea Party. The British Parliament responded by passing the Coercive or Intolerable Acts to punish Massachusetts for the revolt.
The Intolerable Acts escalated tensions in the colonies, especially Massachusetts. This tension broke out into the American War of Independence in April, 1775 with the Battle of Lexington and Concord. The colonies officially declared their independence from Britain and its taxes a little over a year later.
What is an IRS Notice of Deficiency (CP3219A)?
An IRS Notice of Deficiency, or Notice CP3219A, lets you know that the information you reported on your tax return is different from the information reported to the IRS by third parties, such as your employer or any financial institution in which you have accounts, and the IRS has changed the amount of tax you owe.
If you agree with the changes made by the IRS and you do not have additional income, credits or expenses that you need to report, you do not need to amend your tax return. You can sign the Form 5564, Notice of Deficiency – Waiver and send it to the IRS. If you have additional income, credits or expenses, then you will need to amend your tax return and file Form 1040-X.
What to do if you don’t agree with the notice
In case you disagree with the notice, you should contact the IRS over the phone or send a written explanation supporting your position. You may also want to contact the third party that reported the information in question (e.g. employer) and ask them to correct it. The IRS will let you know how long you have to contest their assessment on the notice.
If you filed your tax return and you do not have a copy of it to check the alleged difference, you can request that the IRS to send you a copy of your tax return by sending Form 4506.
If your tax liability has increased because of the changes the IRS made, then you should know that the IRS will charge penalty and interest on the taxes that remain to be paid. Therefore, you should make immediate efforts to confirm the changes, and if found to be true, pay the balance to resolve your back taxes.
Taxpayers that cannot pay the unpaid taxes should apply for an IRS tax debt payment plan. After receiving this IRS notice, it is important to begin efforts to resolve the issue immediately, as penalty and interest are charged on unpaid taxes every month until the entire amount of tax debt is paid in full.
If you owe the IRS and can’t pay, you may qualify for the IRS Debt Forgiveness Program.
Under certain circumstances, taxpayers can have their tax debt partially forgiven. When the IRS considers forgiving tax debt, the present financial condition of the taxpayer is of primary importance. That means the IRS cannot collect more than a taxpayer can pay. If any collection action by the IRS would force a tax debtor into a financial crisis, the IRS cannot collect the back taxes.
Offer in Compromise
Taxpayers that have the resources to pay only a partial amount of their tax debt can apply for the IRS government payment plan called an Offer in Compromise (OIC) to resolve the remaining amount. Depending on the financial capacity of the taxpayer, the IRS significantly reduces the total debt to an amount that the taxpayer can pay. This reduced amount can be paid in a lump sum or in fixed monthly installments.
Fresh Start Initiative
To make it easier for taxpayers to qualify for an OIC, the IRS has expanded their Fresh Start initiative. Under these more flexible rules, taxpayers do not have to disclose extensive financial details to the IRS to judge their paying ability. The Fresh Start initiative for OIC offers taxpayers the following advantages:
- The IRS now looks at only one year of future income for offers if they are paid in five or fewer months when calculating a taxpayer’s reasonable collection potential. This is down from previous four years. For agreements of six to 24 months, the IRS now looks at two years of future income instead of the previous five years.
- Taxpayers are now allowed to make their student loans’ minimum payments for post-high school education loans guaranteed by the federal government.
- Taxpayers may, under certain conditions, pay delinquent federal and state or local taxes in monthly installments if they cannot pay it in full.
- The standard allowance for the Allowable Living Expense amount has been expanded. This allowance now includes credit card payments, bank fees and charges, and other miscellaneous allowances.
Understanding your tax debt and dealing with the IRS isn’t easy to do alone, even with programs like IRS Debt Forgiveness. Luckily, there are professionals who can help you navigate your options. Call Tax Defense Network for a no-cost, confidential consultation today at (877) 588-1098.
The White House is saying “snip, snip” to the IRS’s budget this year, but not for the first time. The agency’s allowance has been cut by 20 percent in just seven years, even though it collects $4 for every $1 spent. Some Americans may be celebrating, expecting a seemingly less stressful tax year, but a slashed IRS means things like less funding for our nation’s many government programs, a wider tax gap, and more problems for everyday Americans who answer to Uncle Sam.
Here are six repercussions the IRS budget cuts have on taxpayers:
1. A slower (and downright miserable) customer experience – Call the IRS and you’ll likely sit on hold for over 30 minutes listening to Muzak. Due to staffing cuts over the years, the IRS doesn’t have the resources to provide efficient service for its overwhelming number of callers – both on and off tax season. Not only that, but many representatives who are answering calls are less equipped to deal with your issues quickly due to lack of training.
2. Fewer, less experienced, or even unethical representatives – An understaffed IRS does more than just hold up customer service lines – it delays Revenue Officer case assignment and adds to the timeline in which you resolve your tax debt. To fill the talent gap, the IRS rehired over 200 employees that have been fired for unethical behavior, like fraud, theft, and even taxpayer data abuse. The people you are supposed to trust could be a danger to your financial life.
3. Clunky and unsafe service-automation processes – Fewer humans means more robots. And for the IRS, the robots don’t quite measure up. For example, taxpayers have the right to appeal an IRS decision with a local Appeals or Settlement Officer, but 12 states are without any qualified local appeals staff. To discourage in-person appeals, the IRS has released a telecommunication system within its centralized appeal office. Non-local Officers understand less about local businesses’ challenges, are out of tune with regional issues and are lower-ranked employees who lack expertise and experience.
The IRS believes that technology can replace the local expertise at a lower cost, but this hasn’t yet shown true. In fact, visits to the IRS website decreased by 4.1 percent despite the push for more online services (enough to make that 30+ minutes on hold sound tempting). This combination of a limited local presence and a poor attempt at replacement with technology ultimately leaves taxpayers who need help out to dry.
4. A lack of taxpayer outreach and education – You may think the government is a pro when it comes to confusing the public about taxes, but the IRS wants you to be informed about (and comply with) tax law. Unfortunately, taxpayers are left in the dark due to lack of awareness and education when only four percent of the “Taxpayer Services” budget goes to working with organizations such as state tax authorities and volunteer groups (most of this budget goes to processing returns). More cuts will continue to widen the gap of outreach and support.
5. More scams and ID theft – Financial scams involving sensitive personal data are everyone’s worst nightmare. If the IRS can’t provide adequate education and awareness of how to mitigate these risks, fraudulent activity increases. Ignorance isn’t the only loophole – confidential data can be easily compromised to do a lack of sufficient infrastructure and technology. The IRS has made significant gains over the past few years, but maintaining the progress may become difficult with less financial support.
6. Debt collection from private companies – Congress recently ruled (again) that a portion of debt collection would be outsourced to private debt collectors (PDCs) – an approach that comes with its own set of issues. For one, a sizable percentage of government funding (25 percent) money now goes to PDCs instead of government programs. When prior private debt collection programs have proven to cost more than the government makes, it’s lose-lose for Uncle Sam and citizens. Taxpayers need to protect themselves and stay informed more than ever.
For people who have tax debt, these six issues aren’t making the already-difficult process any easier. Luckily, tax professionals can deal with the IRS on your behalf (so you can say “sayonara” to long hold times). If you have questions about individual or small business IRS issues, call Tax Defense Network for a free consultation at (877) 588-1098.
Do you know who is collecting your tax debt?
The IRS has called for backup from the private sector, and these four companies could be coming after your tax debt in lieu of the IRS. Here’s what you need to know to stay informed, lawful and safe.
What’s the deal with Private Debt Collection Agencies (PDCs)?
Private debt collection agencies, or PDCs, aren’t rookies to the federal tax debt collection game – they assisted the IRS in both 1996-1997 and 2006-2009. Despite warnings from the IRS and National Tax Advocate on the unsuccessfulness of these previous efforts – wasting money, yielding half the amount of collections, and contributing to inequities in the U.S. tax collection system – it seems that history is repeating itself.
Congress passed Fixing America’s Surface Transportation Act (FAST Act) in December 2015, which includes a section requiring the IRS to use PDCs for outstanding tax debt that the IRS is no longer pursuing. Now a year and a half later, the program is in full swing. The IRS has hired four PDCs: Conserve, Pioneer, Performant Recovery, and CBE Group. Though not all tax debt cases are eligible for PDCs to handle (e.g. offer-in-compromise, innocent spouse cases, deceased), you may be getting a notice that your account will be in new (private) hands.
What are the risks associated with PDCs?
The problems don’t necessarily lie with the four companies themselves, but the program’s loopholes. Here are some of the dangers associated with private debt collection:
- Scam magnets: More scam artists can pretend to be PDCs, especially because PDCs aren’t required to identify themselves as IRS contractors. Here’s a smart rule of thumb: Do not disclose any personal information to someone randomly demanding payment over the phone or internet.
- Elevated risk for low-income taxpayers: PDCs have an agenda to push people to make payments, even if the taxpayers can’t afford it. This can create economic hardship for people who would otherwise qualify for alternative payment plans by the IRS. National Taxpayer Advocate reports half of taxpayers outsourced have incomes of less than 250 percent of the federal poverty level (FPL) and nearly a quarter are at less than 100 percent of the FPL. The result is low-income, elderly, and income-restricted individuals are buried deeper in economic woes and unpayable debt.
- A lack of consumer awareness: The IRS wants consumers to know what’s up, but public awareness campaigns are minimal at best due to drastic IRS funding cuts. As a result, consumers are left in the dark and even more vulnerable to scams.
What you need to know to protect yourself:
- How the IRS works – The IRS isn’t like your crazy ex – it will never call or text you out of the blue to demand payment, but rather send you notices in the mail that progressively increase in urgency to act. If your case has been assigned to a PDC, the IRS will let you know so it won’t be a surprise.
- Don’t pay the PDC directly – Though the PDC is hired to collect your debt, you’re not actually writing out your check to them. All your repaid debt will go straight to the IRS as usual.
- Consult with a licensed tax professional – Turning to a licensed tax professional, which may include CPAs, enrolled agents or tax attorneys, can give you the support and direction you need regarding your tax debt. These experts can negotiate with the IRS on your behalf to relieve tax debt or tie-ups like liens, levies and wage garnishments.
While the lawfulness of PDC use is under scrutiny, it is today’s reality. The key to avoiding trouble is being smart about tackling your tax debt and not going at it alone.
Remember: It’s crucial that you never disclose information to someone calling or messaging to collect immediate payment. Instead, call the IRS directly to see if you owe taxes, or call Tax Defense Network for a free consultation at (877) 588-1098.
If you owe the IRS and don’t know where to start, then you’re one of over 8 million Americans who are in the same boat. And while many financial pros can claim to help, selecting one isn’t the same as choosing a candy bar at the grocery checkout line.
Tax debt resolution professionals help clients figure out the best approach to relieving tax debt or resolving issues concerning the IRS, but they’re not all cut from the same cloth. That’s why it’s important to evaluate which company can best serve you (and who you can trust) before signing on the dotted line.
Here are four things to consider when choosing a tax debt resolution provider:
1. Proven experience and dynamic resources – When tax relief can seem like rocket science, you’ll inevitably have questions for the pros. Look for a company that not only knows their stuff (hint: check their website, social media accounts and credentials), but grants clients direct access to licensed professionals such as attorneys, CPAs and enrolled agents. It’s a good sign that you’ll have a fast pass to the resources you need when these professionals are on staff.
Industry expertise pairs well with practice, so consider how long the company has been in the market and its track record. Is it a law firm that recently added tax services? Is it a bike shop turned tax solutions provider? In short, the longer the company has been successfully helping customers like you, the better.
2. A commitment to client empowerment – When you owe the IRS thousands of dollars, you don’t exactly feel powerful. Client empowerment occurs when a company puts forth effort in communication, guidance and transparency to help you feel valued. A tax resolution company that not only empathizes with your situation, but is a partner to you throughout the process, can be your best catalyst for regaining confidence. If you have a designated consultant on your case, this is a good sign you’ll be in good, steady hands.
3. Accreditation and stellar ratings – There are many unbiased, third-party review sites that provide valuable insight into a company’s business practices and the client experience. Organizations like Better Business Bureau (BBB), Best Company or Trustpilot take real customers’ reviews and ratings to grade companies. For example, the BBB rates companies from F (lowest) to A+ (highest), so you can ensure a company has a “passing” grade.
4. A broad range of service offerings – Here’s a little secret: Most tax resolution companies offer the same basic services. Sift out a true diamond in the rough by seeing if the company goes beyond the basics. Look for a tax services provider offering (and mastering) complex issues such as:
- Federal and state taxes
- Business tax solutions
- Self-employment tax solutions
- International filing
- Trust and estate taxes
- Offshore Voluntary Disclosure Program (OVDP)
Ideally, you want a partner you can trust for all tax-related services or guidance you may need now and in the future.
When you check “yes” to these four must-have qualities, you’ll be on your way to resolving tax issues in no time.
Tax Defense Network has been in the business of helping taxpayers resolve their issues for 10 years and has an A+ rating with the Better Business Bureau. To start the journey to tax debt relief alongside experienced professionals you can trust, call Tax Defense Network at (877) 588-1098 or chat with an analyst today.
With summertime in full swing, you may be considering some much-needed time away from home. Whatever your travel plans, you might want to consider whether or not you’ll be able to take tax breaks for your time off. Believe it or not, there’s a chance that you’ll be able to take some deductions for that much-needed vacation.
Business and Pleasure
The best way to maximize your tax savings when you’re on the road is to incorporate your job into your travel plans; or, perhaps more accurately, squeeze pleasure time in between work activities. Your plane fare, lodging and even meals can be written off if the expenses are made under working conditions. So, just because you have to meet with clients doesn’t mean you can’t enjoy a dip in the hotel pool.
Passive vs. Active Business Trips
There are two types of common work-related trips: passive and active. A passive trip is educational in nature, such as a software training or an industry conference. An active venture involves actual work functions, like business meetings or factory inspections. Expenses for both passive and active trips may be deducted on your taxes – but just make sure that you’re actually paying the bill for these items. In other words, don’t try to write off expenses that your company is covering.
The Acceptable and the Unsuitable
The IRS will allow some tax deductions while rejecting others. Examples of acceptable tax deductions while you’re out of town for work include:
- Your rental car
- Luggage fees
- Hotel wifi service
If you’re combining your vacation with work, you can still take the above deductions if they’re for work activities. What you don’t want to do is attempt to write off expenses for your friend, companion or relative as work-related (unless he or she is a legitimate co-worker). Here are some examples of what not to include:
- Mom’s pedicure while you’re meeting with potential clients
- The kids’ theme park tickets while you’re on conference calls
- Family dinner after your seminar
If your family is tagging along and sharing your hotel room while you’re on the clock, that’s completely acceptable, but don’t try writing off obvious leisure and non-work items. Most importantly, don’t forget to keep receipts for every individual item you write off. While you want to take every deduction you can, you also want to avoid making a fatal error on your return.
How to Play It Smart
It’s a good idea to ask for help when you’re writing off vacation expenses. If the IRS sees anything they perceive as questionable, you might be in for an uncomfortable discussion about your return. A licensed tax professional can help you prevent any IRS issues from mistaken deductions or resolve an existing tax issue.
You probably take for granted just how much time you spend in your car every week. What you do notice is the cost you incur for fuel, general maintenance and ill-timed auto repairs. If you’re looking for a way to save when you hit the road this summer, you can’t afford to overlook some vehicle-related tax deductions.
There are plenty of driving activities which will actually net you some helpful tax savings when it comes time to file next year. Starting as early as the summer months can ensure you have something to show for your various auto excursions. Consider what deductions you can take on your car, and how to simultaneously avoid having a collision with the IRS over some basic filing mistakes.
First, the good stuff: Philanthropy can benefit your community as well as your taxes. Your expenses for driving to volunteer activities are tax-deductible. This includes money you spend on fuel and tolls; even parking at your charity gig is able to be written off.
In the event that you pull up stakes to take a new job, you can deduct some of the moving costs – including the actual distance that you have to travel to make the transition. You have to be sure that you’re at least 50 miles away from your previous workplace in order to take this deduction. The really good news? You can take a tax deduction even if you’re using your car on your quest for a new position.
If you find yourself in a fender-bender or worse, there may be a silver lining in your tax return. When your car loses value as a result of the damage, this may be deductible. Also, should you have a crash where the other liable motorist’s insurance doesn’t completely cover your damages, you can deduct the cost difference.
You might have a little extra income from property you rent, which you no doubt understand is taxable. But did you know that you can actually write off expenses when you’re going back and forth to this location? As long as you’re using your car to visit the rental for landlord duties like maintenance, you’re able to take the deduction.
While you should definitely take advantage of every vehicle tax break you can get, proceed with caution. First, any expense you want to write off should be accompanied by a receipt. A good rule of thumb: if you don’t have valid documentation, don’t take the deduction. Any random audit on your return will result in trouble if you don’t have the proper receipts in hand.
It’s easy to make filing mistakes in your tax break endeavors. If you have any question about whether or not you’re on the right track, consult with a tax professional first. And if you’re face with an IRS issue over tax breaks you’ve taken in error, don’t hesitate to contact a licensed tax professional. The last thing you want is the IRS in your blind spot.
Planning the logistics of your departure from this world may not be a comfortable activity, but a little time and energy on your part can save those you leave behind from an arduous task. You want to be certain that your money, property and assets are divided and distributed according to your wishes. As you navigate this essential activity, it’s critical to determine how your taxes – and any existing problems – can upset your postmortem financial blueprint.
The Life of a Tax Debt
Any delinquent federal tax balance has a lifespan of ten years. This liability clock begins on the date of assessment and ends ten years later. For example, a tax debt assessed on June 1, 2017 will not be excused until June 1 2027. There are factors that can extend this time frame, but if you did nothing to resolve your debt, you can expect that it will be collectible for a full decade.
During Your Debt’s Life Cycle
Any unresolved IRS balance is subject to collection activity. This means that you are vulnerable to efforts such as a levy against your bank accounts, a wage garnishment or even a property seizure. The longer you wait to make resolution efforts, the more likely you are to experience aggressive collection measures.
When You Die
Unfortunately, even your death does not necessarily excuse your tax debt. If your delinquent balance has five years left before it reaches expiration, then collection activity may continue to be taken for this time. And while you obviously won’t be liable for payment, your family may be.
In the event that you filed a joint tax return with your spouse and that ultimately yielded a tax debt, both you and your spouse are initially responsible for the balance. Should you pass away before this sum is paid, your spouse will still be subject to IRS collection efforts. Your partner can make an innocent spouse request if he or she had no knowledge of (and no reason to know about) filing errors which led to the tax debt; if approved, the IRS will not pursue collection activity against your surviving spouse.
While your family and friends won’t be vulnerable to IRS collections for your tax debt, the money and/or property you intend to leave them can be. Following your demise, any outstanding tax liability must be paid before your assets are allocated to your heirs. Failing to plan properly can make a mess of your affairs; one that those you leave behind will be forced to clean up before receiving what’s left of your estate.
