How a 1099-C Affects Your Taxes

form 1099-C Cancellation of Debt

If your debt has become too overwhelming for you to repay, you could contact your lender and negotiate debt forgiveness. Unfortunately, you will probably be called to deal with a huge tax bill if the lender eventually decides to delete your debt and send you a Form 1099-C. This is because you are required by law to report the sum to the IRS by filling out the 1099-C form as taxable income.

We will give you all the details you need to know about a 1099-C Cancellation of Debt so you have an idea of what is involved and how to deal with any tax issues that may come along. 

 

What Is a 1099-C?

If you can no longer afford to pay off a loan or another debt and you have, somehow, managed to get your lender to cancel or write off your debt, the IRS will consider it income for you. Cancellations for more than $600 should be reported on a Form 1099-C Cancellation of Debt. Of course, some exceptions apply, usually in cases of foreclosed homes and bankruptcy (we will also talk about these in a subsequent section). 

Yes, it probably sounds unfair that a debt you have successfully negotiated away or canceled to return as taxable income, haunting your days. Sadly, it is, indeed, classified as income because the IRS sees it as you receiving a benefit without paying for it. This is because when you first borrowed money from the lender, you were bound by a contract to repay it. Therefore, you were not obliged to pay tax on the sum you got. Now that you got yourself a debt cancellation, the contract is no longer in effect, which means that you can do whatever you want with the money you borrowed. So, it looks like you have received money for free – money that you must pay back. This makes it taxable income. 

You can receive a Form 1099-C from a lender that discharged, forgave, or canceled your debt for the:

  • Modification of a loan on your principal residence.
  • Abandonment of property.
  • Return of property to a lender.
  • Foreclosure 
  • Repossession

 

What Is the 1099-C Tax Rate?

The amount of federal tax you will be asked to pay depends on several factors, such as your tax bracket. Taxpayers whose income is less than $35,000 are probably in the 15% tax bracket, which means that you pay 15% of every extra dollar of income on your return. This sum climbs to around $70,000 for married individuals filing jointly. However, your adjusted gross income affects things like phase-out ranges, deductions, and credits you might have. 

You may use the IRS Withholding Calculator to estimate the right amount of tax withheld and the best way to fill out your Form W-4. Or, you can ask an accountant for assistance. Note that any tax liability occurs when the loan obligation is released and not when 1099-C is issued. Failing to report this liability can lead you to be penalized for it (25% underreporting penalty). At the same time, your audit period increases from three to six years. That being said, though, the IRS will not impose penalties for underpayment of tax. The only exception is if you owe more than $1,000 when your return is filed. 

 

Where Does a 1099-C Go On a Tax Return?

You must enter the total sum of your 1099-C on Line 21 of Form 1040. This applies to 1099-C issued for a personal debt (Form 1040 is the Individual Income Tax Return form). If this is about a farm or business debt, you need to use either Schedule F or Schedule C (profit or loss from farming or business). Given that the original 1099-C has gone to the IRS, you do not need to send a copy of it with your return. Just don’t forget to include any interest you may qualify to deduct. 

Now, if you do not file a return that includes canceled debt as income on a 1099-C form, you must be able to prove that the sum is not taxable. This can be done by:

  • Attaching a statement of liabilities & assets or bankruptcy discharge forms to support your claim (in case of bankruptcy). 
  • Complete a Form 982.
  • Attach a letter to your return explaining your situation in detail (i.e., insolvency or bankruptcy). 

 

What’s the Difference Between a 1099-A and 1099-C?

Selling real estate comes with various tax forms that need to be filed, including 1099-A and 1099-C, which create a lot of confusion for everybody involved. Let’s help untangle this knot. 

When real estate property is either transferred or sold, you must notify the IRS using Form 1099-S (Proceeds From Real Estate Transactions). The seller receives this form to report the sale and help show whether there is a loss or gain on the property sale. The seller also receives this form in a deed of lieu of foreclosure and short sale. Nevertheless, when dealing with a foreclosure, the sale is involuntary, which is why no 1099-S is issued to determine whether there is loss or gain on the property sale. Instead, you (the seller) must report the property transfer via a 1099-A (Acquisition or Abandonment of Secured Property), which reports things like the:

  • Balance of principal outstanding on the transfer date.
  • Fair market value on the transfer date. 
  • Date of the transfer. 

Note that selling a property in a foreclosure auction is NOT always tied to zero capital gain. In certain situations, adjustments to cost basis may lead to a capital gain on such property sales, which may result in added tax liability that you might be unable to pay. 