How to Be Ready
You can never be completely prepared to shuffle of this mortal coil, but with some careful planning, you can be reasonably sure that a tax debt won’t complicate matters for your spouse and family. You may wish to consult with a fiduciary when arranging your affairs and, if a tax debt exists, consider speaking with a licensed tax professional. As long as a resolution is in place for any IRS issue, you can rest easier knowing that you’re working towards outliving your tax debt – a proposition that both you and your family can appreciate.
Discovering that you owe tax debt can be a truly stressful (and embarrassing) experience. Your IRS problems may even spread beyond the relative comfort of your home, potentially impacting your job or employment prospects.
Before dismissing a delinquent tax balance as “something to handle later,” first consider what consequences can befall your professional life. Also, understand that resolving your tax debt is within your power, and is certainly in your best interest. Your work reputation might just depend on it.
Tax Debt Escalation
It’s helpful to first examine how a tax debt becomes a problem larger than simply a bill to pay. The IRS will typically afford you a certain period of time to either pay your tax debt in full, or negotiate a formal resolution. However, if you take no action after receiving delinquent notices, you open yourself up to the full scope of the IRS’ collection apparatus.
When you don’t willingly attempt to resolve your tax debt, the IRS can take aggressive steps to take what is due. One collection method that you may be subject to is a wage garnishment. This involves a percentage of your earnings being withheld in order to satisfy your tax debt. Your employer will not learn the specifics of your delinquent tax bill, but a wage garnishment will provide an unfortunate illustration of your circumstances.
If you are a contract worker, the full amount of your earnings can be taken rather than just a percentage. Regardless of whether you are a contractor or traditional employee, your employer will be expected to comply with the IRS’ garnishment instructions. In other words, you won’t be able to negotiate with the boss, no matter how friendly you are.
Whether you are rooted in your current position or you’re pursuing a new job opportunity, there is another IRS collection tactic to keep in mind: the lien. The IRS can place a lien against you when you have a delinquent balance, which effectively tells other creditors that they are first on line to collect from you. This action will negatively impact your credit, impairing your ability to secure a mortgage, loan or even rent.
But your work life may also be in trouble when a lien is present. Many employers will require you to maintain healthy credit as a condition of employment. This is particularly true if your position requires security clearance or necessitates the use of a professional license. Finally, prospective employers are more frequently examining candidates’ credit scores as a part of the hiring process; a tax lien can jeopardize what might otherwise be a tangible opportunity.
No matter what type of collection action you’re facing or are already experiencing, you always have the option to reach a formal resolution with the IRS. This will likely involve reaching an agreement over how you will pay your tax debt over an extended time, although a variety of options may be available to you. You may wish to consult with a licensed tax professional to explore the full range of tax solutions.
Taxpayers who earn income which requires them to estimate and pay their taxes will be required to perform their quarterly task on June 15th. This deadline must be met in order to avoid IRS penalties and late fees. The next quarterly due date for estimated taxes falls on September 15th, 2016 (preceding deadlines typically fall on the 15th of January and April).
Who Has to Estimate and Pay Tax?
Individuals who have taxes withheld from their earnings are not required to pay estimated tax, provided this is their sole source of income. In this scenario, the employer is required to withhold and pay the appropriate amount of tax throughout the year. However, individuals who owe tax of $1000 or greater from any of the following sources on a quarterly basis should plan on meeting the June 15th deadline:
- Self-employed persons or contract workers
- S-Corp shareholders
- Sole Proprietors
Additionally, corporation owners who expect to owe more than $500 are required to meet the quarterly due date.
What to Do
Taxpayers who do not have tax automatically withheld from their earnings must calculate, or estimate, their taxes, based on their total quarterly earnings. Once the correct amount is determined, they must file the proper form and pay the total due. Depending on the type of business involved, one of two forms must be filed:
- Corporation filers should use Form 1120-W, Estimated Tax for Corporations
- Form 1040-ES should be used by self-employed persons, S corporation shareholders, partners and sole proprietors
Instructions on how to pay estimated tax when using Form 1040-ES will be found on the form itself; payment methods include remitting by mail, phone or online. Anyone who is required to file Form 1120-W must make payment by the Electronic Federal Tax Payment System, which will be found at IRS.gov. Individuals who are required to estimate and pay tax, regardless of form type, may also find additional instructional information at IRS.gov.
What Happens If Payment is Not Made?
Any person who is required to estimate and pay quarterly tax and does not do say may be subject to both penalties and interest on the total amount due. Failure to pay, or underestimating/underpaying tax, can result in a penalty for tax liabilities of $1000 or more.
This penalty may be waived in the event the taxpayer fell victim to an unusual circumstance, such as natural disaster, which prevented the liability from being paid on time. Reasonable cause also applies to individuals who became disabled or were retired during the period for which taxes should have been estimated and paid.
Additional interest charges may apply for any tax liability which is not estimated and paid by the June 15th deadline. Individuals may refer to IRS.gov for specifics regarding punitive fees, or may consult with a licensed tax professional before taking action.
If you owe back taxes, the IRS does not report the debt to credit agencies. In other words, your credit report does not show any balance due for taxes. However, if the IRS places a federal tax lien for non-payment of back taxes, the lien will appear on your credit report.
Usually, the IRS files a lien for amounts of $10,000 or more. Once the lien is filed, creditors are informed of the IRS’ claim, which substantially reduces the taxpayer’s ability to obtain credit in the future.
What is a Lien?
A lien is the government’s claim to a taxpayer’s property. A lien can be placed on real estate, personal property or financial assets; anything the individual owns or takes possession of for the life of the tax debt. A lien is placed after the taxpayer:
- Does not respond to the IRS notices regarding the payment of tax debt
- Avoids or refuses to pay the tax debt
The IRS sends various notices to inform the taxpayer of the amount owed.
How a Lien Impacts Credit Report
A lien limits the financial freedom of a taxpayer. When a lien is placed, the taxpayer cannot sell, rent, take a loan or get credit against property until the tax debt is resolved. Along with placing a lien, the IRS also files a public notice to alert creditors of the unpaid taxes. This hurts the taxpayer’s ability to rent or purchase houses, cars, etc. A lien may also negatively affect employment opportunities, as more companies are reviewing the credit reports of prospective employees.
To avoid damaging your credit rating, a tax debt should be resolved as quickly as possible. The IRS offers a variety of ways to resolve tax debts, suited to the different paying capacities of taxpayers.
How to Get a Lien Removed from Credit Report
The fastest way to get a lien removed is to pay the tax debt in full. When the IRS receives the full debt amount (including penalties and interest), they typically remove the lien within 30 days of the date of payment.
Taxpayers that prefer to pay their tax debt over an extended timeframe can apply for an Installment Agreement. An Installment Agreement allows payments in fixed monthly installments. For debt reduction, the Partial Payment Installment Agreement may be a viable option.
Other resolutions may be available, depending on the taxpayer’s unique circumstances. These include “withdrawal”, where the IRS removes the public Notice of Federal Tax Lien. This is subject to the taxpayer using the Direct Debit Installment Agreement to pay the tax debt.
A new tax scam targeting students has been quickly gaining momentum. Scammers are making calls to demand payment of a non-existent tax, which they call the “federal student tax”. No such tax exists, but scammers are tricking people into paying it. The IRS has issued a warning to taxpayers, asking them to remain cautious.
How This Scam Is Operated
Scammers make a telephone call pretending to be the IRS, and demand payment of the bogus “federal student tax”. They convince the taxpayer to wire the payment immediately. If the taxpayer shows reluctance, the scammers can become aggressive and threaten to report the student to the police.
Scammers typically use certain personal information that makes their calls appear legitimate. They might have obtained information, such as the student’s name and the name of the student’s educational institute. Also, scam artists may use sophisticated technology to masquerade as IRS employees or the police. They use names of real IRS agents, and generate false indicators of IRS caller-IDs to appear authentic.
“These scams and schemes continue to evolve nationwide, and now they’re trying to trick students,’ IRS Commissioner John Koskinen said, “Taxpayers should remain vigilant and not fall prey to these aggressive calls demanding immediate payment of a tax supposedly owed.”
Finding Out Their Fake
Any unsolicited phone call claiming to be from the IRS where the individual demands immediate payment, especially through wire transfer or a prepaid debit card, is a fake. The IRS will mail a notice regarding the payment of any taxes due.
A person that threatens the taxpayer with arrest, deportation, license revocation, etc. for not paying taxes immediately, is a fake. The IRS follows an established process to collect back taxes, which begins with notices sent via post. The tax agency provides sufficient time to the taxpayer to pay any back taxes, and with a variety of payment options.
A person asking for personal, financial or tax information over the phone such as credit or debit card numbers, PINs, tax filing status, or social security number, should immediately raise a red flag. Before sharing sensitive information, always confirm the identity of the caller.
How to Respond
Upon receiving such calls, taxpayers should immediately hang up. They should not communicate with the scammer at all. Many of them are seasoned criminals operating in a group. Instead, report the call to the Federal Trade Commission by visiting ftc.gov and clicking on ‘File a Consumer Complaint’. Add “IRS Telephone Scam” in the notes. Alternatively, taxpayers may call the TIGTA at 800-366-4484.
Taxpayers that owe back taxes receive an IRS notice regarding payment. This notice includes the amount owed, the due date for payment, IRS penalties and interest, and basic instructions on how to respond.
IRS Penalties and Interest
Non-payment of taxes will trigger IRS penalties and interest. Taxpayers that do not pay their entire tax bill on time are required to pay the amount owed plus penalties and interest, which accrue monthly. Interest is charged at the federal short-term rate plus 3 percent and is compounded daily. If the tax return is not filed, the penalty for failure-to-file is charged at 5 percent.
On the IRS notice regarding payment of back taxes, you will find:
- The original amount owed
- The total penalty charged
- The total interest charged
- The total amount owed after penalties and interest
It is important to calculate how much you owe before and after the penalties and interest. If the IRS made a mistake in their assessment or your calculation results in a different amount, you may disagree with the IRS’ claims and inform them of your estimate; you can support your argument with written records (copy of tax return, receipts of expenses claimed for deduction, etc.). If there is substantial evidence to your claims, the IRS will adjust the amount to your estimation.
If You Lose Your Notice/Letter
If you do not have the notice or letter the IRS sent, you may obtain an account transcript to determine whether you owe something. To obtain a transcript, use the IRS Get Transcript. You may request to receive a transcript online or by mail. Send a unique request for each tax year for which you require a transcript.
An account transcript may not include the most recent penalties and interest. Therefore, it is best to pay as much you can to bring down the penalties and interest. Upon receiving payment, the IRS will communicate to you the balance owed, if any, by sending a notice/letter.
The IRS sends CP523 Notice to inform taxpayers that they have defaulted on their Installment Agreement. Non-payment of the monthly payment will lead to termination of the agreement. Upon termination of the installment plan, the IRS can proceed with collection activity; this may include a tax lien, or seizing of funds from the taxpayer’s wages and/or bank accounts.
Installment Agreement Rules
Installment Agreements allow taxpayers to pay their tax debt in fixed monthly installments over a period of months or years. Depending upon the amount of the tax debt and the taxpayer’s ability to pay, the amount to be paid each month will vary. After the agreement is made, the taxpayer is required to at least pay the minimum required amount each month. If the taxpayer cannot pay the minimum amount, even for only one month, they must immediately inform the IRS.
What the Notice Includes
CP523 Notice contains the amount due, which needs to be paid immediately to prevent termination of the agreement. It also includes:
- The notice number and date
- The taxpayer’s social security number
- The IRS phone number
- The tax year for which taxes are due
- The failure to pay penalty
- Interest charges
- The total amount due
Taxpayers typically have 30 days from the date of the notice to respond, though are encouraged to reply as quickly as possible.
How to Respond
You can pay the minimum amount before the final due date and prevent your agreement from being terminated. If you cannot pay the required amount, you will need to immediately contact the IRS to see if you can get the agreement reinstated or arrange for a different agreement.
There is a reinstatement fee for getting your agreement reestablished. When an agreement goes into default and is not reinstated, the IRS continues to charge penalties and interest on the balance due. Additionally, they can initiate collection actions such as a lien or levy to recover the unpaid taxes.
If you make payment by check or money order, you may make it payable to the United States Treasury. Include your social security number, the tax year, and the form number with the payment.
Taxpayers receive Notice CP501/CP502 when they owe taxes to the IRS. Usually, incorrect deductions or credits, or excluding certain income on a return can lead to a tax debt. The notice provides information on taxes owed (including penalties and interest) and instructions for payment.
What the Notice Contains
The notice has information about the taxes owed, including penalties, interest, and the total amount due. The notice specifies the due date for the tax liability. If the amount is not paid in time, the IRS charges additional penalties and interest. The notice also includes the notice date, the IRS contact number, and the tax year for which the balance is owed.
How to Pay
The simplest method to pay the amount owed is through the IRS Direct Pay, or using your debit or credit card. You may use the IRS payments page to access these payment options.
If you make the payment by check or money order, make it payable to the United States Treasury. Include the following with your payment or correspondence:
- Your social security number
- The tax year for which taxes are due
- The form number for which taxes are due (e.g. 1040)
If You Cannot Pay
If you cannot pay the full amount due, you may consider these IRS payment plans: Installment Agreement and Offer in Compromise. There are various kinds of Installment Agreements, each designed to suit different financial limitations.
An Installment Agreement allows you to pay your taxes in fixed monthly installments. Penalties and interest continue to be charged on the taxes due, but making a larger payment initially can bring them down significantly. However, if you cannot pay the full amount due, you may consider applying for an IRS tax debt reduction plan called the Partial Payment Installment Agreement.
The Offer in Compromise is a tax debt reduction plan open to individuals that cannot afford to pay their full balance. Typically the IRS will require the taxpayer to provide them with a financial statement, itemizing expenses and assets. This is done to determine the taxpayer’s ability to pay. When attempting a tax debt reduction, it is advisable to use the services of a tax professional.
Notice CP90 is received when a taxpayer owes back taxes, and did not respond to earlier IRS notices regarding payment. This is the final notice a taxpayer receives regarding payment of back taxes before the IRS initiates a levy.
What is a Levy?
A levy is the seizure of a taxpayer’s assets (whether held by the taxpayer, like a car or boat, or held by someone else, like bank accounts, retirement accounts, wages etc.) to satisfy a tax debt. A wage levy or bank levy are commonly used by the IRS to collect delinquent taxes.
The IRS can only place a levy after these two steps are taken
- The IRS assessed the taxes due and sent you a Notice and Demand for Payment
- The IRS sends you Notice CP90 at least 30 days before the levy.
How to Respond
If you pay the full tax debt (including penalties and interest) after receiving Notice CP90, the IRS will stop the levy. If you cannot pay in full, obtaining a payment plan, such as an Installment Agreement or Offer in Compromise, can stop the levy.
An Installment Agreement allows taxpayers to pay their full tax debt in monthly installments. It is available to any taxpayer that can pay back the entire tax amount owed. An Offer in Compromise is a payment plan that allows for a reduction in tax debt. However, it is available only to those that do not have the financial capacity to pay their full tax debt and the meet certain eligibility requirements.
Qualifying for an Offer in Compromise usually involves negotiations with the IRS. Therefore, it is advisable to use the services of an attorney or an enrolled agent before moving forward. If you intend to use a representative, you are required to complete and send Form 2848, Power of Attorney and Declaration of Representative to the IRS. Those with a financial hardship can also use tax debt reduction plans, such as a Partial Payment Installment Agreement, to avoid a levy.
If You Disagree with the IRS
If you do not agree with the IRS’ assessments and actions, you may request a Collection Due Process Hearing. When sending the request, use Form 12153, Request for a Collection Due Process or Equivalent Hearing. You may appeal the IRS’ intent to levy and other issues at the Collection Due Process Hearing.
Notice CP3219 is also known as the “90 day letter”, or the statutory notice of deficiency. Taxpayers receive this notice when the IRS has determined that they owe taxes. Taxpayers may owe back taxes due to the removal of certain credits or deductions that they do not qualify for, or possibly the exclusion of certain income.
The IRS receives information from third parties (W-2s, 1099s) regarding your tax liabilities. If the information on your return (specifically income, credits and deductions) does not match the information from third parties, the IRS may send a notice or carry out an audit.
If You Agree
Read the notice carefully when comparing the details with those found in your own tax records. If you agree with the IRS assessment, you will need to sign the enclosed Form 5564, Notice of Deficiency – Waiver, and mail it to the IRS at the address on the notice. You are required to pay the entire taxes owed, including penalties and interest.
If You Do Not Agree
If you disagree with the IRS assessment, you have 90 days from the date of the notice to file a petition in the U.S. tax court. You may also send information that explains and substantiates your disagreement. The IRS will review your information and will allow you to file a petition with the tax court.
After the 90-day period, if the balance is not paid or a petition is not filed, the IRS assessment becomes final. The IRS may begin collection action after 90 days.
When a petition is filed in the tax court and a decision is pending, the IRS assessment is not considered final, and penalties and interest do not accrue on the taxes owed. Generally, after you file a petition with the tax court, the court refers the case to the IRS Office of Appeals. The Office of Appeals is an independent organization within the IRS, which resolves disputes between taxpayers and the IRS in a fair and impartial manner. The majority of the cases that come to the tax court are referred to the Office of Appeals for resolution.
An attorney, CPA, or enrolled agent can represent you during an appeal. To resolve tax disputes in the Office of Appeals or the tax court, it is advisable to seek representation from a tax professional.
Taxpayers receive notice CP-2000 if they do not report income on their return that was reported to the IRS by a payer. Also, if the IRS believes that payments, credits and/or deductions are overstated on the return, they may send notice CP-2000. The adjustment(s) to the return may lead to the owing of taxes. In such a case, the taxpayer is required to make the payment immediately to avoid additional penalties and interest.
What Does the Notice Include?
The notice includes the changes required, how you can respond to the notice, and an IRS phone number you can contact for assistance. It also includes:
- The tax amount you reported on your return
- The tax amount the payer reported to the IRS
- The payer’s information, including name, ID number, and tax document sent (W2, 1099, 1098, etc.)
According to what was reported to the IRS by the payer, the tax filer’s liability may increase or decrease. The filer has the right to agree or disagree with some or all of the changes proposed by the IRS.
How to Respond to CP-2000
First, review your tax documents and use the information available to determine the accuracy of the IRS’ proposal. If you agree with the changes, follow these four steps:
Complete and sign the response form.
- Enclose it in the envelope provided with the notice.
- A payment voucher is attached to the notice; it must be used to make the payment, if any.
- Mail it to the address specified on the notice.
If you owe taxes, the notice will indicate the total amount due. There may be penalties applied, which may not be shown on the notice. You are required to pay the full amount owed within 30 days from the date of the notice. If no amount is paid before or after the 30-day period, the IRS begins to charge additional penalties and interest on the amount due.
If you disagree with one or more IRS’ changes, follow these steps:
Explain your reasons for disagreeing in a separate signed statement. Do not sign the notice.
- In addition to your explanation, attach any supporting documents that substantiate your claim.
- Include the explanation and supporting documents with the response form. Provide your phone number with area code, and the best time to call.
- Mail the explanation, supporting documents, and response form to the IRS.
If you cannot make full payment due to financial restrictions, you may satisfy the amount in monthly payments using an Installment Agreement. An Installment Agreement provides an affordable way to resolve back taxes that is acceptable to the IRS.
The IRS sends Notice CP59 when a taxpayer does not file his or her tax return. If you were required to file and you did not file your return, you might receive this notice. The IRS also charges a penalty for failure-to-file.
How to Respond
Notice CP59 includes the tax year, the notice date, your social security number, any taxes due, and the IRS contact number. When you receive Notice CP59, you can respond by:
- Filing your personal tax return immediately, or
- Explaining to the IRS why you don’t need to file, are filing late, or that you have already filed
If you disagree with the notice or have already filed your return, you can call the toll free number on the top right corner of the notice. Also, you can use the notice’s response form to communicate with the IRS.
If you agree with the notice, you will need to pay the full amount listed on your notice, including any penalties or interest.
If you filed your return before you received the notice, you don’t need to act if it was within the last eight weeks. If it’s been eight weeks or more, you can complete and mail the response form, attaching a copy of your return to it.
What Happens If You Don’t File
If you don’t file your return after receiving CP59, the IRS may proceed with collection action. The IRS can collect back taxes by:
- Initiating a tax lien
- Initiating a levy
- Offsetting your tax refund
As part of its collection process, the IRS can seize property, wages, bank accounts, social security benefits, and retirement income. The IRS will continue to send notices, encouraging you to resolve your tax issue to prevent collection efforts.
Back Taxes Resolution Options
Taxpayers unable to pay their back taxes in a single payment can request an Installment Agreement. Under an Installment Agreement, taxpayers can pay their back taxes in fixed monthly payments over several months or even years.
An Offer in Compromise is a payment plan that allows for a reduction in tax debt. This plan is accessible to taxpayers that are financially incapable of paying the full debt amount.
It’s National Teacher’s Day today! In recognition of teachers and their work, here are some deductions for educators that can help save tax dollars. The biggest tax deduction available to teachers is the educator expense deduction. Eligible teachers can deduct up to $250, and $500 if married filing jointly (if both spouses are educators).
Using the educator expense deduction, teachers can deduct qualified expenses, including those for:
- School supplies
- Computer equipment, including related software and services
- Other equipment and supplementary materials used in the classroom
Teachers of health and physical education can deduct qualified expenses related to athletics.
Who is Eligible?
The eligibility for the educator expense deduction is simple. To qualify, you are required to meet both the following criteria:
- You are a teacher, instructor, counselor, principal, or aide at kindergarten through grade 12.
- You worked at least 900 hours during the school year in a state-certified school that provides elementary or secondary education.
If you were reimbursed for your expenses, then you cannot claim those expenses on your return.
Claiming the Deduction
Teachers can claim this deduction whether they itemize or not. They can claim it on Form 1040 or Form 1040A, but not on Form 1040EZ.
If you itemize, you can exceed the $250 per teacher limit. That’s because you can deduct expenses that were not reimbursed and that exceed 2 percent of your adjusted gross income.
Figuring the Deduction
Educators can determine their total educator expense deduction by first examining:
- Distributions from a qualified tuition program that you excluded from income.
- Expenses that remain reimbursed and are not reported on box 1 of Form W2.
- Tax-free withdrawals from Coverdell education savings accounts.
- Interest on U.S. savings bonds that that you excluded from income because you used the money to pay for higher education expenses.
The amount that remains after subtracting the above items can be deducted on your return. For more information on the educator expense deduction, review IRS Publication 529 (2015).
Spring cleaning and discovering piles of used household items can help save you tax dollars. By donating used clothing, electrical appliances, jewelry, vehicles, etc. to charitable organizations, you can get substantial deductions on your return. Here are some non-cash charitable contributions that can be deducted:
Household Items & Used Clothing
Taxpayers can donate any household item, including used clothing, but only if the items are in good condition. Equally important is to donate to a qualified charity. The IRS only accepts deductions for contributions made to qualified charities. To find out if the charity you are donating to is eligible, use IRS EO Select Check. When figuring out your deductions, use the fair market value of the donated items.
Donating Pre-Owned Vehicles
When donating a pre-owned car, boat, etc. the amount of the deduction you can claim depends upon the fair market value of the item and how the charity uses the vehicle. According to the IRS, the donor may claim a deduction of the vehicle’s fair market value if:
- The charity makes a significant intervening use of the vehicle, such as using it to deliver meals on wheels.
- The charity makes a material improvement to the vehicle, i.e., make major repairs that significantly increase its value (not mere painting or cleaning).
- The charity donates or sells the vehicle to a needy individual at a significantly below-market price. In other words, this applies if the transfer furthers the charitable purpose of providing transportation to a person in need.
Here are important tax requirements to consider when deducting noncash donations:
- An item donated must be in good condition and donated to a qualified charity.
- You must Itemize deductions to claim the charitable deduction(s) on your return.
- Ask the charity for a receipt of the items donated, which must include the date, name of the charity, and the complete list of the donated items with a description. For noncash donations of more than $250, you also require documentation of whether the items were given in exchange of goods/services or not.
- Take photographs of the items donated, especially if they are of high value. Keep the receipts in your tax records to back up your claims on the return.
If the total amount of your noncash charitable contributions is more than $500, you need to file Form 8283, Noncash Charitable Contributions. Form 8283 can be filed by individuals, partnerships, and corporations. This form is filed along with your tax return for the year in which you made the contribution and claim the deduction.
Keeping all your tax documents forever can lead to clutter and confusion. In the interest of making tax filing simple every year, it’s good to know which tax records to keep and which ones to dispose of. To begin with, stay organized all year round by making separate files for short-term and long-term tax records. Here are some simple and effective methods of organizing your tax records:
The 3-Year File
Usually, the minimum duration for which you need to keep your tax documents is three years. These include records that support items on your return such as bills, credit card and other receipts, mileage logs, and other proof of payment.
It’s a good idea to keep your records for 3 years from the date you filed your original return, or 2 years from the date you paid the tax, whichever is later. In the case of an audit, the IRS normally asks for important tax records dating three years back.
Additionally, the IRS advises taxpayers to keep their employment tax records for at least 4 years after the payment due date or the date when the tax is paid, whichever is later.
The 6-7 Year File
If a taxpayer underpaid taxes by a big margin (more than 25% of the gross income on the return), the IRS can ask for tax documents of up to 6 years back. If you file a claim for a loss from worthless securities or bad debt deduction, then keep your records for 7 years.
The Indefinite File
If a taxpayer does not file a return or files a fraudulent return, then tax records need to be kept indefinitely. If there’s non-compliance such as non-payment of tax debt or tax evasion, it is smart to keep the records intact.
Organizing Tax Records
It is important to have a system of organizing tax documents that is simple and easy. Most taxpayers have both paper and electronic tax documents. To keep them in order, use the same tag for related paper and electronic folders. Also, having a box or a drawer exclusively for all physical tax folders can make access easy.
For organizing electronic tax records, you may use trusted software and/or programs. When storing tax documents in online storage spaces, ensure that the provider uses optimum security. Keep receipts of expenses separately for the corresponding year in a physical and an electronic folder to ensure they’re organized.
Saving the environment sometimes has the added benefit of paying less in taxes. Individuals and businesses purchasing or using energy-efficient systems may be able to reduce their tax liability. Here are the environmental tax breaks that taxpayers can use in 2016:
Tax Credit for Renewable Home Energy Systems
This tax credit helps to save 30 percent of the cost of a renewable energy system such as hot water heaters, solar electric equipment and wind turbines. Many taxpayers can use this tax credit, as it applies to any home owned by the taxpayer and is not limited to the primary residence. New construction is included. However, rented homes do not qualify. This credit expires on December 31, 2016, if not extended. This tax credit has no upper limit.
Another tax credit helps to cover 30 percent of the cost of a residential fuel cell and micro-turbine system. There is no upper limit. However, it can only be claimed on the primary residence. Existing homes and new construction qualify; however, rental homes and second homes do not. The credit is available through 2016.
A tax credit is also available on residential small wind turbines. This credit covers 30 percent of cost, and has no upper limit. Existing homes, new construction, principal residences and second homes qualify. It is available through 2016.
Taxpayers can save 10 percent of the cost of up to $500, or a specific amount from $50 to $300, on the following:
- Biomass stove
- Air source heat pump
- Central air conditioning
- Gas, propane, or oil hot water boiler
- Gas, propane or oil furnaces and fans
- Water heaters (non solar)
- Windows, doors and skylights
This tax credit applies only to existing homes and primary residences. It does not apply to new construction and rentals.
Tax Credits for All-Electric Vehicles
Fuel cell motor vehicles or all-electric vehicles can qualify for a tax break. The battery capacity of the vehicle determines the amount of the tax credit. The credit may be anywhere between $2,500 and $7,500. To find out if your vehicle qualifies for this credit, visit U.S. Department of Energy’s Fuel Economy.
The tax-filing season is over in most states, except in Maine and Massachusetts. Taxpayers that could not pay their tax bill have various options to avoid or reduce penalties and gain back compliance. Those that still need to submit a return can use the IRS efile to quickly and securely file and pay their tax liability. For those who can’t pay their tax bill, here are some tips:
Request an Installment Agreement
Taxpayers that have the financial ability to pay their tax bill in installments may send a request to the IRS for an installment agreement. Under an installment agreement, you agree to pay your full back taxes, including penalties and interest, in monthly installments. The installment amount is based on your current financial ability, and can be modified if there are significant changes in your finances.
To request an Installment Agreement, you may use the Online Payment Agreement if you owe $50,000 or less in back taxes (including penalties and interest). You may also qualify for a short-term Installment Agreement if your total tax debt is under $10,000.
Obtain Additional Time to Pay
If you can pay your full tax bill, including penalties and interest, you may request for additional time to pay if necessary. Use the Online Payment Agreement to obtain an additional 120 days to pay your taxes. Paying in full brings down the penalties and interest drastically, helping taxpayers avoid paying more to the IRS. No fee is charged for obtaining this short extension to pay.
Get Extension of Time to Pay
If paying your tax bill will cause you an undue hardship, then you may qualify for an extension of time to pay. Use Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship to obtain an extension. You are required to include a detailed explanation of the undue hardship.
Explore Other Resolution Options
Other options for resolving unpaid taxes include:
- Offer in Compromise
- Currently Not Collectible
- Innocent Spouse Relief
- Separation of Liability Relief
- Equitable Relief
To determine whether or not you qualify for an alternate resolution option, you may research the terms of eligibility at IRS.gov. Also, you may want to enlist the help of a tax professional in order to determine your best course of action.
Mistakes on a tax return can lead to needing to file an amended return and a delay for your refund. The last-minute rush often causes taxpayers to create basic errors on their return. When reviewing your return before filing, check for these tax mistakes:
- Incorrect Social Security Number (SSN)
Match your SSN with the number on your Social Security card. If you are filing jointly, ensure that both you and your spouse’s SSNs are included.
- Selecting the Wrong Filing Status
This is one of the most common mistakes taxpayers make. Often, they file as Head of Household instead of Single. If you are unsure of which filing status you should use, review information at the IRS Interactive Tax Assistant.
- Not Reporting Foreign Income
U.S. citizens and resident aliens are required to report and pay taxes on their worldwide income. Income earned anywhere in the world must be included on a U.S. tax return. Even if taxes have already been paid in the country in which the income is earned, the income needs to be reported to the IRS. Not reporting income can be seen by the IRS as willful evasion of taxes.
- Errors in Claiming Deductions
Claiming deductions that a filer does not qualify for can lead to an audit or owing of back taxes. Many business owners and individuals claim baseless deductions that the IRS rejects. If you have an unusual expense that you believe can be deducted, seek advice from a tax professional.
- Mixing Personal with Business
Taxpayers often mix personal and business expenses. Be careful of occasions when it becomes difficult to separate these elements. For example, hosting a dinner to discuss business with a professional who is also a friend is a gray area. In such situations, remember this simple rule: if the activity is solely done for business, then you can make the deduction.
- Wrong Bank Account Numbers
The IRS sends your refund to the bank account number(s) you share on your return if you choose Direct Deposit. Therefore, it is important to include correct bank account number(s) on your return.
- Forgetting to Sign
Signing is the last thing you do before filing your return. Many taxpayers forget to sign their return, especially when they’re in a rush. Whether you are efiling or paper filing, an unsigned return is considered invalid by the IRS.
Individuals and businesses can reduce their tax liability by claiming tax deductions on their return. If you are doing last-minute return preparation, you can consider claiming these tax deductions:
Individual Retirement Arrangements (IRAs)
Taxpayers may deduct some or all of their contributions to a traditional IRA, or they may be eligible for a tax credit equal to the percentage of their contribution. To figure out the allowable deduction, taxpayers may use the worksheets in Form 1040 Instructions, Form 1040A Instructions or in Publication 590-A.
However, contributions to a Roth IRA are not deductible, but qualified distributions or distributions that are a return of contributions are not subject to tax. Taxpayers do not report Roth IRA contributions on their tax return.
Contributions to qualified charities are deductible. To find out if the charity you donated to is a qualified charity, see the IRS Exempt Organizations Select Check. To determine if your charitable deductions are deductible, you may use the IRS interactive interview ‘Can I Deduct My Charitable Contributions’.
Home Office Deduction
Taxpayers that use a part of their home exclusively and regularly for carrying out business activity may be eligible for the home office deduction. If you qualify, you may deduct expenses such as mortgage interest, repairs, utilities, insurance, and depreciation for the office area of your house. This deduction is available for homeowners and renters. To make calculating the deduction simpler, the IRS created a simplified option.
Generally, any gift is taxable. However, there are certain exceptions to this rule. These are:
- Gifts that are not more than the annual exclusion for the calendar year are excluded. The annual exclusion for 2015 and 2016 is $14,000.
- Tuition or medical expenses you pay for someone (the educational and medical exclusions).
- Gifts to your spouse.
- Gifts to a political organization for its use.
Certain business expenses are deductible. In order to be deductible, an expense needs to be both ordinary and necessary to a business, but not indispensable. Capital expenses and personal expenses are not deductible business expenses.
When claiming deductions, it is important to keep all the receipts of the expenses deducted.
The IRS has issued a warning against the most dangerous and widespread tax scam that taxpayers may encounter: the IRS phone scam. Over 5,000 victims have paid over $26.5 million to IRS phone scammers, and roughly 896,000 phone scam contacts have been registered by the Treasury Inspector General for Tax Administration (TIGTA) since October 2013.
Latest Variation of IRS Phone Scam
Initially, criminals impersonating IRS agents called taxpayers, aggressively demanding payment of back taxes, often threatening them with arrest or deportation. In the latest variation, scammers call as IRS agents, pretending to verify an individual’s tax return information. They call saying that they have the taxpayer’s tax return, and just need to verify a few details before processing. Unlike the previous aggressive tactics, this time the scammers politely seek information.
“Don’t be fooled. The IRS won’t be calling you out of the blue asking you to verify your personal tax information or aggressively threatening you to make an immediate payment,” said IRS Commissioner John Koskinen.
Scammers keep changing their method of deception as taxpayers become aware of their current tricks. The latest variation has become increasingly prevalent in recent weeks.
Taxpayer Safety Initiatives
To protect taxpayers, the IRS, the states, and the tax industry came together in 2015 to launch a public awareness program: Taxes. Security. Together. The campaign educates and assists taxpayers to maintain security online, and to recognize and avoid phishing and other scam attempts.
There are some things that scammers often do, but the IRS will never do. The IRS will not:
- Call to demand payment over the phone, or call about taxes owed without first mailing you one or more notices.
- Call or email you asking for your personal and financial information for any reason, including verification of your identity.
- Ask for credit or debit card numbers over the phone or email.
- Ask you to use a specific tax payment method, such as a prepaid debit card.
- Threaten you with arrest, legal action, etc. for not paying taxes.
Whether you owe back taxes or not, do not respond to unsolicited calls or messages about taxes. Seek help from a tax professional to resolve back taxes if you owe.
When Internet fraudsters impersonate legitimate business to attempt to steal your personal information, it is called phishing. They use fake emails, websites and text messages to carry out phishing. The stolen information is used to file false tax returns to pocket exaggerated refunds, and for conducting other financial crimes.
According to the IRS, there has been a “400 percent surge in phishing and malware incidents so far this tax season.” Taxpayers receive an official-looking email that claims it is from a bank, the IRS, or an official source. The email may lead to a website or ask the taxpayer to reply to it. On any pretense, it will ask the taxpayer to share personal information such as their Social Security Number, filing status, bank account numbers, credit card number, and PIN. These websites may also contain malware directed to infect computers and allow fraudsters access to personal data.
“The phishing schemes can ask taxpayers about a wide range of topics. E-mails can seek information related to refunds, filing status, confirming personal information, ordering transcripts and verifying PIN information,” the IRS says.
Examples of Phishing
A phishing message looks urgent and official. It may look something like this:
“We suspect an unauthorized transaction on your account. To ensure that your account is not compromised, please click the link below and confirm your identity.”
“During our regular verification of accounts, we couldn’t verify your information. Please click here to update and verify your information.”
Most Recent Phishing Scams
Fraudsters keep devising newer methods to steal taxpayers’ personal information. The most recent types of phishing scams are:
Tax Refund Scammers Posing as Taxpayer Advocacy Panel
This is a new email scam recently discovered by the Taxpayer Advocacy Panel (TAP). In this scam, taxpayers receive emails about tax refunds that appear to be from TAP. In reality, they are sent by scammers who are attempting to steal taxpayers’ information. Do not respond to such emails or click the links located in the messages.
IRS Phone Scam Variation
In the latest variation to the IRS phone scam, scammers call taxpayers over the phone, saying that they have their tax return and need just a few details to process it. They pretend to be IRS agents.
This W-2 scam targets payroll and human resources professionals. In it, a phishing message from a company executive, usually the CEO, is received, which requests personal information on employees. The email contains the actual name of the company’s CEO. The request may be a list of employees’ financial and personal information, including Social Security Numbers.
Staying Safe from Phishing
To stay safe from phishing, watch out for:
- Scammers pretending to be the IRS agents calling immigrants, the elderly or single women demanding payment of back taxes.
- Scammers duplicating the IRS e-Services web page to steal information from taxpayers.
- Bogus emails where “the IRS” penalizes you for failure to file on time.
- Malicious email which claims to be from the IRS Tax Forums, requesting tax professionals to register. The registration form includes personal information.
- Any unsolicited email that requires you to share personal information over the Internet or phone.
There are less than three weeks remaining in the 2016 tax-filing season. Taxpayers that cannot file their tax return by the April 18 deadline or are missing tax forms can obtain an automatic six-month extension to file. Most taxpayers can get an extension without providing a reason to the IRS. After obtaining an extension, the new return filing deadline is October 17, 2016.
After filing for an extension, you receive an extension automatically if the IRS does not contact you. If they do reach out, it might be because your request was declined. An extension to file cannot be obtained after April 18, 2016.
How to Apply
Individual taxpayers can use Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, to file for an extension. The three ways to file for an extension are:
- Use IRS Free File to efile your Form 4868 for free.
- Send the paper form to the IRS.
- Pay all or part of your estimated tax and indicate that the payment is for an extension using Direct Pay, the Electronic Federal Tax Payment System (EFPTS), or credit or debit card.