Now, if a lender cancels or forgives a debt, be it a foreclosure, deed in lieu of foreclosure, or a short sale, it may involve the issuance of a 1099-C to report the cancellation of debt. Beware as the tax consequences are exactly the same for the cancellation of debt income, irrespective of where it is generated from (I.e., a foreclosure, deed in lieu of foreclosure, or short sale), as long as the forgiven debt is $600 or more. Certain exclusions apply that can eliminate or reduce the 1099-C sum from taxable income, such as:

  • Relief pursuant to the Mortgage Forgiveness Debt Relief Act – if the seller qualifies for it. 
  • Insolvency of the seller before having their debt canceled or forgiven.
  • Discharge of the debt in bankruptcy.

Do not hesitate to use our expertise and experienced tax professionals to help report these transactions on your tax return correctly. 

 

You May Be Able to Avoid Paying Tax on Canceled Debt

You may qualify for one of the many exclusions that enable you to reduce your taxable income from debts that have been forgiven or canceled. Here are some of the most sweeping ones:

  • Debts canceled when you were broke (IRS refers to this as being insolvent). It applies to the sum by which you are insolvent. 
  • Discharged debts in bankruptcy if you filed for bankruptcy protection.
  • Forgiven student loans after having worked for a period of time.
  • Canceled interest that would have been otherwise deductible (i.e., on business debt). 
  • The debt was canceled as a gift (usually from friends or family members).
  • Farm and business real estate-related debt that was canceled when you owned more than how much your property was worth at that time.   

It is paramount to let an experienced tax preparer handle this type of activity for you. If any of these exclusions apply to your case, you will probably need to file a Form 982 on top of the 1099-C. 

 

The Mortgage Forgiveness Debt Relief Act

The Mortgage Forgiveness Debt Relief Act (MFDRA) was passed in 2007 in an attempt to tackle the huge collapse of the real estate market that began in 2007. Congress decided that you may exclude up to $2 million for calendar years 2007 through 2020. This applies exclusively to forgiven mortgage debt, of course. The sum mentioned above relates to married individuals filing jointly. For other filing statuses, the amount that can be excluded is no more than $1 million. 

Note that you may benefit from the MFDRA for debt that was discharged in 2021. The only prerequisite is that you enter into a written agreement in 2020. This exclusion also covers mortgage debt that has been canceled in connection with a foreclosure or via a mortgage restructuring. 

 

Avoiding Tax Debt After Insolvency and Bankruptcy 

You might still be able to avoid taxation in case you have had your debt canceled, even if you receive a Form 1099-C if your debt was discharged in a Chapter 13, Chapter 7, or another Title 11 bankruptcy proceeding. This means that if your case falls under this category, you won’t have to pay taxes for your forgiven debt. 

Similarly, you can avoid taxes on canceled debt if you can show the IRS that you were broke (insolvent) when your debt was forgiven. 

Are you eligible for tax debt relief? Can you reduce or even eliminate your tax obligations after a 1099-C is issued to you? Give us a call or contact us for a free tax consultation and let’s discuss your options so that you can finally be relieved of your tax problems.  

Truck Driver Tax Deductions

truck driver owner-operator

Understanding how you and your trucking business are taxed is one of the biggest challenges for any owner-operator and truck driver. Using good planning and record-keeping all year round, though, can help you avoid any headaches in April. This guide will shed some light on truck driver taxes, deductions, and more.

 

How Much Tax Does a Truck Driver Pay?

Being an owner-operator means that you need to pay taxes yourself. This can be a major hurdle for those that were company employees before as they are now called to calculate and pay taxes that were once automatically withdrawn from their paycheck and then pay them to Federal and State agencies themselves. This involves making quarterly estimated tax payments that often range between 20-30% of their net income (the one earned per quarter). Doing so enables you to minimize any tax bill surprises while also avoiding tax penalties before Tax Day (usually in mid-April). In a nutshell, truck drivers need to pay three major types of taxes:

The first two are calculated on your tax return. If you are an employee, these taxes are being withheld from your check. Owner-operators will have to estimate and pay these taxes themselves. You can refer to >Tax-brackets.org to check cross-state tax brackets.

Now, when it comes to estimated tax payments, you will need to make quarterly payments if you owe more than $1,000 in taxes. This sum is, of course, the final amount you get after subtracting withholding and credits.

Note that owner-operators can show deductions or even file a tax return at the end of the year. So, estimating your business profit will show you (1) the required estimated tax payments you need to make, and (2) the due taxes when you file Form 1040. Your net profit is calculated with this equation:

Net profit = Gross pay (what’s on your 1099-MISC) minus allowable business-related expenses.

If you don’t file a tax return or show deductions, the IRS will determine what you owe in taxes without taking into account any potential deductions. This instantly means that the required tax amount will be significantly higher than if you had shown deductions or filed a tax return.

Are you a truck driver or owner-operator with tax debt?