When requesting a filing extension, businesses and corporations can use Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.
When obtaining an extension of time to pay taxes, businesses and corporations may use Form 1138, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback.
An extension to file only applies to a tax return. It does not extend the time to pay taxes. Therefore, taxpayers with an extension are still required to pay their tax liability before April 18.
If certain forms are missing or you do not have sufficient information to accurately determine your tax liability, you may make an estimate and pay at least 90% of your tax liability for 2015. The IRS charges penalties and interest on unpaid taxes after the due date. Interest is compounded every day. Remember, it is preferable to pay more in taxes and receive a refund than to face penalties and interest for paying less.
Those that bought health insurance from the Marketplace may need to determine if they are required to make shared responsibility payments or are eligible for an additional premium tax credit. A 1095 form is required to complete Form 1040, U.S. Individual Income Tax Return, Form 8962, Health Coverage Exemptions, and to figure your shared responsibility payment.
The three health care forms in the 1095 family are:
- Form 1095-A
- Form 1095-B
- Form 1095-C
Employers and health care coverage providers send these forms. Here are the details about each form:
Form 1095-A, Health Insurance Marketplace Statement
This form is provided by health care coverage providers. It includes information about the amount of coverage you have, tax credits that you were eligible for, and if adjustments to any tax credits payments were made. It also includes information about the recipient, coverage household, and household details.
The information provided on this form is used to fill out an individual tax return. Form 1095-A is also needed to file the Premium Tax Credit form, as it includes any claims to premium tax credits.
Only Form 1095-A is to be provided in 2015. Therefore, for the 2016 filing season, health care insurers will receive only 1095-A. Forms 1095-B and 1095-C are required to be sent starting 2016.
Form 1095-B, Health Coverage
Health care insurance providers and employers with fewer than 50 full-time employees send Form 1095-B to those with non-marketplace coverage or coverage from more than one source.
The form includes information on the type of coverage you have, the dependents that are covered, and the duration of the coverage. This information is used to report the Minimum Essential Coverage of you and your dependents.
According to the IRS, for year 2015, not all insurance providers are required to file 1095-B or 1095-C. Transition relief is provided for 2014 to relieve providers from the reporting requirements.
Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
Employers with 50 or more full-time or full-time equivalent employees file Form 1095-C. The form includes information on the coverage offered and whether you chose to participate. This form is used to fill out your tax return.
If the recipient of the form is fully insured, they receive the form from the insurer and only need to fill out Section I and II of Form 1095-C. If self-funded, every section needs to be filled by the recipient.
Schedule K-1 (Form 1065, Partner’s Share of Income, Deductions, Credits, etc.) is filed by partnerships to report to the IRS their share of income, deductions, credits, etc. received from the partnership. Schedule K-1 includes each partner’s share of income received. The information on this tax document helps taxpayers to prepare their individual tax returns.
A taxpayer may expect to receive Schedule K-1 around the time of receiving Form 1099, but it may be one of the last tax documents to reach a taxpayer.
What the Form Includes
Schedule K-1 includes the following parts:
- Part 1: Information about the partnership
- Part II: Information about the partner
- Part III: Partner’s share of current year income, deductions, credits, and other items
Filing and Reporting
Depending upon the type of business (trust, partnership, S corporation), Schedule K-1 filing and reporting requirements differ.
In a partnership, each partner is responsible for paying taxes on the income. Along with filing their individual tax returns and partnership’s return, the partners are also required to prepare Schedule K-1 where they report their share of income received from the partnership.
S corporations use Schedule K-1 to report the income, deductions, credits, etc. received by each shareholder. The shareholders use the information on Schedule K-1 to prepare their individual income tax returns.
Trusts, if they pass over income to the beneficiaries, are required to send a Schedule K-1 to each beneficiary. The document includes the income that the beneficiary received from the trust, which they need to include on their tax return.
Many taxpayers do not receive income solely from wages; income may also come from investments and interest. If taxpayers receive income from interest, dividends or capital gain distributions, they should remember to consult any form 1099-INT and form 1099-DIV they received when preparing their tax return.
What is Form 1099-INT?
Usually interest is taxable income and must always be reported to the IRS. Form 1099-INT, Interest Income, is used to report interest received from banks, brokerages and other financial institutions. These institutions are not required to file Form 1099-INT for interest of less than $10, but taxpayers still need to report it on their tax return.
What Form 1099-INT Includes
- Box 1 – total taxable interest paid
- Box 2 – the amount of early withdrawal penalty (if any)
- Box 3 – the amount of U.S. Treasury security interest paid
- Box 4 – the amount of tax withheld
- Box 5 – investment expenses
- Box 6 – foreign tax paid
- Box 7 – the foreign payor
- Box 8 – tax-exempt interest
- Box 9 – interest from special private activity bonds
- Box 10 – the CUSIP number for tax-free bond interest
- Boxes 11-13 – state ID information and withholding
Certain entities are not required to file Form 1099-INT. These include:
- A corporation
- A tax-exempt organization
- Any individual retirement arrangement (IRA)
- Archer medical savings account (MSA)
- Medicare Advantage MSA
- Health savings account (HSA)
- A U.S. agency
- A state
- The District of Columbia
- A U.S. possession
- Registered securities or commodities dealer
- Nominees or custodians
- Notional principal contract (swap) dealers
What is Form 1099-DIV?
Taxpayers receive Form 1099-DIV, Dividends and Distributions, when their stocks pay dividends or a mutual fund earns them capital gains. Taxpayers must include the income reported on 1099-DIV on their tax return and pay the requisite taxes.
What Form 1099-DIV Includes
- Box 1a – total ordinary dividends
- Box 1b – total qualified dividends
- Boxes 2a-d – break down of capital gains from mutual funds, REITs and collectibles
- Box 3 – nondividend distributions
- Box 4 – federal tax withheld
- Box 5 – investment expenses
- Boxes 6 and 7 – foreign tax paid and the foreign payor
- Boxes 8 and 9 – cash and noncash liquidation distributions
- Box 10 – private interest dividends
- Box 11 – specified private activity bond interest dividends
- Boxes 12-14 – state ID information and withholding
If the total amount reported in box 1a of Form 1099-DIV exceeds $1,500, taxpayers may be required to prepare Schedule B, which reports information about each 1099-DIV.
If you have received any forms 1099-INT or 1099-DIV and are uncertain about how to file your taxes, be sure to check with a licensed tax professional. Preventing expensive tax mistakes before they happen will save both time and money.
Gambling income, including winnings in a jackpot, race, raffle or contest are considered taxable income and must be reported on your tax return. If you win a car or other noncash prizes, the fair market value of the prize is taken.
When Do You Receive Form W-2G?
If a large amount is won in gambling, the organization that is paying the winnings sends Form W-2G, Certain Gambling Winnings, to the winner. The payer is required to send Form W-2G only if the winner receives:
- $1,200 or more in gambling winnings from bingo or slot machines
- $1,500 or more in proceeds (the amount of winnings minus the amount of the wager) from keno
- More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament
- $600 or more in gambling winnings (except winnings from bingo, keno, slot machines, and poker tournaments) and the payout is at least 300 times the amount of the wager, or
- Any other gambling winnings subject to federal income tax withholding
When the winnings are shared by more than one person, or when the person receiving gambling winnings is not the actual winner, Form 5754, Statement by Person(s) Receiving Gambling Winnings, is used instead of Form W-2G.
Deducting Gambling Losses
Gambling losses can be deducted by itemizing your losses on line 28 of Schedule A, Form 1040. Just remember, you cannot deduct more than you winnings.
To find out if you need to claim your gambling winnings or can deduct your gambling losses, you may use a 10 minute IRS interview. You will need the amount of your gambling winnings and losses, your filing status, and any information provided to you on Form W-2G when using this resource.
If you receive Form W-2G, pay taxes on your winnings, or deduct your losses, it is important to keep an accurate record of the precise amounts involved. The receipts, tickets, statements, etc. of each win/loss must be kept to verify the amounts.
Any asset in a foreign financial institution that exceeds a certain amount needs to be reported to the IRS. Failure to report can lead to a heavy penalty and/or imprisonment. The Foreign Account Tax Compliance Act (FATCA) came into existence in March 2010 to limit tax evasion.
Form 8938 Statement of Specified Foreign Financial Assets is used to report specific foreign financial assets in which the taxpayer has an interest. As FATCA became a law in 2010, most individual taxpayers need to start filing Form 8938 from year 2011.
When to File
Form 8938 should be filed with your income tax return if the aggregate value of your foreign financial assets exceeds $50,000. You will also need to file Form 8938 if you are:
Unmarried: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the tax year.
Married filing jointly: The total value is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
Married filing separately: The total value is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
When Not to File
If you are not required to file an income tax return, you are not required to file Form 8938 even if your assets exceed the threshold based on your filing status. Even if you are required to file, you do not need to report financial accounts that are maintained by:
- A U.S. payer,
- The foreign branch of a U.S. financial institution, or
- The U.S. branch of a foreign financial institution.
If you are required to file, you will need to attach Form 8938 with your annual return and file it by the due date. For additional information on Form 8938, review Instructions for Form 8938.
If the only income you received last year was your social security benefits, you may not be required to pay taxes on them or file a tax return. However, if you receive income from other sources, your social security benefits will not be taxable only if your modified adjusted gross income is less than the minimum requirement for your filing status.
Determining Your Taxable Benefits
If your benefits are taxable, you need to include them in your gross income. If both you and your child receive benefits, you need to only include your part of the benefits to determine if they are taxable. Your child’s benefits must be added in the child’s income to see if they are taxable.
If you are married filing jointly, you and your spouse need to combine your incomes, social security benefits and other benefits to see what your total tax liability will be. For more information on calculating if your benefits are taxable, you may use the worksheet in Form 1040 Instructions or Form 1040A Instructions.
Form SSA-1099, Social Security Benefit, is a tax form used to report social security benefits. The Social Security Administration sends Form SSA-1099 each year in January to people who receive Social Security benefits. The form shows the total amount of benefits you received in the previous year.
Using Form SSA-1099, you can accurately report your social security income to the IRS on your tax return. Noncitizens who live outside the U.S. receive Form SSA-1042S instead of Form SSA-1099. If there are errors on Form SSA-1099, contact the Social Security immediately.
You are not required to attach Form SSA-1099 with your tax return. However, it is important to accurately report the benefits and pay taxes on them, if you are required to file.
The income reported on forms 1099s is also sent to the IRS. During processing, they match the information on your return with information received from third parties. Inaccuracies on your tax return, if any, may be corrected by the IRS and the tax liability adjusted. If the IRS does not correct the errors, an amended return may need to be filed.
If you are a business and accept payments online, you will receive Form 1099-K, Payment Card and Third Party Network Transactions from credit card or third party processors. 1099-K is an information return used to report all qualifying payments made with a debit card, credit card or stored-value cards during a year. 1099-Ks are important to accurately determine your total income and pay taxes accordingly.
What Does 1099-K Include?
Form 1099-K includes the gross amount of all reportable payments made online. Any payment that has been made with a payment card, any account number or any identifying data associated with a card is considered a reportable payment and included in 1099-K. There is no threshold for payment cards. However, payments settled through a third party must be reported only if:
- They exceed $20,000, and
- There are more than 200 such transactions
Who Receives a 1099-K?
Any business that accepts online credit card payments from customers receives a 1099-K. Usually, the form is received by January 31st. If a processor has not sent a 1099-K by this date, you may contact them. If you still do not receive the form, you may report all your online income on Schedule C, Form 1040.
Filing and Record Keeping
Whether the income received is in cash or made by credit/debit card payments, stored-value cards, checks, or any other method of payment, it needs to be reported on your tax return. For all qualifying online payments, you will receive 1099-Ks, which will help you to determine your gross receipts (gross income is generally called gross receipt on a tax return) accurately.
When preparing your tax return, ensure that you have received 1099-Ks from all payment processors. Estimating your income less than what you actually received can result in inaccurate reporting and tax payments, which presents a risk of IRS penalties and audits.
Keep your 1099-Ks with your tax records. They provide evidence of your online income from all sources during the year.
Form 1099-C is used to report cancellation of debt if the cancelled debt amount is $600 or more. The lender is required to file form 1099-C to the IRS to report the details of the cancellation, and send a copy of it to the debtor. The debtor after receiving 1099-C is required to report and pay taxes on the canceled debt it because a cancelled debt is considered taxable income for tax purposes.
Cancelled Debt and Taxes
If a debt is cancelled, forgiven or discharged, the borrower is required to pay taxes on the amount of debt cancelled. It might seem unfair to pay taxes on a cancelled debt, but the fact is that when the borrower borrows money, he/she is not required to pay taxes on the amount borrowed. That is because they are under a contract to eventually repay it. However, when the borrowed money is not to be repaid (fully or partially), the IRS considers it income, and therefore, charges tax on it.
As taxpayers receive 1099-C from the creditor and not the IRS, they often misunderstand its importance. A 1099-C reports the amount of cancelled debt and includes the following information:
- The creditor’s name, address and telephone number
- The debtor’s name, address, and account number
- Amount of debt discharged
- Interest if accrued
- Date of identifiable event
- Debt description
- Fair market value of property
This form acts as proof of the cancelled debt by the creditor. When reporting and paying taxes on the cancelled debt to the IRS, the debtor will use information from Form 1099-C. Taxpayers receive 1099-C for canceled debts, including credit card debts, foreclosure, and repossession.
If you qualify for an exclusion or exception, you may not be required to pay taxes on the canceled debt. Insolvency exclusion is one of the most common exclusions. In insolvency exclusion, the forgiven debt qualifies for exclusion if:
- The total liabilities of the borrower are more than the total assets, or
- The debt is discharged under a Title 11 bankruptcy proceeding such as Chapter 7 or Chapter 13, or
- The debt is qualified farm indebtedness or a qualified real property business indebtedness.
If you do not qualify for an exclusion or exemption, you are required to pay taxes on the canceled debt amount if it is $600 or more. Non-payment of taxes on canceled debt attracts the same penalties and interest as that on income tax.
Taxpayers have until April 18, 2016 to file their tax return, but delaying the process can create problems. Even when complying with tax laws, having less time to prepare and file the return can create issues with the IRS. Here are five reasons why you should not procrastinate in filing your return:
1. Tax Identity Theft
According to a report by the Government Accountability Office, the IRS estimated that it prevented $24.2 billion in fraudulent identity theft refunds in 2013. However, the tax agency paid out $5.8 billion in what was later determined to be fraudulent refunds.
Identity theft is real and the IRS cannot shield every taxpayer from falling prey. Once a fraudulent tax return reaches the IRS, there is a chance that it will be accepted. Therefore, to minimize the risk, taxpayers should file their returns as early in the season as possible. After your return has reached the IRS, they will not accept any other return filed in your name by scammers.
2. Early Tax Refund
Almost 75% of Americans receive a tax refund each year. By filing your return early, you can receive your refund sooner. The sooner you receive it, the earlier you can invest or spend your money.
3. Owing More Than You Paid
If you file your tax return a few days before April 18, you may believe that your yearly tax duty is over. There is always a chance, though, that you will receive an IRS notice informing you that you owe more than you paid.
Filing in haste can cause mistakes that can only be corrected by filing an amended return. If you miss the filing deadline, the IRS begins to charge penalties and interest on the taxes due.
4. Sufficient Time, Less Mistakes
With adequate time to prepare and review your tax return, you minimize the chance for errors. If you’re filing in a rush, you could miss a credit or deduction that could save you hundreds in taxes. Simple errors can also lead to an audit.
5. Availability of Return Preparers
The longer you wait, the narrower your filing options become. Many of the CPAs in your area may be already booked, leaving you with fewer choices. There may be long lines forming the closer the filing deadline gets.
To help avoid refund fraud, mistakes on your return, and unnecessary stress, it is preferable to file weeks before the filing deadline. Procrastination where taxes are concerned can cause both stress and loss of money.
Qualifying taxpayers can get free return preparation help with Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites across the country. These sites have IRS-certified volunteers that provide basic income tax return preparation, free of cost.
Taxpayers with income of $54,000 or less, persons with disabilities and those who speak limited English can get free return preparation and filing help at VITA sites. You can get tax queries answered, seek advice on tax breaks, and receive return preparation assistance.
Those who are 60 years or older can seek free tax help from TCE centers. These centers specialize in questions about pensions and retirement. At TCE sites, the majority of volunteers are IRS-certified retired individuals associated with non-profit organizations.
Finding a VITA or TCE Site
You will find VITA and TCE centers at local libraries, schools, shopping malls, community centers etc. across the country. To find a VITA or TCE site in your area, you can use the VITA/TCE Locator Tool. Alternatively, you can call 888-227-7669.
Most of the TCE sites are run by the AARP Foundation’s Tax Aide program. To find an AARP TCE Tax-Aide site, you can use the AARP Site Locator Tool. Alternatively, you can call 888-227-7669.
Certain VITA or TCE sites also offer taxpayers the choice to prepare their own basic federal and state tax return for free, using web-based tax preparation software. Volunteers are available to help you through the process.
Documents to Bring
When visiting a VITA or a TCE site, you need to bring certain documents with you. These are:
- Proof of identification
- Social Security cards for you, your spouse and dependents
- Your ITIN if you do not have an SSN
- Wage and earning statements (Form W-2, W-2G, 1099-R, 1099-Misc) from all employers
- Interest and dividend statements from your bank or banks (Forms 1099)
- All Forms 1095, health insurance statements & health insurance exemption certificate, if appropriate
- A copy of last year’s federal and state returns
- Proof of bank account routing and account numbers for direct deposit such as a blank check
You should bring any document that you think will be required to prepare your tax return such as receipts of expenses, previous year’s returns, and your W-2s. If you are efiling a joint tax return, both spouses must be present at the site to sign the return.
Hiring a return preparer sometimes becomes necessary when taxes are more complicated than simple calculations. A professional with knowledge of the tax code and tax breaks can help save you time and money. However, before choosing a return preparer, taxpayers should check the following to avoid fraudulent return preparers.
1. Preparer’s PTIN
Anyone, including enrolled agents, who prepares or assists in preparing federal tax returns for compensation, is required to have a valid 2016 Preparer Tax Identification Number (PTIN). A PTIN helps to track a return preparer in case of fraud.
2. Preparer’s Qualifications
To find a return preparer with sufficient qualifications, you may use the IRS Directory of Federal Tax Return Preparers. Using this directory, you can search professional return preparers with a valid PTIN holding professional credential or those who have obtained an Annual Filing Season Program Record of Completion from the IRS.
Here are the various types of individuals who may prepare federal tax returns for compensation:
3. Preparer’s History
Even if you choose a return preparer from the IRS directory, it is important to check the preparer’s background and history before moving forward with him or her. The Better Business Bureau and the Federal Trade Commission are valuable resources for researching this information. For CPAs, you may check with the State Board of Accountancy. For attorneys, check with the State Bar Association. For enrolled agents, visit ‘Verify the Status of an Enrolled Agent’ at IRS.gov.
4. Service Fees and Hidden Fees
Fraudulent return preparers often base their service fee on a percentage of the client’s refund. To increase their fee, they manipulate information on their client’s tax return for a bigger refund. Avoid return preparers who base their fee on the refund amount or charge a hidden fee after being hired.