We’ve helped many individuals just like you. Visit our Truck Driver Tax Help page to see how we can help you resolve your tax debt once and for all.

 

What Expenses Can a Truck Driver Write Off?

Let’s begin with Per Diem expenses, which refers to the assumed tax-deductible sum you spend on beverages, meals, and tips when on an overnight (always business-related) trip away from home. This one is deductible on IRS Schedule C for owner-operators and lowers your income and self-employment taxes owed on the return directly. Per Diem expenses are used by the majority of over-the-road truckers that are away from their home base most of the time as it saves them more money than gathering meal receipts. The only prerequisite is that you spend the night away from home.

Note, though, that you won’t be able to deduct your total Per Diem dollar for dollar. So, ensure you are familiar with the IRS regulations, though, as the laws and amounts change almost annually. According to the current rules, you can take 80% of the Per Diem expenses as a tax deduction.

Other accepted deductions are those referred to as ordinary and necessary business expenses. In general, these include:

  • Truck maintenance and supplies – You might be able to deduct these costs if you pay for them out of your own pocket (i.e., cleaning supplies, washer fluids, new tires, and oil changes). Note that if your employer reimburses you, you won’t be able to double-dip (hence, deduct these expenses).
  • Sleeper berth – Many truck drivers are not aware that they can deduct items from using a sleeper berth. These include first aid supplies, mini refrigerator, alarm clock, cab curtains, and bedding.
  • Electronic devices – You can deduct costs related to your cell phone from your tax return if you use it exclusively for work. CB radios and GPS units are also deductible costs.
  • Travel expenses – Besides overnight stay-associated expenses (including per diem and hotel rooms), you may also consider the standard meal allowance. This may vary per location, but the amount is higher for truckers due to the Hours of Service regulations. For the current amounts, check out IRS Publication 1542.
  • Professional association or union fees – Feel free to deduct fees you pay at a trucking industry organization or union from your taxable income.
  • Uniforms – If you need to wear a uniform and it is not paid for by your employer, then you can deduct the related costs. These include goggles, protective gloves, boots, and other specialized work gear. Also, when away from home, you may deduct cleaning expenses for your clothing.
  • Office supplies – These are deductible only if you use office supplies to keep track of your day or route and include from staples and maps to writing supplies, clipboards, and logbooks.
  • Depreciation – You can deduct specific property as expense (i.e., your truck(s)) if you use that property in service, per Section 179. Always consult a tax professional before determining how to deduct these expenses if you are an owner-operator, though. Deciding how to use the leveraged deduction when filing your taxes can be challenging. The standard (aka straight-line) depreciation for a new Class 8 truck either uses the accelerated depreciation or the multi-year formula.
  • Truck lease – The entire leasing amount of your monthly payments can be deducted. Note that you will probably see a higher deduction in the first 48 months due to depreciation. After three years or so, the truck purchaser will have little depreciation, which means that you will be able to see the reduced tax benefit. For the owner-operator who buys the truck, the tax delay is the net effect. In this case, the tax is not eliminated by depreciation – it is paid in the following years.
  • Other costs – These include expenses such as DOT physical exams, drug testing fees, driver license renewal fees, and sleep apnea costs.

 

Other Truck Driver Tax Write-Offs That You May Qualify For:

  • Lifetime Learning and American Opportunity tax credits – If you, your child, or spouse are attending college, you may qualify for partial reimbursement of the fees and tuition you pay for college provided that you have not received any scholarship or grant.
  • Child tax credit You may claim up to $1,000 for every offspring that is below 17 as long as the child lives with you (at least most of the time), and you cover at least 50% of their living expenses.
  • Child & dependent care – You may receive compensation for some of the costs tied to dependent or child care if you have children below 13 years of age. In the case of disabled spouses and offspring, though, the age limit does not apply (eligible regardless of age).
  • Earned income tax credit – This is a refundable credit that is based on your income and covers low- and middle-income individuals and families. You could get $6,000 or more in reduced tax credit with this one.

 

What Tax Forms Should Truck Drivers Use?

Filing a Form 1099-MISC (Miscellaneous Income) is the responsibility of self-employed truck drivers. You need to report that income, along with any expenses, on the IRS Schedule C (Profit and Loss from Business). You will also have to report your self-employment taxes and report them on your form 1040 if your net earnings are at least $400.

You should have received a Form W-2 for your job if you are a truck driver/employee and none of your job-related costs are deductible. In detail, the forms you will need to file your taxes are as follows:

  • Schedule C form – For statutory and self-employed drivers. It determines your business profit and loss.
  • W2 – For agents or commission drivers. Your Statutory Driver box in your W2 may have been checked. This form is also received by company truck drivers with a report of income and wages of the driver.
  • Form 1099 – To report miscellaneous income and applies to truck drivers working as independent contractors for a company.
  • Form 1040 or 1040A – This reports your individual income tax return. It is the standard federal income tax form.
  • Other forms for reporting your income if you are owner-operator – It depends on your records.