5. Check Availability
Gather the contact information of the return preparer, including their office address, phone numbers and PTIN. The preparer should be available in case you need help after the filing deadline.
6. Review Your Return
Sign your tax return only after reviewing all the information on it. Check if the preparer has included his/her PTIN. Ask the preparer to e-file your tax return. Alternatively, you may e-file your return for free using the IRS e-file service.
Preparing a tax return using software is affordable, compared to hiring a return preparer. Even still, return filers need to know how dependable software is and which ones they can trust to help accurately prepare their tax return.
IRS Free File Alliance
Since 2003, more than 46 million people have used Free File. If your adjusted gross income for 2015 was $62,000 or less, you may use free return preparation software. The alliance between the IRS and the tax industry was formed to provide free return preparation to taxpayers with lower income.
There are 13 brand name software to choose from, including TurboTax, 1040NOW.NET, Online Taxes at OLT.com, TaxACT, and TaxSlayer. Each software offers a variety of services. For 2016, more Free File software providers are offering both federal and state tax return preparation. However, not all providers offer state return preparation for free.
“You don’t have to be an expert on taxes. Free File software can help walk you through the steps and help you get it right,” said John A. Koskinen, IRS Commissioner.
Choosing the Software
When choosing the appropriate software for your needs, you may use the IRS tool ‘Help Me Find Free File Software’. Answering simple questions about your adjusted gross income, age, state residency, eligibility for the Earned Income Tax Credit, and military status can help you determine which software to use.
Tim Hugo, executive director of the Free File Alliance, said, “We are proud to once again offer the industry’s most innovative and secure tax software at no cost to 70 percent of American taxpayers.”
Any taxpayer, regardless of their income or other factors, can electronically his or her file tax return for free using IRS efile. An added benefit of efiling a return is a faster refund.
Paid Tax Software
If you earn more than $62,000, are self-employed, or receive income from freelancing, you may need to use paid software.
Paid software may offer the service to import W2 information. However, taxpayers should review the information carefully to ensure the information entered is accurate and without error. Regardless of the software type you’re using, it is wise to double-check the information you’re sending.
If your taxes are complicated and you need specific questions answered, it is preferable to hire a professional return preparer. To find one in your area, you may use the IRS Directory of Federal Tax Return Preparers available on irs.gov.
A large number of taxpayers still prefer to file paper tax returns. For those who are not computer savvy, paper filing is preferable to electronic filing. If you are more comfortable filing a paper return, reviewing the following IRS online services may simplify the seemingly complex process of preparing and filing your return.
‘Do I Need to File a Tax Return?’
If you are unsure of whether or not you’re required to file, you may visit IRS.gov to determine the criteria. You will need your filing status, federal income tax withheld, and basic information to help you determine your gross income.
Determining Your Filing Status
Your filing status can affect your standard deduction, eligibility for certain credits, tax liability and filing requirements. If you are eligible to use more than one filing status, you may determine the one that saves you the most in taxes using the IRS service, ‘What Is My Filing Status?’.
When you use this service, you will need your marital status, and the percentage of the costs that your household members paid towards keeping up a home. If your spouse is deceased, you also need your spouse’s year of death.
Downloadable Tax Forms
To obtain tax forms, including Form 1040, Form W-9, Form W-4, Form 9465, Form 8962, Form 941, and Form 1040-EZ, you can use the IRS Forms and Publications page. Tax forms and publications for individuals and businesses are available for download and print. The IRS also provides prior year forms, instructions and publications for download and print.
If you do not find a tax form that you need in order to file, you may request the form(s) by U.S. mail. You may order up to 100 different products and up to 100 copies of each form you order. To place an order, you may use this page: https://www.irs.gov/uac/Forms-and-Publications-by-U.S.-Mail
‘Where to File Paper Tax Returns’
Depending upon the tax form you are filing and your state, the mailing address changes. Those filing Forms 1040, 1040A, 1040EZ, 1040ES, 1040V, amended returns, and extensions (also addresses for taxpayers in foreign countries, U.S. possessions, or with other international filing characteristics) can use this IRS page to find out the address to which to send the paper return: https://www.irs.gov/uac/Where-to-File-Addresses-for-Tax-Professionals#stateLinks
You may check the status of your refund on the IRS service ‘Where My Refund?’ four weeks after you mail your paper return.
The IRS offers free tax return preparation for those earning less than $62,000. Filers who are employees, employers or self-employed can choose from 13 brand-name software programs to prepare their tax returns for free. Those earning more than $62,000 can use Free File Fillable Forms, electronic versions of the paper forms.
Free File Software
Taxpayers with income of $62,000 or less can use free tax preparation software available at irs.gov. There are 13 free file software offers to choose from. Each software has different qualifying factors. Some companies offer free state tax returns as well. Free File offers the following services:
- Free online return preparation
- E-file for electronic filing
- Direct deposit
If you have trouble deciding on the appropriate software to prepare your return, you may use the IRS tool ‘Help Me Find Free File Software’. By answering simple question about your age, adjusted gross income, place of residence, eligibility for the Earned Income Tax Credit and military status, you can quickly find out which software to use for your return preparation.
To prepare your return, you will need your email address, copy of prior year’s tax return, and documents of your income and deductions.
Free File Fillable Forms
Fillable Forms allow taxpayers with income above $62,000 to prepare, print and efile their tax return regardless of age, income or state. Before using Free File Fillable Forms, filers should review the following:
- You need to create a new account each year to use this service. All accounts are removed after October 20 each year to protect taxpayer information. Create a new account by visiting https://www.freefilefillableforms.com/#/fd.
- This service only performs basic calculations.
- It supports filing an extension, Form 4868.
- Federal tax preparation and e-file for forms, including 1040, 1040EZ and 1040A are available for free on this service. However, state preparation and state e-file are not available. Nearly all forms for the 2016 filing season are available.
- You may efile your return in Step 2.
- Free File Fillable Forms cannot be used by paid return preparers.
If you efile your return, you can track your tax refund using the IRS tool ‘Where’s My Refund?’.
The simplest way to prepare and file a tax return for free, download tax forms, check refund status, and more is to use the IRS website. The IRS encourages taxpayers to use their various online services to get free tax help and avoid scammers. The important services the IRS provides on irs.gov are:
‘Do You Need to File a Return?’
You can find out if you are required to file a return by taking a short 12-minute questionaire, using this service. You will also need your filing status, the amount of federal income tax withheld, and basic information to help you to determine your gross income.
‘What is My Filing Status?’
If you can use more than one filing status, this five-minute questionnaire will help you to determine the filing status that will give you the lowest amount of taxes. For the questionnaire, you need your marital status (and spouse’s year of death, if applicable) and the percentage of the costs your household members paid towards keeping a home.
IRS Withholding Calculator
If you are an employee, you can calculate your withholding and see if you need to give your employer a new Form W4. To use this service, you need your most recent pay stubs, and your most recent income tax return.
Who Can I Claim as a Dependent?
By participating in a standard 15-minute questionnaire, you can know who you can claim as a dependent on your return. For the questionnaire, you need your marital status, relationship to the dependent and the amount of support provided. You also need your basic income information.
If your income is below $62,000, you can choose free file software at irs.gov to prepare and file your tax return for free. There are a variety of tax software from reputed brands to choose from. If your income is above $62,000 and you can do your own taxes, you may try free file fillable forms.
There is an online database of authorized IRS e-file providers. You simply need to enter your ZIP code to locate an authorized IRS e-file provider near you.
‘Where’s My Refund?’
You can use this service to check the expected arrival date of your tax refund. To check the status of your refund, you need your Social Security Number or Individual Tax Identification Number, filing status, and the exact amount of your refund.
‘Where’s My Amended Return?’
This tool provides the status of Form 1040X Amended Tax Return for the current year and for the past three years. Usually, the IRS takes up to 16 weeks to process an amended return. You may check the status of your amended return three weeks after you mail it to the IRS. To get the status, you need your SSN, date of birth and zip code.
Even if you earned income in 2015, you might not need to prepare a tax return this filing season. Generally, if your total yearly income is below your standard deduction plus one personal exemption, you are not required to file a tax return. Additionally, you must not be a dependent on another taxpayer’s return.
In addition to your income, your filing status and age also determines whether you need to file. For 2015, if you are filing as single and are under 65 years of age and your gross income is less than $10,300, then you are not required to file a return. The amount of $10,300 is the sum of the 2015 standard deduction plus one exemption for single filers. Tax-exempt income should not be included when calculating gross income.
For 2015, the standard deduction is $6,300 for single persons and married persons filing separate returns. It is $12,600 for married couples filing jointly. The standard deduction for heads of household is $9,250.
If Claimed As a Dependent
If you are claimed as a dependent on someone’s return, you are subject to different filing requirements. A dependent must file a tax return if their earned income is more than the standard deduction. For 2015, the standard deduction for single taxpayers under age 65, who are not blind, is $6,300. A dependent cannot claim a personal exemption, and you can never claim your spouse as a dependent on your tax return.
If Claiming a Tax Credit for a Refund
Even if you are not required to file, you may consider filing a return if you are eligible for tax credits such as the Earned Income Tax Credit (EITC). Claiming the EITC on your return even when you have zero tax liability can get you a refund of up to $6,242.
To claim EITC for 2015, your earned income and adjusted gross income must be less than:
||Qualifying Children Claimed
||Three or more
|Single, Head of Household or Widowed
|Married Filing Jointly
Your investment income must be less than $3,400 a year. The maximum EITC amount for tax year 2015 is:
- $6,242 with three or more qualifying children
- $5,548 with two qualifying children
- $3,359 with one qualifying child
- $503 with no qualifying children
If you are self-employed, you are required to file if your net earnings are at least $400. Additionally, if you owe special taxes, such as the alternative minimum tax, you need to file a return. To find out if you are required to file a return for 2015, you may use the IRS tool ‘Do I Need to File a Tax Return?’.
Usually, a victim becomes aware of ID theft when their refund doesn’t reach them or they are informed about a duplicate tax return filed in their name. During tax season, fraudsters use stolen identities and file false tax returns to receive big refunds. If you believe your identity has been stolen, you need to immediately take the following steps:
- File a Complaint with the FTC
You may file a complaint with the Federal Trade Commission (FTC) at identitytheft.gov or use the FTC Identity Theft Hotline at 1-877-438-4338 (TTY 1-866-653-4261).
- Contact the IRS Immediately
The IRS’ Identity Protection Specialized Unit can be reached at 1-800-908-4490. To report fraud, send a copy of your police report or IRS Form 14039, ID Theft Affidavit to the IRS. You will also need to provide proof of your identity, such as a copy of your driver’s license, passport or Social Security card.
If your return gets rejected because a return has already been filed using your Social Security Number, you may complete Form 14039, attach it with your return and mail it according to instructions provided therein.
- Place ‘Fraud Alert’ on Credit Records
To place a ‘fraud alert’ on your credit records, contact any one of the following three major credit bureaus:
- Equifax (www.Equifax.com, 1-800-766-0008)
- Experian (www.Experian.com, 1-888-397-3742)
- TransUnion (www.TransUnion.com, 1-800-680-7289)
You may review and monitor your credit reports to spot any suspicious activity. Also, inform your bank or other financial institutions about the theft and request that they block any unauthorized or suspicious transaction made on your account(s).
- Report to the Police
Additionally, you may file a complaint with your local law enforcement agency. Credit bureaus and other business may require you to provide them with a police report to remove fraudulent transactions.
Keep a record of the communications you receive and send. The resolution process for identity theft is elaborate and may take weeks. Even if your identity has been stolen, you must file your tax return and pay your tax bill on time. For more information about tax related ID theft, you may use FTC’s publication – IdentityTheft.gov Bookmark – available in English and Spanish at ftc.gov.
Taxpayers are most vulnerable to identity theft early in the tax season. Identity thieves attempt to file a fraudulent tax return before their victim has a chance to file one. Identity theft is the top complaint the Federal Trade Commission (FTC) has received. In 2013, about 43 percent of identity theft complaints received by the FTC were regarding tax returns.
To prevent your information from being used for tax related ID thefts, use the following measures:
- Don’t share your Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), bank account numbers, PINs, filing status, or date of birth with unreliable sources.
- Secure data on your computers by using firewalls and anti-virus software.
- Keep your financial and tax documents in a safe place at home.
- Don’t share your tax, financial and personal information over the phone, through mail, text messages, or social media sites.
- Check your credit card report frequently, preferably every 12 months.
- Frequently change passwords for important financial and tax-related online accounts.
- Use IRS online services for return filing and preparation, paying taxes, checking the status of your refund, etc.
If you need to talk to your bank, the IRS or any other organization regarding a message you received, don’t respond to the message. Instead, call the institute on the number that you have obtained from a reliable source such as their website, or an old notice or letter.
Taxpayers can expect to receive unsolicited scam communications through any of these methods: email, phone, text messages on the phone, social media messages, and personal visits. If you receive such communication, never respond immediately. Refuse to share sensitive information and end the communication.
Judging from the number of false returns filed each year, a large number of taxpayers fall victim to scammers. For 2011, the Treasury Inspector General for Tax Administration (TIGTA) reported that approximately 1.5 million tax returns filed were ID-theft related.
Even though the IRS has enhanced their security methods to combat tax-related ID theft, the agency has limited resources. Taxpayers should take every measure to protect their information all through the tax season.
Filing tax returns electronically is fast and secure, and generally makes the processing of your return faster. There are a variety of ways to file your return electronically. Individual taxpayers can file their tax return and tax forms electronically for free by using the following online IRS tools:
IRS Free File
If your adjusted gross income is $62,000 or less, you can use Free File software to prepare and file your return for free. The IRS offers 13 software programs from different companies to choose from. You may review each company’s qualifying restrictions to ensure that you are eligible for free return preparation and filing.
Some companies support and do not charge for state tax returns. Some offer free state returns only for some states. You may visit this IRS page to review each offer. You may also use ‘Help Me Find Free File Software’ to select the right software for your needs.
Free File Fillable Forms
If your adjusted gross income is above $62,000, and you can do your own taxes, you may use Free File Fillable Forms. This service does your math and offers basic guidance on return preparation. State tax preparation is not available on this service.
You will need to create a new account each year to access Free File Fillable Forms. For security reasons, the IRS deletes all accounts after October 20 of a year.
E-File with Commercial Software
If you use commercial software to prepare your taxes and want to e-file your return electronically, you need to sign in to e-file using the Self-Select PIN or the Electronic Filing PIN. Once your filing is complete, your return will be securely transmitted through an IRS-approved electronic channel. The IRS does not use e-mail for the transmittal of returns because it is not as secure as IRS channels.
The IRS computers will automatically check the return for errors. In the case of simple mistakes such as math errors or incorrect social security number, the IRS immediately sends back the return for corrections. The filer can correct the mistakes and send the return back. This prevents the taxpayer from having to file an amended return.
Finding an e-file Provider
If you need an authorized e-file provider to file your tax return electronically, you may use the ‘Authorized IRS e-file Providers for Individuals’ to find one. By simply entering your ZIP code, you can find a professional e-file provider. This service is available on the IRS website, IRS.gov.
The 2016 tax season starts today, January 19, and will end on April 18, 2016. The filing deadline has been extended to April 18 because the Emancipation Day holiday falls on Friday, April 15, the traditional deadline. For taxpayers in Maine and Massachusetts, the deadline is Tuesday, April 19 because of Patriot’s Day on April 18.
The IRS expects more than 150 million tax returns to be filed this year. More than four out of five returns are expected to be filed electronically. Taxpayers can use e-file, the free tax return filing service of the IRS, to electronically file their returns.
Electronic filing makes processing of returns and issuing of refunds faster. Taxpayers can check the status of their refund using the ‘Where’s My Refund?’ tool on the IRS website. Electronic filers can check the status of their refund within 24 hours after filing their return, and paper filers in 4 weeks after mailing their return.
IRS Online Tools
The IRS phone lines are expected to be busy this tax season as well. To avoid the wait, taxpayers may use the IRS website to:
- Download tax forms and IRS publications (1040, 1040EZ, W-4, W-9, 1099-MISC, 941, Tax Table, etc.)
- File their tax return (e-file)
- Verify that they need to file a tax return (‘Do I Need to File a Tax Return?’ interview)
- Pay their tax bill (Direct Pay)
- Check the status of their refund (‘Where’s My Refund?’)
- Check the status of their amended return (‘Where’s My Amended Return?’)
- To find a return preparer (Directory of Federal Tax Return Preparers)
“IRS.gov is the best place for taxpayers to go for information about filing their income tax returns this year,” IRS Commissioner John Koskinen said. “Although we will have more people staffing our phone lines this year, we expect those lines to remain busy so we encourage people to visit the web first as the quickest and easiest way to get assistance.”
Taxpayers may need to undergo new security requirements when preparing their taxes online, especially when signing in to their tax software. Enhanced security by the IRS is part of the IRS’ working together with states and the tax industry to provide better protection to taxpayers against identity theft and refund fraud.
Although the IRS will take less than 21 days to issue refunds, states may take longer to process returns owing to additional reviews due to security.
Ty Warner, the owner of Beanie Babies, and Ty. Inc., was found guilty of tax evasion. In 1996, Warner deposited $80 million at UBS AG in Switzerland without paying taxes on the funds. He kept it so secret that even his accountants did not know about the deposit. In 2002, UBS had to declare information about U.S. account holders to the IRS under the Foreign Account Tax Compliance Act (FATCA), Warner had to shift his unaccounted money to another bank in Switzerland.
Warner was able to keep his hidden fortune a secret for more than a decade. Over the years, his unaccounted money had grown. He was evading $5.6 million in taxes on $25 million in earnings from the account.
He admitted to evading taxes in 2013 and had to pay $53.5 million in penalties, and $16 million in back taxes and interest. The court gave him two years of probation and 500 hours of community service. Unhappy with the sentence, the U.S. Department of Justice appealed it. However, the sentence was upheld.
Hiding income abroad is punishable by law. However, the Offshore Voluntary Disclosure Program (OVDP) allows taxpayers with hidden income overseas to disclose their unaccounted money without the risk of heavy penalties. Since the OVDP first started in 2009, there have been more than 50,000 disclosures with more than $7 billion recovered in taxes.
It is legal to maintain financial accounts overseas, but there are reporting requirements that need to be met. Additionally, U.S. citizens are required to pay taxes on their worldwide income. Any income received abroad and kept in a foreign financial institution (FFIs) needs to be reported to the IRS and the appropriate amount in taxes paid. Failure to comply with these rules can lead to significant penalties and the possibility of criminal prosecution.
The IRS uses information shared by FFIs and their investigators to pursue taxpayers that have undeclared income overseas. FATCA allows the IRS to gain information about U.S. account holders in FFIs. As a result of the transparency FATCA encourages, many taxpayers use the OVDP to declare their hidden income and assets abroad. The program was closed in 2011, but was again reopened for an indefinite period of time. It is the only way taxpayers evading taxes can reestablish compliance without the risk of severe penalties.
Leona Helmsley was rich and famous, and called herself the “hotel queen”. But in her 71st year, she found herself being awarded another title: tax evader. Helmsley was sentenced to 4 years in prison for evading $1.7 million in taxes.