 

Tips for Filing Truck Driver Taxes

Here are some more details and tips for filing your taxes:

  • Don’t throw away your receipts. Hold on to them for at least five years.
  • Know the specifics related to your truck driver-associated deductions. Ask a tax professional to review your accounts if you need extra help, so you don’t over-claim or miss out on these deductions.
  • Be diligent about record-keeping to avoid penalties.
  • You can visit the IRS Publication 583 page for information about record keeping and kinds of records that you may not have been aware of that you need to keep.
  • You may also find useful information at the >IRS Trucking Tax Center.
  • Try to minimize your taxes contributing to a SEP, IRA, or 401(k) frequently, tracking personal vehicle miles, and benefiting from the available credits and deductions. Of course, getting assistance from a tax professional with experience helping truck drivers will help relieve some of the headaches and burdens.

 

Understanding the IRS Statute of Limitations

You have probably been bombarded with tips from your tax professional to hang onto copies of your tax returns and any relevant receipts and forms after you file every single year. The question that arises is, “Just how long do you need to save these copies and receipts?”. With a statute of limitations, you can now have a definite answer.

In a nutshell, this means that the IRS cannot look at your old tax returns after a certain number of years have passed. Hence, you cannot be audited after that time frame has passed. Unfortunately, the statute of limitations is largely dependent on whether you have indeed filed the return and whether you have included fraudulent information on it.

To help you better understand the details of the IRS Statute of Limitations, we have prepared this guide. Note, though, that this is basic information. For an in-depth assessment of your case, please contact our tax experts.

 

What Is A Statute of Limitations?

In tax law, a statute of limitations is one of the most critical deadlines for the assessment of tax. It gives the IRS an X-year window to assess your tax files and attempt to collect your unpaid taxes. Just how many years back can the IRS go to assess these files depends on several factors. The truth is, though, that once the given time period is up, the IRS is obliged to stop its collection efforts.

Nevertheless, there are several exceptions to the general rule (see below for details) according to varying federal laws. This means that, under certain circumstances, like, for example, failure to file a tax return, the assessing period is extended. In some cases, it never starts to run and remains “open” perpetually.

It is, therefore, crucial that you familiarize yourself with the current exceptions, so you know what to expect and what your rights and obligations as a taxpayer, in each case, are.

 

How Long Is the IRS Statute of Limitations?

The general rule dictates that the IRS has the right to go through your tax files up to 10 years from the time of debt assessment which is the date your tax return is processed (not filed or received). In other words, the IRS can legally try to collect unpaid tax debt for up to 10 years from when your tax return was assessed. After the end of this ten-year period, the IRS must cease its collection attempts.

Now, here comes the confusion. The IRC (Internal Revenue Code) that governs federal tax laws in the USA was also published under the U.S. Code Title 26. So, don’t be surprised if you often see IRC statutes being referred to as statutes of limitations (i.e., the IRC § 6501 and 26 U.S. Code § 6501 share, more or less, the same details).

Irrespective of the format, the regulations established by both sets of code affect millions of taxpayers, including recording the taxpayer’s tax liability, the deadline for assessing tax, and other statutes of limitations.

26 U.S. Code § 6501(a), in particular, mentions that the IRS shall assess a taxpayer that owes taxes within three years after the filing of the return, regardless of when the return was filed (on or after the prescribed date). The exceptions referenced in this code are set forth under 26 U.S. Code § 6501(c), and give the Internal Revenue Service extra time to assess taxes in the following cases:

  • Up to 6 years – If there has been a significant omission of items, like, for example, an omission of a sum over $5,000. Also, if a taxpayer does not share specific details regarding their personal holding company return.
  • Unlimited amount of time – In case of tax evasion (a willful or deliberate attempt on behalf of the taxpayer to evade taxes). Acting with a lack of due care and negligence are two cases when this time extension does not apply. The rule also applies when the taxpayer files inaccurate or false tax returns (intentionally to evade taxes) or when they fail to file a tax return.

It becomes apparent that the federal law gives the IRS all the time they need to assess tax (even decades) when a taxpayer engages in fraudulent or intentional acts (i.e., reporting untruthful information on their income tax return). For that reason, it is crucial that you understand that, say, lying to an IRS civil auditor or even worse, an IRS Criminal Investigation agent about the prior tax fraud or tax evasion (in cases where tax evasion or fraud is suspected) gives the IRS and IRS Criminal Investigation Division unlimited time to prosecute you, especially when the last affirmative act of tax evasion took place in the 5- 6-year criminal statute.

Important Note: Depending on the specific criminal tax statute, the IRS can criminally prosecute income tax evasion in the following 5-6 years after the tax evasion attempt has occurred. This is a major consideration as the IRS won’t be simply civilly assessing additional tax that has no statute of limitations after tax fraud has been identified.

 

When Does the IRS Statute of Limitations Begin and End?

The clock of the statute of limitations begins to tick on the date your tax return is assessed (NOT when it’s sent or received) or of your account’s last activity, which is usually the date you last used your account or the date you last made a payment. Nevertheless, it may also include the date you entered a payment agreement, made a promise to pay, or acknowledged debt liability.

However, take note that you may hear from a debt collector even after the expiration of the statute of limitations. According to law, they can file a lawsuit against you at any given time. In case you are being sued for old tax debt, your tax attorney can try to avoid a judgment being entered against you by using the expired statute of limitations as your defense mechanism.

So, if you have an old debt, knowing whether the statute of limitations has expired or not will help you decide whether to leave that old debt alone or pay it off. This involves being aware of when your tax debt was assessed/processed (NOT when you sent your tax return or when it was received) – you will need to have your tax transcripts pulled to know these details.

 

Tolling Events — Events That Pause the Clock on the Statute of Limitations

Under certain circumstances, the statute of limitations can be tolled. This means that the running of the time period stops until a law-specific event occurs. When that happens, the taxpayer gets a time extension since the period of time set forth by the statute of limitations is either being delayed or paused/suspended.

However, it’s important to note that the length of time the statute of limitations was paused for the tolling event will extend the statute of limitations expiration date. So tolling events simply pause the statute of limitations but don’t actually shorten it.

Examples of tolling events are:

Filing for Bankruptcy

According to Chapter 3, the taxpayer gets a 3-month pause while Chapter 13 gives them 3 to 5 years.

Requesting an Offer in Compromise

This one adds about 12 months. However, the extra time is added to the original statute of limitations expiration date.

Lack of Legal Capacity

It applies when one of the parties involved is under a legal disability (i.e., mental illness) that does not allow them to initiate a legal action on their own behalf at the time the cause of action accrues. Once the disability is removed, the statute of limitations will begin to run again and will not be affected by subsequent disability unless the statute specifies otherwise.

Unconditional Promise to Pay

Either a debt acknowledgment or an unconditional promise to pay the due debt may toll the statute of limitations for obligation or debt. You will have to wait until the payment established by the acknowledgment or promise to pay has arrived before the suspension of the lawsuit that enforces payment of the debt. The period of limitations will begin again upon that due date.

Cause of Action Has Been Concealed (Fraudulently)

In this case, the statute is suspended until the action is discovered via the exercise of due diligence.

Note: Mere ignorance, failure, or silence to disclose the existence of a cause of action does not generally toll the statute of limitations. This is particularly true in cases when the facts could have been earned by diligence or inquiry. The statute of limitations is also NOT tolled (unless otherwise provided by the statute) if the taxpayer is absent from the jurisdiction.

 

How to Use the Statute of Limitations To Your Advantage

Sometimes the best way to take advantage of the statute of limitations is to simply let it run its course. We’ll use an example to illustrate.

Let’s say you’re a truck driver and back in 2006 you received a 1099 for the amount of $200,000 but only netted $50,000 because of the high costs associated with driving a truck. You avoided filing your taxes for that year and so the IRS eventually sends you a tax bill based on the entire $200,000. In reality, you should only have to pay tax on $50,000. But because the IRS filed for you with NO tax deductions and due to added penalties and fees, your tax debt is now $70k–more than you even made that year!

So you do what most people do–you go to a local tax filing company and they file an amended tax return and get your tax debt reduced to a certain extent. But you also still have IRS penalties and fees to deal with. However, if you had simply allowed the statute of limitations to run its course, you would have ended up owing the IRS nothing.

The key, of course, is to know exactly when the statute of limitations began. You or a tax expert would need to pull your tax transcripts to know that information.

You could also file for what’s called “Currently Non-Collectible Status” or get set up on a Partial Payment Installment Agreement (PPIA) based on a hardship status and make, for example, $25-$50 a month payments to the IRS until the statute of limitations expires. However, we should tell you that it’s very very difficult for an individual to get set up on a PPIA dealing directly with the IRS; it’s something that you will need the help of a tax expert to do.

Irrespective of your particular case, it is strongly advised to be represented by knowledgeable IRS tax experts with experience in statute of limitations cases and ways to make the most of them. So if you are facing IRS tax debt and collection, contact us and we will be happy to provide you with a free initial consultation, answer any questions that have been troubling you, and help you get out of this undesirable circumstance you have found yourself in.