A billionaire herself and married to the real estate and hotel magnate Harry Helmsley, she disagreed with paying taxes. She had famously said, “We don’t pay taxes. Only the little people pay taxes.”
She would claim personal expenses as business expenses. She spent $8 million for making renovations to her new house bought for $11 million, but she charged the renovations as business expenses. Frustrated by the pace and the quality of the renovations, Helmsley got into conflict with the contractors working on the renovations. The contractors suited her alleging that she was evading taxes by claiming personal expenses as business. That brought in the IRS.
In the end, she was convicted of 33 felony counts of tax evasion and mail fraud from 1983 to 1985. The court sentenced her to four years in prison, ordered her to pay $8 million in taxes, interest and penalties, and perform 750 hours of community service.
She pleaded with the judge, citing the ill health of her husband, but the judge declared, “There is a community that needs to be served by the enforcement of the law . . . It is my judgment the motion for sentence reduction should be denied.”
Mixing business with personal interests can result in back taxes, and worse. Only expenses that are ordinary and necessary for business can be deducted as business expenses. In other words, any expense that is necessary for the running or growth of a trade is a business expense, and tax deductible.
To avoid getting into trouble with the IRS, keeping business separate from personal is critical. Going on a business trip for 2 days and extending it to include a vacation can create confusion regarding which expenses to claim as business versus personal.
Deducting business expenses as personal expenses can immediately lead to back taxes as soon as the IRS discovers the discrepancy. The taxpayer is then asked to pay back the taxes owed with penalties and interest, as in the case of Helmsley. Therefore, it is critical to keep business accounts separate from personal for all financial and tax purposes.
Al Capone was a famous gangster who was charged with the most severe tax crime: tax evasion. After he was imprisoned for just nine months for carrying a concealed weapon and two months for contempt of court, the feds began to build up a case of tax evasion against him.
With millions in unaccounted income from illegal earnings, he was found guilty of not reporting and paying taxes, and was awarded 11 years in prison. He was also fined $50,000 for the tax crime and ordered to pay $215,000 in back taxes, with interest.
The federal law requires that illegal income be reported and taxed just like legal income. It means that gangsters, scammers and thieves are also legally required to file a return and pay taxes on their income. Disclosing illegal income to the IRS, however, poses problems. Tax experts say that most criminals do not declare their “earnings”. The only ones that report their earnings do it because they fear being caught.
The feds, on the other hand, use this tax law to put criminals behind bars; if not for their other criminal activities, then for tax evasion. The case of Al Capone stands as example. The IRS says, “When no other crimes could be pinned to Al Capone, the Internal Revenue Service obtained a conviction for tax evasion. As the astonished Capone left the courthouse he said, ‘This is preposterous. You can’t tax illegal income!’ But the fact is income from whatever source derived (legal or illegal) is taxable income.”
When attempting to evade tax, or a willful failure to collect or pay over tax, the penalty is not more than $250,000 for individuals and $500,000 for corporations with or without imprisonment for a maximum of 5 years.
For willful failure to file a return, supply information, or pay tax, the penalty is not more than $100,000 for individuals and $200,000 for corporations with or without imprisonment for a maximum of 1 year.
On any unpaid taxes, a penalty and interest are added each month. That substantially increases the total taxed owed.
Criminals that disclose their illegal earnings face the risk of being caught because the IRS does inform law enforcement agencies of the illegal activity. Also, in case of an IRS audit, they fail to furnish receipts and supporting documents to reveal income sources. The bright side is that they do not have to face criminal tax charges that can mean more years in prison and a heavy fine.
Actor Wesley Snipes, star of the “Blade” movie series, became a poster child for celebrity tax troubles in the 2000’s when he was convicted of willfully failing to file tax returns for 1999, 2000 and 2001.
The actor tried many arguments to avoid the charges. He maintained that he was innocent of tax evasion and was misled by his tax advisors. He also maintained that the IRS was an illegitimate government agency, that he was a nonresident alien, and that he received incorrect information from associates. The IRS rejected Mr. Snipes’ claims, labeling them as “frivolous tax arguments.” Wesley Snipes was given the sentence of three years in federal prison for failing to file the tax returns.
To avoid getting into trouble with the IRS, taxpayers need to know what constitutes frivolous arguments. In many cases, it is unscrupulous tax advisors that encourage taxpayers to evade taxes by quoting arguments that will not stand up in a court of law or with the IRS.
The IRS makes it clear which arguments are unacceptable to them and to the court. These are:
- The federal income tax is voluntary or the filing of a tax return is voluntary.
- Taxpayers can reduce their federal income tax liability by filing a “zero return”.
- The IRS is required to prepare and file tax returns for those taxpayers who do not file.
- Compliance with administrative summons such as letters and notices issued by the IRS is voluntary.
- Only income from foreign sources is taxable.
- Federal reserve notes are not income.
- Military retirement pay does not constitute income.
Some twist the meaning of certain terms used in the Internal Revenue code to avoid punishment for non-compliance. For example, the taxpayer is not a “citizen” of the United States, and is, therefore, not subject to the federal income tax laws.
Frivolous arguments also include using constitutional amendment claims, such as arguing that the federal income tax laws are unconstitutional because the sixteenth amendment was not properly ratified. Legal claims that have no basis in fact and are purely fictitious are also dismissed as frivolous.
Arguing questionable tax positions in court is dangerous, as the court can impose a penalty of up to $25,000 if it concludes that your position is frivolous. Regardless of any inaccurate tax information you’re given, you are ultimately held responsible for non-payment of taxes.
Preparing your tax and financial records for 2015 will help you to keep track of your income, expenditures, savings and taxes. These four elements are vital in measuring monetary growth. Organized records also make preparing your tax return easier. Here are tips on what to do when preparing your records.
What Records to Keep
Records of receiving of income such as bank statements, expenditures such as credit card statements, and receipts of expenses that are tax deductible such as those of charitable giving are important and should be retained. Any document that supports the claims you make on your tax return should find a space in your tax records.
In case of an audit, the responsibility of proving deductions, entries and statements on your tax return falls on you. This is called the burden of proof. Even if you did not include incorrect information on the return, you must be able to prove that you included the correct information by using supporting documents.
Collect Information Returns
Depending upon whether you file as individual or business, you might be required to file various information returns. Some of the most commonly filed information returns are:
- Form W-2 for Wage & Tax Statement
- 1099-INT for Interest Income
- 1099-D for Dividends
- 1099-MISC for Miscellaneous Income
- 1098-E for Student Loan Interest
- 1099-R for Distribution from Pensions, Annuities, IRAs, Retirements, etc.
- 5754 for Receiving Gambling Winnings
- 1099-C for Cancellation of Debt
For businesses, there are forms, including:
- Form 8027 – Employer’s Annual Information Return of Tip Income & Allocated Tips
- Form 8300 – Report of Cash Payments Over $10,000 Received in a Trade or Business
The recipient must receive these forms by January 31 unless the deadline doesn’t apply, such as in the case of gambling winnings.
Gather the Receipts
If you itemize deductions, it is vital to keep the receipt or bank record of any deduction you claim on your return. You may gather receipt for medical expenses that are not covered, charitable contributions, restaurant bills for business meetings, property taxes, and so on. If you are unsure of what to keep, retain and organize the receipts of all the expenses before your return preparer informs you of which deductions to claim.
Tax season begins on January 19, 2016. Filing your tax return early in the season can help you to avoid falling victim to identity theft. It also means getting your refund sooner. If you enlist help in filing your return, it is important to choose a tax preparer carefully. The tips below will help you to choose a professional and trustworthy return preparer.
Use IRS Directory of Return Preparers
To find a professional and legitimate return preparer in your area, use the IRS Directory of Federal Tax Return Preparers available on the IRS website – IRS.gov. The directory is searchable and has a comprehensive list of tax professionals with credentials and select qualifications.
Tax Professionals Who Can Prepare a Return
The categories of tax professionals below are legally permitted to prepare tax returns for compensation.
Tax Compliance Check
Yes (Special Enrollment Exam)
72 hours every 3 years
Check the PTIN
The IRS requires every return preparer to have a Personal Tax Identification Number (PTIN). The return preparer must include his or her PTIN on every return they handle.
Do a Background Check
Make sure to research your preparer’s years of service, customer complaints, office address, number of staff, and contact information. The Better Business Bureau (BBB) and the Federal Trade Commission (FTC) are valuable resources to conduct research.
Make a Complaint
If your tax return and/or refund was impacted by a fraudulent return preparer, you may complete Form 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit and Form 14157, Complaint: Tax Return Preparer, and mail it to the IRS where you mail Form 1040. You may mail supporting documents with the forms as well. If you received a letter or notice from the IRS regarding your return and/or refund, you must also send them a copy of the notice or letter along with Form 14157-A, Form 14157 and supporting documents.
If your tax return and/or refund was not impacted misconduct, you may simply mail Form 14157, Complaint: Tax Return Preparer with supporting documents to the IRS. You can download these forms from the IRS website or call 800-829-3676.
If you have a 529 plan, you may consider using a Coverdell Education Savings Account (ESA) as well. It supports a 529 perfectly and helps you to save more for the educational expenses of your child, from kindergarten to college. It is an ideal tax-saving tool for parents, as their savings can grow tax-deferred. Also, there are no taxes charged at the time of withdrawal.
Only those whose adjusted gross income is less than $110,000 ($220,000 for those filing jointly) are qualified to establish a Coverdell ESA.
Benefits of an Education Savings Account
The two primary advantages of an ESA are:
- The savings grow tax-free (No taxes on interest, dividends, appreciation, etc.)
- Withdrawals made are tax-free if they are used for qualified education expenses before the child turns 30
Qualified education expenses include tuition fees, books, room and board, supplies, equipment, etc. If a child has special needs, the 30-year old limitation does not apply.
Rules of Education Savings Account
An ESA can only be opened before the child turns 18. All contributions must be made before that time. Due to this rule, most parents or guardians open an ESA when the child is very young. This gives them adequate time to make sufficient contributions. All the contributions made must be used by the beneficiary before he or she turns 30.
The maximum amount you can deposit in an ESA is $2,000 per year. Depending upon their yearly contribution, individuals can easily calculate the amount they will have in the account when their child is ready to use the funds. The ESA, when combined with a 529 plan, can provide substantial help to parents in saving for the educational expenses of their children while saving on taxes.
Opening the Account
Generally, there is no fee charged for opening or maintaining an account. However, there might be an account fee or brokerage commissions. Depending upon the provider, the initial investment payment and the fee may vary. Before opening an account, check the annual fee the provider charges, as this can reduce your gross savings.
Paying too much or too little in taxes calls for a review of your withholding. If you paid too much in taxes, you essentially gave an interest-free loan to the IRS. If you paid too little, you risk owing back taxes.
The 2016 tax season starts on January 19. Before that, you may estimate your tax liability to pay the correct amount to the IRS.
Did I Pay the Correct Amount?
An easy method to figuring out if you paid more or less in taxes is to consider changes that impacted your tax bill. You may want to check your withholding if you experienced the following:
- Rise in income (promotion, change of job, bonus, prize money, windfall gain)
- Fall in income (loss of employment, theft, natural disasters, capital loss)
- Increase in expenditure (birth of a child, marriage, medical expenses, college fees)
- Decrease in expenditure (a child moving out, divorce, change in lifestyle)
You may also calculate your tax liability using both the standard deduction and itemized deduction. If your income increased, check for deductions to lower your tax bill.
Withholding Too Much
Getting extra taxes withheld means depositing the excess amount to the IRS until they return it back to you in the form of a refund. If you received a large refund last tax season, you need to check your withholding (if you are an employee) or calculate your tax liability carefully (if you are self-employed or run a business).
Withholding Too Little
It’s never a good idea to pay less in tax than you are required to. After the deadline for the payment of taxes, the IRS begins to charge a penalty and interest on the balance to be paid. If you believe you paid too little throughout 2015, you may want to be begin saving now to cover your liability. If you cannot pay the entire amount in a lump sum come April 18th, you may be able to pay the amount in monthly installments.
You are no doubt used to taking either the standard deduction or itemized deduction when you file taxes. If there was no major change in your financial situation in 2015, you may not need to change filing tactics. However, you may want to review your options if a change affected your finances, such as marriage, the birth of a child, promotion, change of job, a child who can no longer be claimed as a dependent, receipt of extra income, and so on. Estimating your tax liability using both the methods can help you to choose the method that provides more financial advantages.
How to Itemize
You may first itemize your deductions to see how much in taxes you need to pay. For that, you may add all the deductible expenses you incurred during 2015. Expenses that can be deducted include:
- Gifts to charities
- Home mortgage interest
- State and local income taxes or sales taxes (one of the two, not both)
- Casualty or theft losses
- Certain medical expenses
- Certain employee business expenses
You may use the IRS Free File to help you determine if you should itemize. If you itemize, use Form 1040 and Schedule A, Itemized Deductions. IRS Free File also allows you to choose the correct tax forms you need to file if itemizing.
How to Use the Standard Deduction
After determining your tax liability by reviewing your deductions, you can see which of the two methods will help you save more in taxes. Before considering the standard deduction, verify that you are eligible to take it.
Your standard deduction for 2015 depends upon your filing status. The standard deduction for 2015 is as follows:
Single – $6,300
Married filing jointly – $12,600
Married filing separately – $6,300
Head of household – $9,250
Surviving spouse – $12,600
If you are having trouble determining your standard deduction, you may use the IRS’ Interactive Tax Assistant Tool. You will need to fill in your age, your spouse’s age, filing status, and basic income information including amounts and adjusted gross income. If you use the standard deduction, you may use Form 1040, 1040A, or 1040EZ.
If you received a big tax refund last year, you might be withholding more than you are required to. Excess withholdings mean that you are essentially providing an interest-free loan to the government. In order to reduce your tax refund but increase your regular take-home wages, you would need to reduce your withholding. You can do that by adjusting the amount of allowances you claim on your Form W-4.
Major Changes in Life
It is important to review your tax withholding, especially when there has been a major change in your life during the year. Examples include a change of job, promotion, birth of a child, older child no longer a dependent, marriage, divorce, major financial gain, or major expenditure.
IRS Withholding Calculator
The IRS provides a Withholding Calculator, a tool that helps taxpayers to calculate the amount of taxes they should withhold from their paycheck. The Withholding Calculator can be used by:
- Employees who want to reduce their tax refund or balance due
- Employees whose situations are only approximated by the worksheet on the paper W-4, such as those filing as head of household, and those with children eligible for the Child Tax Credit
- Employees having non-wage income after adjustments and deductions, who prefer to have taxes withheld from their paychecks rather than pay estimated taxes.
You need to have your recent pay stubs and recently filed income tax return to work from accurate information when using the Withholding Calculator.
How to Withhold More
If you are withholding less than you are required to, you risk owing back taxes. To withhold the maximum amount in taxes, enter 0 on line 5 of Form W-4. Alternatively, you may use the IRS Withholding Calculator and report the exact dollar amount that you want to get withheld by entering it on line 6 of Form W-4.
To avoid withholding too much or too little from your paycheck, check your withholding before the end of the year. If you receive a minimum refund or none at all in 2016, it can indicate that your withholding was accurate.
A capital loss is incurred when you sell an asset for less value than its purchase price. Capital losses are bad for your finances, but they can be good for your taxes. If you incur capital losses, you can use them to offset capital gains or even your regular income.
Short-Term and Long-Term Capital Losses
If you held the asset that you sold for one year or less, then your capital gain or loss is considered short-term. However, if you held the asset for more than one year before selling it, then your capital gain or loss is long term. You may calculate the time duration by subtracting the date of the purchase from the date of the sale of the asset.
A loss in the short-term can offset a gain in the long-term, and a loss in the long-term can offset a gain in the short-term. For example, if your net short-term loss is $2,500 and your net long-term gain is $3,500, then you need to pay taxes on $1,000.
Deduction and Carry Forward
You can deduct a loss of up to $3,000 from other income as well. If you had a loss of more than $3,000, then you can carry it forward to the next year and pay taxes on it in that year. You can then deduct the loss from the capital gain next year.
Tax-loss harvesting is most beneficial when you hold the asset for more than one year. You can save more in taxes, as the long-term capital gains rate is likely to be lower. Long-term capital gains stands at 15% for medium and lower-income groups, and 20% for higher-income groups. Additionally, you can reinvest your savings from tax-loss harvesting, which will continue to compound until it is invested.
Reporting to the IRS
To claim a deduction, you need to fill out Form 8949 Sales and Other Dispositions of Capital Assets, and Form 1040 Schedule D. Most taxpayers need to file only Schedule D to report capital gains and losses. However, some taxpayers may additionally need to file Form 8949 along with Schedule D.
Saving for the future has several benefits. You pay less in taxes, ensure your retirement years are secure and qualify for tax breaks. The simplest way to realize the full advantages of your retirement account is to maximize your retirement contributions.
If you have a 401(k) plan, you can contribute up to $18,000 in 2015. The limit was raised by $500 in 2014. If you maxed out your 401(k) in 2014, then you can adjust your monthly contributions to a higher contribution threshold.
Eligibility for a Roth IRA phases out for taxpayers with income between $116,00 and $131,000 ($183,000-$193,000 for couples). Couples earning more than this limit can convert a traditional IRA to a Roth IRA.
You do not pay taxes on your contributions to a 401(k), but you’re taxed on withdrawals. However, on Roth IRA, you pay taxes at the time of making the contribution and make tax-free withdrawals later. Depending on which retirement account you have, you can plan your contributions based on how you are taxed. If you prefer paying taxes at a known tax rate, then the Roth IRA is preferable. However, if you want tax-free growth, a traditional IRA or a 401(k) is the retirement account to choose.
You can contribute up to a maximum of $5,500 to an IRA in 2015. If you are age 50 years or older, the maximum contribution limit is $6,500. One restriction to an IRA is that if you have a workplace retirement plan and a modified adjusted gross income (AGI) between $61,000 and $71,000 for individuals ($98,000-$118,000 for couples) in 2015, then you cannot make a full deduction on the contribution. In some cases, you cannot even take a partial deduction.
Also, even if you don’t have a workplace retirement plan but your spouse does, you cannot deduct the full amount of your contribution to an IRA if your income together is over $183,000. If your income together is over $193,000, then you cannot take any deduction.
Any taxpayer that donates to a qualified charity can reduce his or her tax bill. Regardless of the amount or the number of items donated, deductions for charitable contributions can be claimed to save more in taxes. Some taxpayers wait until the end of the year to make charitable contributions to maximize their tax savings through tax adjustments.
In order to comply with IRS guidelines concerning charitable contributions, consider the following rules and limitations:
You can only claim a deduction on a contribution if you donate to a qualified charity. A qualified charity is one that has obtained tax-exempt status. Religious organizations such as the church, synagogue and temple are considered qualified charities even without a 501(c)(3) tax-exempt status.
Generally, you can deduct cash contributions of up to 50% of your adjusted gross income (AGI). For contributions made in the form of property, you can deduct up to 30% of your AGI. For contributions of appreciated capital gains, you can deduct up to 20% of your AGI. Contributions made in excess of this limit can be carried over to the next year, up to a maximum of five years.