Tax Planning for the Self-Employed

old tax returns and tax debt

Being self-employed gives you a unique opportunity to be your own boss. However, this level of freedom comes with great responsibility. For starters, you are called to take charge of your own retirement plan and, of course, pay your own FICA taxes (Social Security and Medicare). This means that you must understand and comply with your federal tax responsibilities.  This guide will help you get a pretty good idea of what tax planning should look like for you. We will also share valuable insights and tips to help you minimize your tax obligations. 

 

What is the Self-Employment Tax?

In a nutshell, it is the way the federal government funds Medicare and Social Security benefits. The only case you are not obliged to pay this tax is when you have a minimal amount of self-employment income. The way your self-employment income is calculated varies depending on your business structure. For instance, if you are a sole proprietor, statutory employee, or independent contractor and file Schedule C, your self-employed tax is the net profit listed on your Schedule C (or C-EZ). This must be included on your Schedule SE. 

 

Minimizing your Tax Obligations

1. Choose the Best Business Structure

As it has already become apparent, identifying what business structure best suits your needs is important for the self-employed. This decision will not only determine how much you pay in taxes, but also affect (1) the personal liability you face, (2) the amount of paperwork required, and (3) your ability to raise money. Your individual circumstances will pinpoint the structure that makes the most sense, though. You can choose among the following business entities:

  • Partnership – You share the losses and profits of a business with two or more people. This means that you don’t bear the benefit of losses-profits or the tax burden of profits all by yourself. During tax time, each business partner files a Schedule K-1 form that indicates their share of income from the business, tax credits, and deductions. As for the losses, these are passed through to the partners, who report them on their individual tax reruns. On the flip side, each partner is personally liable for the business’ financial obligations. Plus, partnerships require more extensive accounting and legal services than sole proprietorships. Hence, they are costlier to establish. 
  • Sole Proprietorship – The most common business structure. It offers the owner complete managerial control and is very easy to form. Nevertheless, the owner is held responsible for all their business financial obligations. Tax-wise, a sole proprietorship business owner includes income and expenses from the business on form 1040 (their personal income tax return). The losses and profits are recorded on Schedule C (a tax form) that is then filed along with their 1040. Finally, the Schedule C “bottom-line amount” is transferred to their personal tax return. Worth noting is the fact that your business earnings are taxed once
  • LLC (Limited Liability Company) –  It is a hybrid form of partnership that enables business owners to benefit from the advantages of both the Partnership and Corporation forms of business (i.e., owners bear no personal liability, losses and profits are passed through to owners without taxation of the business). LLCs are great entities for tax purposes as they enable owners to enjoy liability protection skipping the double taxation of corporations. They also offer more attractions to business owners than S-Corps (i.e., no shareholder limitations. However, they usually dissolve after 30-40 years.
  • C-Corporation (or C-Corp) – It is a legal entity that is separate from the individuals that found the business. A corporation is taxed and held liable for its actions pretty much like a person (liability protection for the owners). This is perhaps the biggest advantage of going for a Corporation business structure – the owner does not have any personal liability. The extensive record-keeping required, alongside the cost to form a corporation, though, are the primary disadvantages. Plus, corporation owners pay a double tax on the earnings of the business. 
  • S-Corporation (or S-Corp) – You may choose the S-Corp (aka Subchapter corporation) structure that enables losses and income to be passed on individual tax returns (single-level federal tax to be paid). Usually, an S-Corp structure is offered to companies with no more than 75 shareholder returns and provides business owners with the liability protection of a corporation. 

The type of business format that best suits your requirements will primarily depend on the following three factors

(1) Record-keeping – How much paperwork is required? Are you up to it? Can you bear the cost of paperwork and record-keeping, along with the costs related to incorporation? Remember that administrative requirements like that can eat up your time, which can, consequently, create costs for the company. But, if you are benefiting from protection from liability and tax implications, a corporation is a good option. In any other case, you would be better off with a sole proprietorship, especially if you own 100% of the business. 

(2) Taxation – There are much fewer tax options available to partnership and proprietorship than to corporations. For example, a self-employed that receives a 1099 pays an additional self-employment tax. Those that do not make much is best to choose a sole proprietor business entity. As for those making at least $50,000 and are 1099’d, it would be better to create a corporation business structure, depending on the number of employees, business owners, and the size of the business. 

(3) Liability – To what extent do you need to be held legally liable for potential losses related to your business? Can you afford the risk of the potential liability? If not, then a partnership or sole proprietorship may best be avoided. 

2. Make Your Estimated Tax Payments on Time

This is a major consideration as it will help you avoid penalties. Ensure you (1) set up estimated tax payments and (2) make the required quarterly estimated tax payments (using Form 1040-ES) to cover both your self-employment tax and income tax liability. Note that you may also need to make estimated tax payments to avoid getting penalties and receiving a big tax bill at the end of the fiscal year. And, don’t forget your periodic tax responsibilities if you have employees (see IRS Publication 15 for more information). The IRS has an automated payment system called EFTPS that you can use for your payments. We strongly advise you to opt for monthly payments as it is easier to stay current than with quarterly payments. This also helps prevent the IRS from penalizing you for not paying your due (quarterly) tax on time. 

Tip: You can save taxes by employing family members (not minors), which allows you to shift income to your relative. That way, the business takes a deduction for employee compensation (ensure it is a reasonable amount), which reduces the business taxable income that flows to you. 

3. Establish an Employer-Sponsored Retirement Plan 

This will not only allow you to take care of your own retirement needs but also provide you with several tax benefits by enabling your business to be eligible for an immediate federal income tax deduction (expenses to fund the plan). Such employer-sponsored retirement plans worth considering are SIMPLE IRA, SEP, SIMPLE 401(K), Keogh plan, and Solo (or one participant or individual) 401(k). Note that until you withdraw earnings and contributed funds, you will not need to pay any federal income tax. IRS Publication 560 has more details about these schemes. You may, however, call us and let us guide you appropriately. 

4. Take Advantage of Business Deductions

Your business is entitled to deductions that reduce your taxable income. Make sure you use every single one of the offered deductions to deduct business expenses, including equipment costs, utilities, office expenses, and rent. Just ensure your business expenses are considered necessary, common, and accepted in your business or trade. Also, using the cash method of accounting allows self-employed taxpayers for greater maneuverability at the end of the year. 

Tip: You may also deduct self-employed healthcare-related expenses (up to 100% of the health insurance cost you provide for yourself, your dependents, and your spouse). Note that your contributions to HSA (health savings account) are also deductible. 

 

Two Effective Ways to Sidestep the 13.25% Self-Employment Tax

1. Become  a Partnership. 

The first would be to become a partner and make K1 distributions (aka guaranteed payments) to yourself.

2. Become an S-Corp.

The second option is to become an S-Corp. Whichever business structure you choose will enable you to sidestep the self-employment tax.

Here’s a savings example to get an idea of what we are proposing here:

Let’s assume that you make $100K and write $50K for business expenses. According to the current federal tax laws, you will be called to pay around 20% tax PLUS the 13.25% self-employment tax. As an S-Corp, though, you will NOT have to pay the 13.25% tax – the profit would be a K1 distribution. 

Important notes:

  • You must file an 1120-S. 
  • Ownership pulls must be consistent (for example, $5K every month).
  • The IRS wants to see one or more W2, which could be yourself. 

 

Make Sure You Do Your Bookkeeping

You may either want to outsource bookkeeping or use platforms like QuickBooks. When it comes to calculating estimated payments and paying the right tax amount on time, bookkeeping with the help of a software or by trusting a reliable and experienced tax accountant makes things far easier. 

As you can see, there are legitimate (aka legal) ways to save money on your taxes while being self-employed.  It’s simply a matter of planning well, staying on top of things and taking advantage of all possible tax savings strategies.

 

What Is An IRS Revenue Officer & What Do They Do?

IRS Revenue Officer on the way to visit a business

Dealing with an IRS Revenue Office can be a challenging and, sometimes, even nerve-racking experience, especially when one shows up at your business or house doorstep unannounced. However, most of the time, these feelings of anxiety and stress are misplaced.

This guide will shed some light on the details surrounding IRS Revenue Officers, what exactly they do, and what to do if one contacts you. We also dispel some common myths and share some handy tips and information so you can use the acquired knowledge to your best advantage. 

 

What Does an IRS Revenue Officer Do?

Often confused with an IRS Revenue Agent, an IRS Revenue Officer is responsible for collecting money (taxes). They are civil employees employed by the IRS Field Collection office and collect taxes by interviewing taxpayers and running asset checks. If they cannot make contact with a taxpayer, they will work with third parties to gather the information they need. 

The general powers of an IRS Revenue Officer include:

  • Finding liens against you.
  • Interviewing 3rd parties about you.
  • Summoning records.
  • Issuing levies. 
  • Commencing seizure proceedings against you without needing a court order (see notes below). 
  • Referring you to the IRS CID if required. 
  • Levying any receivable accounts, bank accounts, subpoena documents, wages, or retirement funds. 

Remember that an IRS Revenue Officer is assigned to specific cases, not just any tax-debt-related case. In the overwhelming majority of cases, an IRS Revenue Officer will visit you if:

(1) The tax issue is associated with your business.

(2) Your tax debt is from older tax years.