Direct Contribution from an IRA
If you are 70 ½ or older, you can directly transfer money from your IRA to a charitable organization. Such a transfer can help retired taxpayers meet the required minimum distribution (RMD) threshold. However, direct contributions from an IRA are not tax deductible.
Giving Used Household Goods
You can claim a deduction when you donate used household goods, but only if they are in good condition. You can calculate the fair market value of the donated goods and deduct it on your return.
If you donate noncash items, you may need to consider the following:
- If you donate noncash items worth more than $500, the IRS requires you to file Form 8283, Noncash Charitable Contributions with your tax return.
- If you claim a deduction for a noncash contribution worth $5,000 or less, you need to fill out Form 8283, Section A.
- If you claim a deduction for a noncash contribution of more than $5,000, you need a qualified appraisal of the noncash property and fill out Form 8283, Section B.
It is important to maintain proper records for your charitable contributions. An IRS audit means producing receipts and supporting documentation for all deductions claimed in a year. For charitable contributions made in cash, check or other monetary gifts, you are required to obtain a bank record or a written communication from the qualified charity. The record should contain the name of the organization, the amount and the date of the contribution.
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that provides free assistance to taxpayers in resolving tax problems. The TAS can be beneficial to both individual taxpayers and businesses whose problems are causing financial difficulty.
Taxpayers who tried but failed to resolve their tax issues through normal IRS channels are eligible to receive help from the TAS. Also, taxpayers who are dissatisfied with the procedures and service of the IRS can seek assistance from the TAS. Some of the problems that the organization helps to resolve are identity theft, fraud by unscrupulous return preparers, tax debt and collection actions.
If you or your business is experiencing financial difficulties due to the IRS, are in danger of IRS collection actions, or are frustrated with the IRS’ service, you may seek help from the TAS.
As part of the TAS resolution process, an individual or business is assigned to an advocate who listens to their tax problem and helps them to become familiar with standard IRS procedures. All services of the TAS are free.
The information taxpayers share with the TAS is not shared with the IRS except when it is necessary to provide relief to the taxpayer.
How to Contact
The TAS has at least one local taxpayer advocate office in every state, the District of Columbia, and Puerto Rico. Taxpayers can contact the advocate in their state by finding their phone number in Publication 1546. Additionally, taxpayers may call the TAS toll-free number 1-877-777-4778.
To send a request for assistance, file Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order) with the TAS. Form 911 is available by phone at 1-800-829-3676, and on the IRS website – irs.gov.
The Treasury of Inspector General for Tax Administration (TIGTA) was established to provide independent oversight of Internal Revenue Service (IRS) activities. Since 1999, the year of its inception, TIGTA has consistently provided guidance to the IRS through its evaluation, criticism, and suggestions for improvement. TIGTA reveals the weaknesses of the IRS through its analysis of IRS activities so that the agency remains free from fraud, biases and abuse, and provides the best service to taxpayers.
TIGTA consists of mainly auditors and investigators that gather information regarding the activities of the IRS, conducting analyses, and providing criticism and advice for the enhancement of IRS operations. TIGTA acts within the IRS, but is independent of the IRS, the Treasury Office of the Inspector General (OIG) and all other Treasury offices. This makes the organization’s evaluation of the IRS neutral and unbiased.
TIGTA’s audit and investigative activities aim at:
- Detecting and deterring fraud and abuse in IRS programs and operations.
- Protecting IRS against external attempts to corrupt or threaten its employees.
- Reviewing and making recommendations about existing and proposed legislation and regulations related to IRS, and TIGTA programs and operations.
- Preventing fraud, abuse, and deficiencies in IRS programs and operations.
- Promoting economy, efficiency, and effectiveness in administering the Nation’s tax system.
- Informing the Secretary of the Treasury and Congress of existing problems and progress made to resolve them.
By bringing transparency to IRS operations, TIGTA keeps the IRS in check through publicly sharing its routine evaluation of the IRS. TIGTA reports also include the response of the IRS to scrutiny. As TIGTA reports and IRS replies are made public, the IRS is encouraged to resolve any problems in its operations.
TIGTA ensures that the IRS operates at the highest level of integrity, and acts without prejudices. It also promotes improvement in the agency by providing solutions and suggestions aimed at offering the best service to taxpayers.
IRS penalties can be forgiven under certain situations. If an IRS officer or employee provides erroneous written advice to a taxpayer, then the IRS will abate the penalty. Also, a taxpayer may qualify for relief under reasonable cause if the delay in filing or paying taxes was due to a situation beyond the control of the taxpayer, such as theft, natural disasters and personal tragedies.
Erroneous Written Advice
If penalty abatement is sought under inaccurate written advice from the IRS, the agency reviews various factors, including the taxpayer’s past history of compliance, the supporting documents, and if the taxpayer was provided other means of getting correct information. After the review, an IRS agent concludes whether the penalty should be forgiven.
If a major disaster such as a hurricane, earthquake, tornado, etc. hit an area and the IRS declares it a federal disaster area qualifying for relief, taxpayers living in that area or impacted by the disaster can get full relief from penalties. Generally, automatic relief is offered to taxpayers affected by the disaster in the form of extended time to file and pay taxes.
A reasonable cause is one that was beyond the control of the taxpayer. Usually, the IRS accepts causes such as:
- Death, serious illness or an unavoidable absence of the taxpayer or a member of his or her immediate family
- Natural disasters that directly impact the taxpayer, or his or her property
- Personal distress caused by events such as a divorce
Generally, any cause that prevented the taxpayer from filing or paying taxes which was beyond his or her control may be eligible for penalty abatement.
Taxpayers have the right to challenge an assessment or demand for penalty by the IRS at any stage of the penalty process. Taxpayers have the right to request:
- A review of the penalty before it is assessed (example: deficiency procedures)
- A penalty abatement after the penalty is assessed, and either before or after it is paid
- An abatement and refund after the penalty is paid.
IRS penalties can substantially increase the total amount of back taxes owed. To avoid paying more to the IRS, taxpayers can consider applying for Penalty Abatement. The help of a tax professional may be helpful in understanding the specific qualifying requirements and rules for penalty abatement.
The IRS relaxed many qualifying restrictions under its Fresh Start program to make it easier for individuals to resolve their back taxes. Taxpayers can now avoid IRS collection actions, such as wage garnishments, by using the Fresh Start program. The three prime features of the program are:
- Relaxation in the placement of tax liens
- Easier access to streamlined Installment Agreements
- Less intrusive Offer in Compromise rules
Relaxed Rules for Tax Liens
Under the Fresh Start, the minimum tax debt amount that is owed before the IRS files a Notice of Federal Tax Lien has been raised to $10,000. However, in rare cases, the IRS may place a lien on debt amounts of less than $10,000 as well.
If a taxpayer, after the placement of a lien, pays the entire tax debt and meets certain other requirements, the IRS may withdraw the lien. Previously, the lien would be in place for years after the taxpayer had paid off the entire debt. To get a lien removed, taxpayers may use Form 12277, Application for Withdrawal.
Easier Access to Installment Agreements
Under the Fresh Start, more taxpayers can use Installment Agreements to resolve their tax debts. Individual taxpayers who owe up to $50,000 can pay their debt plus penalties and interest through monthly direct debit payment,s for up to 72 months (six years).
The IRS has also relaxed the rules for the sharing of financial information. The IRS will not ask for a financial statement (Form 433-F, Collection Information Statement), but may need some basic financial information to set up the installments.
Flexible Offer in Compromise Rules
Offer in Compromise (OIC) is an IRS program that allows taxpayers a reduction in tax debt. Due to the strict qualifications for an OIC, taxpayers had to undergo a difficult process of financial inspections by the IRS. The Fresh Start eased these restrictions, especially the analysis of a taxpayer’s ability to pay, to make the OIC accessible to more taxpayers.
For an OIC, the IRS will require a financial statement to determine ability to pay, but they will show more flexibility when considering such a request. Because of this, more taxpayers will be able to use the OIC to resolve their tax debts.
The IRS accepts partial payments in installments if a taxpayer is financially incapable of making the full payment of tax debt. These payments are made under the payment plan called the Partial Payment Installment Agreement (PPIA). Before the PPIA came into existence, the IRS would accept partial payments from taxpayers, but without the statutory authority.
Only taxpayers that cannot pay their entire tax debt can hope to achieve a resolution under the PPIA. You need to use Form 9465, Installment Agreement Request to request to pay a partial amount in tax debt. It is important to hire a tax professional who can calculate the amount of payments you can make depending upon your financial situation. Certain financial documents to prove inability to pay the full amount also need to be provided to the IRS. All the financial information provided to the IRS is reviewed and verified by them.
Essentially, the IRS will look at your income sources and assets to judge the maximum amount that you can pay. They will also consider your ability to take on new credit.
After a taxpayer has qualified for the Partial Payment Installment Agreement, the IRS will conduct a financial review every two years. If they see an improvement in the taxpayer’s financial circumstances, they may increase the amount of installment payments. If the fiscal improvement is such that the taxpayer can pay the full amount of taxes owed, the IRS may terminate the agreement.
Penalties and Fee
The IRS charges a one-time fee of $120 if you pay your installments using any method other than direct debit. For direct debit, the fee is reduced to $52. For low-income taxpayers, the fee is $43.
Penalties and interest continue to build onto to the tax debt amount to be paid even after a taxpayer has qualified for the PPIA and begun to make payments. The IRS may also place a federal tax lien on one or more of the taxpayer’s properties. Using a tax professional’s assistance may be essential to correctly plan, prepare for and finalize a PPIA.
The statute of limitations for a tax debt is the time period of ten years the IRS gets to collect back taxes. If the IRS is unable to collect any tax debt amount during this ten-year collection period, the tax debt is considered forgiven.
Calculating the Start of the Statute of Limitations
The ten-year collection period begins from the day the IRS accesses the taxpayer’s tax liability. If you miss the paying deadline, you receive a notice from the IRS informing you of the taxes owed. The date on this notice is the date when the ten-year period starts. If you did not file a return, the IRS files a substitute tax return called the Substitute for Return (SFR) to estimate your tax bill. The date on the SFR starts the statute of limitations. Whichever communication regarding the payment of back taxes is received first is counted as the start of the ten-year clock.
When the Statute of Limitations is Suspended
The statute of limitations is temporarily halted when the IRS is legally stopped from collecting back taxes. The following situations are common examples of when the statute of limitations is suspended:
- If a taxpayer has applied for an Offer in Compromise and the IRS is reviewing the request, the statute of limitations is stopped.
- It is also stopped in case of bankruptcy when the IRS has to stop all collection actions temporarily under the automatic stay.
- When the collection due process hearing is being conducted.
If the IRS cannot enforce collection due to the poor financial condition of the taxpayer, the statute of limitations is not stopped.
Extension of the Statute of Limitations
The collection limitation is not definitive. The IRS has been known to collect back taxes that are more than a decade old. The IRS can also negotiate with a delinquent taxpayer to extend the statute of limitations when the 10-year period is about to expire. They usually offer an attractive payment plan in exchange for extending the limitations for more years.
Taxpayers that have the ability to pay their tax debt should seek a resolution rather than waiting for the statute of limitations to expire. The IRS can use damaging collection actions such as a federal tax lien and tax levy to collect a tax debt during the collection period if the taxpayer has the ability to pay.
The IRS adopted the Taxpayer Bill of Rights as proposed by Nina Olson, the National Taxpayer Advocate, after it was determined that many taxpayers were unaware of their rights before the IRS. The rights existed before, but were not clear, easily accessible, or understandable to taxpayers.
The 10 fundamental rights of every taxpayer when communicating with the IRS are:
- The Right to Be Informed
- The Right to Quality Service
- The Right to Pay No More than the Correct Amount of Tax
- The Right to Challenge the IRS’s Position and Be Heard
- The Right to Appeal an IRS Decision in an Independent Forum
- The Right to Finality
- The Right to Privacy
- The Right to Confidentiality
- The Right to Retain Representation
- The Right to a Fair and Just Tax System
The Right to Be Informed
Taxpayers have the right to be informed of how to comply with tax laws. They are entitled to a clear explanation of the laws and IRS procedures in all communications with the IRS, including decisions.
The Right to Quality Service
Taxpayers have the right to receive quick, courteous, and professional help from the IRS. They can expect to receive clear and easily understandable communications, and to speak with a supervisor in case of unsatisfactory service.
The Right to Pay No More than the Correct Amount of Tax
Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties. They can expect the IRS to apply all tax payments accurately.
The Right to Challenge the IRS’s Position and Be Heard
Taxpayers can disagree with the IRS and raise objections. They can expect the IRS to consider their timely objections and documentation promptly and fairly, and respond if they don’t agree.
The Right to Appeal an IRS Decision in an Independent Forum
Taxpayers have the right to a fair and impartial administrative appeal of most IRS decisions. Usually, they have the right to take their tax cases to court.
The Right to Finality
Taxpayers have the right to know the maximum time they have to challenge the IRS’s position and the maximum time the IRS has to audit. Taxpayers have the right to know when the IRS has finished an audit.
The Right to Privacy
Taxpayers have the right to expect IRS action to comply with the law and be no more intrusive than necessary. The IRS is required to respect all due process rights and provide a collection due process hearing where needed.
The Right to Confidentiality
Taxpayers have the right to expect that the information they provide to the IRS will be kept confidential unless authorized by the taxpayer or by law. Taxpayers can expect action against those who wrongfully use or share their return information.
The Right to Retain Representation
Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS.
The Right to a Fair and Just Tax System
Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their tax debt, ability to pay, or ability to provide information timely. They can receive help from the Taxpayer Advocate Service in cases of financial duress or if the IRS did not resolve their tax problem satisfactorily.
To make it easier for taxpayers to file, report, and make inquiries, the IRS offers various online services such as Where’s My Refund?, Online Payment, and Withholding Calculator. These services can help individuals to prepare their taxes accurately, pay easily, and obtain information quickly.
Where’s my Refund?
Through Where’s My Refund?, taxpayers can find out when their tax refund will reach them. They can also receive information about the status of their return, and the expected date of their funds. Taxpayers can check the status of their refund at the IRS website within 24 hours of electronically filing their tax return, and four weeks after mailing their paper return.
Want to check a tax account transaction of a past year? Get Transcript provides you with line-by-line tax return information for any tax year. To get a copy of your return, you need to file Form 4506, Request for Copy of Return.
If you wish to get a transcript by mail, you will need to share your Social Security Number or your Individual Tax Identification Number with the IRS, along with your date of birth and mailing address from your latest tax return.
If you get your taxes withheld by your employer, you can use the Withholding Calculator at the IRS website to calculate your withholdings. Accurately accessing the amount to be withheld is vital to avoiding underpayment or significant overpayment. A major change in the withholding amount indicates that you need to provide a new Form W-4 to your employer.
The Offer in Compromise (OIC) pre-qualifier tool helps taxpayers determine their eligibility for the Offer in Compromise program. It allows electronic preparation and submission of an OIC request to the IRS.
The tool asks various questions related to the eligibility. It also calculates the possible minimum amount of the offer, evaluates potential eligibility for “doubt as to collectability”, and directs taxpayers that qualify to Form 656-B, Offer in Compromise.
Taxpayers can now pay their tax bill directly from their bank accounts, debit or credit card by using IRS Direct Pay. Other ways to make a payment include:
- Electronic Federal Tax Payment System (EFTPS) –appropriate for businesses, enrollment is required
- Electronic Funds Withdrawal – to be used during e-filing
After making the tax payment, you receive instant confirmation. Using this service, you can also look up payments, modify or cancel them two business days before your payment date.
In the convenient spirit of Halloween, it seems appropriate to indulge in a little exaggeration to underscore a pervasive American horror: tax scams. While you’ve probably heard passing stories of unsuspecting taxpayers being duped or falling victim to identity theft, you may not be aware of the full magnitude of the problem. It’s far worse than you likely realize.
If you’ve been able to avoid just one of the dozens of tax cons lurking across the country, consider yourself fortunate. And before you dismiss tax scams as so much superstitious hype, you might want to review some common scenarios that have already cost taxpayers millions of dollars. Arming yourself with a little knowledge can make a big difference. Your money might just depend on it.
If your phone rings and you see “IRS” on your caller ID, a sense of dread is perfectly natural. The only problem is that the IRS won’t contact you by phone. But that won’t stop scammers, posing as the federal collection agency, from calling and demanding money. You’ll be advised that you have a tax debt and will be given specific instructions with how to pay – or else.
Fraudsters have been known to threaten deportation or arrest for failing to comply with their demands. And while it might seem unbelievable that such a con would work, the fact is these scammers are extremely convincing. They may have your personal information, such as your Social Security number or address, to perpetuate the illusion. No matter what you hear on the other end of your phone, don’t panic. Even if you do have a tax debt, the IRS will contact you through the mail.
In the Mouth of Madness
It’s terrifying to think that you could wake up one day and find you’ve been replaced – by a clone. While scammers can’t quite pull this off yet, they can pretend to be you and file an income tax return. This nefarious form of identity theft is designed to exploit both you and the Treasury Department during tax filing season. The scammer’s goal is to claim a fraudulent refund before you get a chance to prepare your return. Since the IRS typically issues refunds without first scrutinizing what’s been filed, this scam is frighteningly successful.
Not only will you be unable to get your refund until the IRS sorts the problem out, which can take six months or more, your future tax returns will likely fall under greater scrutiny. In order to prevent such a scenario, you will want to get your tax return in as quickly as possible. Scammers rely on individuals’ tendency to wait until late into tax season to file; don’t make this mistake.
It Came From the Mailbox
Some truly deceptive scammers will attempt to scare you with a fake IRS notice. Much like a scam call, fraudsters will attempt to exploit the fear taxpayers tend to have towards IRS correspondence. A phony notice may appear legitimate, with IRS logos, codes and even the verbiage being carefully replicated.
Unlike fake IRS calls, though, IRS notices cannot be so easily dismissed. You’ll first need to determine whether it’s authentic. A tell-tale sign of a scam is an odd demand for payment, such as a prepaid debit card. In order to be 100% certain, you can call the IRS at 1-800-829-1040 and verify what, if anything, is due.
In the event that your tax balance turns out to be real, there’s no need to scream. You can contact a licensed tax professional to help you explore your resolution options. In most cases, tax debts can be handled quickly and affordably. The only horror beyond tax scams comes when you ignore a legitimate tax liability.
The IRS can be scary when they take a closer look at your tax returns and finances to find mistakes and discrepancies. IRS audits can be upsetting even if you haven’t made a mistake in any of your returns and are compliant with all IRS rules. That is largely due to the responsibility of providing receipts, bank statements, and financial documents to prove to the IRS that you reported correctly. The IRS can go as far back as 10 years or more if they suspect significant tax evasion.
An IRS audit can hit any taxpayer. The agency randomly selects taxpayers to be audited based on a statistical formula. They may order an audit after matching documents such as W-2s or Form 1099 with the information reported to them on a tax return. If your business partner or investor is audited, you may also face an audit.
You are informed about the audit either by telephone or by mail. Email is not used by the IRS. Even after a telephone conversation with the IRS, you may still receive a letter regarding the audit.
Initially, the IRS asks you to provide certain documents relating to financial transactions and assets. The law requires all return filers to retain records used to prepare a tax return. Usually, the records should be kept three years after the return was filed, but it is safer to go back further.
If after the audit, the IRS finds that you owe back taxes, you will either need to pay the full amount in a lump sum or consider your payment options. The IRS will add penalties and interest on the original back taxes amount from the due date of the payments. If the back taxes are not paid or the agreement is defaulted upon, the IRS has the power to place a lien on any property and/or asset of the taxpayer without a court order. If back taxes remain unpaid after the lien is in place, the IRS can sell the property and/or asset under the lien to satisfy the debt.
If you disagree with the IRS audit findings, you may file an appeal, use an appeals mediation program, or request further review of the issue.
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to combat tax evasion by U.S. persons holding unaccounted income in offshore accounts. The aggressive implementation of FATCA by the Internal Revenue Service is quickly leading to the end of bank secrecy.
The IRS has so far established FATCA agreements with more than 75 countries, including the commonly used tax havens Switzerland and Ireland. Under the agreement, any bank operating in a cooperating country can be asked by the IRS to provide information about the bank account(s) of their customers who are U.S. citizens. The Foreign Financial Institutions (FFIs) are also required to report directly to the IRS certain information about financial accounts held by U.S. citizens.
Even if a U.S. citizen has a dual citizenship or doesn’t live in the U.S., s/he is required to report their worldwide income to the IRS every year. Some persons must file Form 8938, Statement of Specified Foreign Financial Assets and also file Report of Foreign Bank and Financial Accounts (FBAR) separately.
Failure to file a tax return or FBAR can trigger a serious penalty. Even if the U.S. citizen is not evading taxes in the U.S., s/he can be charged with a fine and/or jail time, if found guilty of holding back information from the IRS.
Tax evasion can lead to a penalty of $250,000 and imprisonment for five years. Filing a fraudulent tax return generates a penalty of $250,000 and jail time of three years.
Failure to file the FBAR is considered a criminal offense with a fine of $500,000 and imprisonment of 10 years. Non-willful civil FBAR non-compliance can lead to a fine of $10,000. For willful civil FBAR non-compliance, the penalty is the greater of $100,000 or 50% of the account for each year the person fails to file the FBAR. The IRS is known to rarely reduce or waive penalties, and is expected to be bolder now with FBAR penalties.
To encourage voluntary disclosure of unaccounted money held overseas, the IRS runs the Offshore Voluntary Disclosure Program (OVDP). This allows those with unaccounted money overseas to come out clean with much reduced penalties or none at all.
Those with dual citizenship are now required to follow every tax rule of the U.S. to avoid penalties. The fear of harsh penalties is making many U.S. citizens with dual citizenships renounce their U.S. citizenship. On the other hand, the IRS has recovered billions of unaccounted money from tax havens, and more in penalties after the strict implementation of FATCA.
The IRS initiates collection action when taxes are not paid on time or paid in full. The financial condition of the taxpayer does not initially factor in to this process. To recover back taxes, the IRS can go so far as to seize and/or sell the debtor’s property without obtaining a court order.
IRS collection actions are damaging on many fronts because of the power the IRS is granted by law to recover back taxes. They can extract money from a taxpayer’s bank account(s), garnish their wages, or sell property or assets to satisfy the tax debt. The agency is not required to pursue the taxpayer in court to proceed with the collection action.
The collection process typically advances from notices to lien, and finally to a levy. The levy is the most damaging of all collection actions. It allows the IRS to sell property such as a house, vehicle, and other personal assets. They can order a bank to transfer money to them, or demand employers to transfer an employee’s wages. The IRS decides how much funds will be transferred, or which property to seize and sell.
A lien is the government’s claim on a taxpayer’s properties and assets. A lien is placed when a taxpayer owes back taxes that go unpaid after multiple notices. After a lien is placed on a property, the debtor cannot sell the property or take a loan against it.
After placing a lien, the IRS files a public notice that alerts creditors about the claim on the property. If the property is sold, the IRS satisfies the full tax debt before other creditors receive their share of the proceeds. Due to the public notice, which remains on record for years even after a lien is removed, the debtor can find it difficult to get new credit, rent property, or even obtain certain job positions.
Any lien or levy action, be it wage garnishment, bank levy, or the selling of property, can destabilize a taxpayer’s financial condition. The IRS does not consider whether collection action will push the taxpayer into a financial crisis. It falls upon the taxpayer to request a resolution that works within his or her budget.
Due to the impact of IRS collection actions, taxpayers are advised to resolve their tax debt as quickly as possible.
Federal tax liens are more damaging than other liens because the IRS is not required to file a lawsuit against the taxpayer beforehand. If they have sent sufficient notices to the taxpayer regarding the payment of the debt, they can proceed to the placement of a lien. A lien ensures that the IRS will be paid the debt, in most cases before other creditors.
What Can Be Placed Under a Lien?
The IRS places a lien on all the properties, vehicles, and assets of a taxpayer. A lien can be attached to a taxpayer’s assets, future assets acquired during the lien, business property, and rights to business property. Essentially, whatever a taxpayer owns falls under the lien. Even in bankruptcy filings, the lien may continue after the taxpayer has filed.
A tax lien is valid for a 10-year period. If the IRS is unable to collect the tax debt within 10 years, they cannot then sell the property or assets of the taxpayer to pay for the debt. A lien automatically expires after 10 years. However, in most cases, the IRS does not wait that long to collect tax debt if it sees that selling a property or asset can satisfy the debt partially or fully.
Adverse Impacts of a Lien
After placing a lien, the IRS makes the details public to alert creditors of its claim on the taxpayer’s property. A record of the tax lien shows on the taxpayer’s credit report, and can remain on the report for up to seven years, even after the debt has been satisfied. These actions damage the taxpayer’s ability to obtain new lines of credit, hurt their reputation, and can adversely impact employment prospects.
A lien can be removed by paying the full tax debt in a single payment, or through a discharge, subordination or withdrawal. Using professional help is advisable if the taxpayer cannot pay the entire debt. In such a situation, negotiations with the IRS may become necessary.
Civil asset forfeiture is the legal process by which law enforcement agemts, including IRS officers, can seize assets (cash, car, home, etc.) from a person suspected of carrying out an illegal activity. Such action can be conducted without the individual being charged of a crime. This controversial process allows a government official to seize bank accounts, property, or take cash from any person without having to charge the person with a crime or provide proof of any wrongdoing. Moreover, the responsibility of proving innocence falls on the victim.
Earlier this year, as reported by the New York Times, Lyndon McLellan lost over $107,000 (his life’s savings) to the IRS when the agency raided his company’s bank account. He runs a small business, L&M Convenience Mart in North Carolina. It had taken him 13 years to save the money that the IRS took away in seconds. His only “crime” was that he was depositing less than $10,000 at a time in his bank account.
The IRS was acting under a law created to limit tax evasion, money laundering and drug trafficking. Federal law prohibits “structuring” deposits of less than $10,000, as it might be used to avoid reporting requirements. Under the Bank Secrecy Act, banks and other financial institutions are required to report cash deposits greater than $10,000. However, making smaller frequent deposits is only a crime if it is done to evade reporting requirements. Despite this, a bank statement showing frequent deposits of less than $10,000 is sufficient for federal investigators to obtain a seizure warrant.
McLellan’s is not an isolated case. There have been thousands of victims of civil forfeiture, many of them small business owners. Carole Hinders, the owner of a humble cash-only restaurant in Iowa is another such victim. Like McLellan, Ms. Hinders was also depositing less than $10,000 in her bank at a time. The IRS raided her checking account, taking away $33,000 from it. She was not charged with any crime.
Dissatisfaction with civil forfeiture is growing, as innocent small business owners and individuals with no intention to evade taxes are losing years of savings only because they chose to deposit less than $10,000 at a time. Statistics reveal that 639 seizures were made in 2012, up from 114 in 2005. Only one in five was prosecuted as a criminal structuring case.
Maybe the only attractive aspect of tax season is receiving a refund. But when the amount received is only a portion of the original refund amount, or is not received at all, it can be disappointing and often confusing. If you have certain delinquent debts, the U.S. Treasury reduces your federal tax refund (sometimes to zero) to satisfy the balance. This is called a refund offset.
The Offset Notice
In the case of a refund offset, you will receive a notice from the Financial Management Service (FMS) of the U.S. Treasury with information on your actual refund and your offset amount. The notice also includes the name and contact information of the agency receiving the offset payment. The Treasury Department’s FMS is the agency that issues refunds and carries out offsets.
The Process of Refund Offset
Some of the debts to which refund offsets can be applied are overdue child support, federal income tax, state income tax, and student loans. Agencies such as the Department of Education submit delinquent debts to the Fiscal Service for collection.
Officials compare the payment information with data obtained from the creditor agency. If the payee’s TIN and name matches the TIN and name of a debtor in the records, the refund will be offset to fully or partially to satisfy the debt. The Fiscal Service then transfers the withheld amount to the creditor agency.
The Fiscal Service will continue to carry out refund offsets until the debt is paid in full, or until the creditor suspends or terminates the debt collection.
If you do not have a financial debt and have received an offset notice, or want to dispute the amount offset from your refund, you may contact the agency that received the offset amount. The agency’s name and contact information is included in the notice. Neither the IRS nor the FMS answers queries about refund offsets.
If you filed a joint tax return and your refund was offset, you may be entitled to a part or the entire offset amount if your spouse was solely responsible for the debt. This relief is a part of the Injured Spouse Allocation.
An SFR is a Substitute for Return – a Form 1040. It is a tax return that the IRS files on the behalf of a taxpayer that failed to file his/her tax return. If you are required to file and you do not, the IRS will determine if a SFR will be prepared in order to calculate the unpaid taxes.
Estimating a filer’s tax liability is the first step towards the collection of back taxes. To determine how much in taxes an individual owes, the IRS reviews various financial information, including income reported on W-2s, 1099-MISC, and 1099-INT. The IRS also uses information from third parties, including employers and banks, to calculate the total income. The final amount is calculated based on the total income minus the withheld taxes.
It is important to note that the IRS only calculates income on an SFR, not the deductions, credits or exemptions that the taxpayer qualifies for. Therefore, an SFR will likely show the taxpayer owing a greater amount in taxes.
The IRS prepares an SFR in a very basic manner. Even if you could have filed a joint return and saved on taxes, the IRS will treat you as an individual. This may not be to your advantage.
The IRS adds penalties and interest to the total back taxes owed. Penalty for non-filing of a return is 5% and the penalty for non-payment of taxes is 0.5%. Penalties are incurred every month. The interest charged is the federal short-term rate plus 3% for a year. It is compounded daily.
The IRS has to prepare hundreds of SFRs each year, and they may file one long after the due date on your return. If the IRS files an SFR after several years, the total tax debt increases substantially due to the accumulation of penalties and interest.
The IRS sends many letters to a non-filer, informing the taxpayer that they have not received a tax return. It is only after the taxpayer does not file, ignoring these notices, that the IRS files an SFR to begin collection.
A taxpayer can file his/her return after the IRS has filed an SFR, and claim deductions and credits to lower their tax bill. The penalties and interest, however, apply unless the taxpayer qualifies for penalty abatement.
The IRS charges a variety of penalties for different kinds of non-compliances. They typically will charge either a civil penalty or criminal penalty, depending upon the infraction. A civil penalty is only monetary while a criminal penalty can be monetary and include jail time. For cases such as tax fraud, the IRS can charge both civil and criminal penalties.
Penalty for Failure to Pay Taxes
Usually, the penalty charged for non-payment of taxes is 0.5%. However, it can grow to a maximum of 25% in some cases. If a taxpayer owes taxes and does not pay them by the filing deadline, the IRS begins to charge a penalty and interest on the taxes owed for the month, or part of the month the return remains unfiled. Even with an extension, taxpayers are required to pay their full tax bill before the filing deadline.
Penalty for Failure to File Tax Return
The IRS charges the penalty of 5% for non-filing of a tax return. A taxpayer is charged this penalty if s/he is required to file a return and does not do so before the filing deadline.
Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty (TFRP) is charged if the person (sole proprietor, partner, corporation, or an employee of any kind of business) responsible for withholding and depositing taxes to the IRS fails to do so. This individual is personally held responsible for paying the entire amount of unpaid trust fund tax, plus interest.
The penalty can include imprisonment of not more than 5 years and/or a fine of more than $250,000 for individuals ($500,000 for corporations). The kind of taxes usually withheld and paid to the IRS are income and employment taxes, including social security taxes, excise taxes, and railroad retirement taxes.
Penalty for Underpayment of Taxes
The IRS may charge a penalty if there is understatement of income due to negligence or willful disobeying of the tax rules, substantial underpayment of taxes, or hiding of assets and/or income overseas. Also, if benefits are claimed without sufficient economic substance (a transaction that lacks meaning or purpose), the IRS can charge this penalty.
The penalty can be a fine of not more than $100,000 for individuals ($500,000 for corporations), and/or imprisonment of not more than 1 year.
Additional Penalty for Early Retirement Accounts Withdrawal
If you make an early withdrawal from your retirement account, a tax penalty of 10% is charged along with the regular income tax. If you qualify for an exception, you can get the penalty removed.
Penalty for Tax Fraud
Penalty for tax fraud is punishable by both fine and jail time. It may include a fine of not more than $250,000 for individuals ($500,000 for corporation) and/or imprisonment of not more than 3 years. Tax fraud includes providing false statements and information to the IRS in any form.
Revenue officers are highly skilled employees of the Internal Revenue Service (IRS) who are responsible for collecting back taxes and resolving tax debt cases. Their duties may vary depending on the IRS department they work for. Revenue officers receive more intense training than regular IRS employees. They have the ability to enforce the tax code and collect taxes from delinquent accounts as quickly as possible.
Absolute Collection Power
The IRS grants revenue officers substantial power to collect on tax debts. They have the ability to place levies (wage garnishment, order the banks of debtors to transfer funds to them) and send IRS notices; call taxpayers to meetings with IRS officers; place liens on property and/or assets, and use other collection actions against a debtor. They may inspect accounts and documents, and ask taxpayers to provide their financial information.
Revenue officers have a deep and comprehensive knowledge of the tax code. That provides them an advantage over taxpayers, as they use the tax laws to enforce actions to their fullest.
What You Can Do
A revenue officer will usually confirm whether or not a taxpayer is fully compliant with the tax laws. This includes filing of all tax returns and correctly paying any tax liabilities. As such, you’ll want to ensure that all past tax returns are filed, paycheck stubs and bank statements organized, and receipts for the deductions claimed are accessible. The revenue officer ask for tax and financial documents, including bank account statements and pay stubs.
Review past filings to ensure the correct amount of taxes was paid. An officer may perform an audit if they find discrepancies in the information they receive from third-party sources (employers, banks, etc.) and those reported on a return.
A revenue officer is assigned to a tax debt case for collection of unpaid taxes. If a taxpayer receives a notice from the IRS regarding collection and they cannot pay the tax debt, they can hire a tax attorney or an enrolled agent who specializes tax debt resolution to represent them. Having professional representation from an experienced tax professional can be a benefit when seeking the best resolution possible.
Among the logistical responsibilities that come with closing a business, some important tax-related steps need to be taken. Specifically you need to report the closure to the IRS, file the final tax return, and provide wage and withholding information to employees.
Final Tax Return
Usually, when you close a business, you are required to file an annual or quarterly tax return for the final year or quarter of operation. If your business was a partnership, corporation, S corporation, limited liability company or trust, then you need to check the boxes near the top front page of your tax return. Remember to check the box that specifies that this is your final tax return.
With you final tax return, attach a statement with the name of the person that keeps the payroll records and the address where the records are kept.
Final Employment Tax Returns
If you had employees, you are required to file final employment tax returns along with paying the federal tax deposits. You also need to issue final wage and withholding information to employees using Form W-2, Wage and Tax Statement.
Reporting Business Property Exchanges or Disposal
The disposing or exchange of business property, or change in the form of business, also needs to be reported to the IRS. To report the sale or exchange of property, use Form 4797, Sale of Business Property. To report sale of business assets, use Form 8594, Asset Acquisition Statement.
To file your tax return with or without a payment, use this IRS page.
Apart from these tasks, consider the following reporting responsibilities that you may need to fulfill, depending upon your business structure:
- Report information from W-2s that you issued. Use Form W-3, Transmittal of Income and Tax Statements
- File final income and allocated tips information return. Use Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips
- Report capital gains or losses. Use Form 1040, U.S. Individual Income Tax Return, or Form 1065, U.S. Partnership Return of Income, or Form 1120 (Schedule D), Capital Gains and Losses
- Report partner’s/shareholder’s shares. Use Form 1065 (Schedule K-1), Partner’s Share of Income, Credits, Deductions, etc., or Form 1120S (Schedule K-1), Shareholder’s Share of Income, Credits, Deductions, etc.
- File final employee pension/benefit plan. Use Form 5500, Annual Return/Report of Employee Benefit Plan
- Issue payment information to sub-contractors. Use Form 1099-MISC, Miscellaneous Income
- Report information from 1099s that you issued. Use Form 1096, Annual Summary and Transmittal of U.S. Information Returns
- Report corporate dissolution or liquidation. Use Form 966, Corporate Dissolution or Liquidation
- Consider allowing S corporation election to terminate. Use Form 1120S, Instructions
Calculating and collecting sales tax is one of the most difficult parts of running a small business. The U.S. has no federal sales tax that applies to all the states. Each state has its own sales tax rules, paying deadlines and exemptions. This can make sales tax very confusing, especially to businesses that sell in more than one state.
What are Sales Taxes?
Sales tax is charged at the point of sale by the state government from the purchaser of the good or service. Small business owners are required to assess and charge sales taxes on behalf of the government and transfer it to them after collection.
Exempted Goods and Services
The state government determines which goods and services are exempt from service tax. However, usually, sales tax is not charged on the following:
- Raw materials
- Wholesale items
- Resold goods
- Non-profit goods and services
- Products supporting important industries such as agriculture, research, etc.
- Sales to charities, religious, and educational organizations
Also, states may not charge sales tax on certain essential goods such as basic food items and medicine. Many states also exempt occasional sales such as garage sales from sales tax.
Reporting and Paying
Sales taxes are generally reported quarterly or monthly. To report and transfer the collected taxes to the state government, a tax return is filed. Depending upon the location of your business, the rules for reporting may change. Therefore, check your area’s payment and reporting process. Remember that in some states, business owners may need to obtain a sales tax permit to charge and collect sales taxes.
Brick and Mortar vs Online Businesses
A business must have a physical presence known as a “nexus” to collect sales tax. It should have:
- A physical presence (a store, office or facility) in the state
- Property in the state is owned or leased for operating the business
- Business is conducted routinely and not occasionally on the business premises
There is no single sales tax law concerning online businesses. The Supreme Court makes it mandatory for online retailers to charge sales tax in the state in which it has a “nexus”. Certain states, however, require customers to pay sales tax to the state in which they reside. Two bills are under consideration and might become a law, clearing the present confusion over online sales tax.
Even though determining sales tax can be tricky, the states are typically unforgiving. In case of erroneous or late payments, a heavy penalty is charged with the possibility of criminal charges being pressed.