(3) Your tax debt exceeds $100,000. 

 

Things to Know:

  • IRS Revenue Officers (1) do NOT carry weapons, (2) can NOT investigate you criminally, and (3) have absolutely NO right/authority to arrest you. 
  • Their badge is usually a plastic lanyard as opposed to that of an IRS Criminal Investigation Divisions (CID) officer, which is golden. 
  • An IRS Revenue Officer has a limited ability when it comes to seizing a taxpayer’s home, thanks to the Revenue and Reform Act of 1998. 
  • Anybody with a 4-year degree (not necessarily with a financial-related background) can get a job as a Revenue Officer. Before one visits you, though, they undergo months of (initial) training, and then ongoing training. 

 

What’s the Difference Between an IRS Revenue Officer and a Revenue Agent?

As already mentioned before, an IRS Revenue Officer collects taxes. Interestingly, they are not graded based on the sums they collect rather than how quickly they close cases. Although this is not always in the taxpayer’s favor, there may be cases when a taxpayer and a Revenue Officer have common goals and aspirations – for the case to be over and done with. 

IRS Revenue Agents, on the other hand, are assigned a different task – that of auditing taxpayers. So, the person that will collect taxes from you is NOT the same individual as the one who performs the audit. 

How Things Work – The Drill

As soon as the IRS assesses the tax, you will be called to pay the due amount (i.e., withholdings and unpaid employee taxes for business owners). If you cannot pay, the IRS will send out several notices. Then, the IRS will make contact with you to identify who is to blame for the underpayment. In doing so (most of the time, at least) an IRS Revenue Officer will visit your business and seek to assess the TFRP (Trust Fund Recovery Penalty), which is another word for the taxes, against as many taxpayers as possible. 

Therefore, you can understand that it is not just you, the business owner, who is at risk for a TFRP assessment – it includes everybody else also managing the finances of the company. It is worth noting that many times, these assessments reveal employees embezzling money from the business.  

Note: Depending on the amount of due tax, your collection case may as well stay with the ACS (Automated Collections System). This also happens when a taxpayer owes money to the IRS. In this case, you may never see an IRS Revenue Officer coming your way. Instead, you will be sent notifications of past due balance. If these are ignored, the IRS will try to collect the owed money via wage garnishments, bank levies, and liens. 

 

What To Do If an IRS Revenue Officer Contacts You

Nine out of ten times, the IRS Revenue Officer will try to determine your ability to pay. That aside, though, they may even investigate you for a TFRP assessment that you have not paid (this usually happens when you have unpaid employee taxes). No matter the reason why an IRS Revenue Officer shows up at your business, we strongly recommend ensuring you get the best representation possible. This can come from an individual that is helping you with this tax matter. You may, however, need a more robust representation, such as a lawyer or tax attorney (many taxpayers seek legal advice before giving an IRS employee any testimony). 

Keep in mind that things are usually fairly serious, especially considering that the IRS has half the field officers they used to have ten years ago. So, there must be a very important reason why you were assigned an IRS Revenue Officer. And, don’t think even for a second that the IRS will take it easy on you. 

When a Revenue Officer visits you for the first time, they should identify themselves by showing their ID (remember, badge carriers are usually from the Criminal Investigation Department). If you are certain that you don’t have fraudsters in front of you, you can sit down with the Revenue Officer and hear the “collection alternative” (i.e., Offer in Compromise) they have to offer you. If you agree to the proposed terms (meaning, a reasonable agreement is presented to you), you put everything behind you. If not, refer to the next section for the appropriate course of action.

In any case, you may want to consult with your tax professional before the IRS Revenue Officer pays their visit. Experienced tax representatives can be of significant assistance to you as they will:

  • Help you figure out your options.
  • Come to the negotiation table with the IRS agent knowing what to do. 
  • Deal with your IRS Revenue Officer and get a better agreement for you (than you). 

Tips:

  • Be honest with your Revenue Officer. You don’t want to annoy them by doing things like incurring a lot of new liabilities or hiding your assets while dealing with them. Just work with them. 
  • Cooperating with an IRS Revenue Officer does NOT mean that you must push yourself into something without considering the “aftermath” and consulting a tax professional. 

 

What To Do If You’re Getting Nowhere With the Revenue Officer

If the IRS Revenue Officer is being unfair or things show that you two will not see eye to eye anytime soon, you could:

  • Speak with their Group Manager (but do not keep your hopes up that they will take your side).
  • Address the Territory Manager (a step above the Group Manager). In this case, ensure you can prove that the IRS Revenue Officer did not act correctly. Otherwise, it may get you into deeper waters. 
  • Wait until you receive a Notice of Federal Tax Lien, Notice of Levy, or a notice proposing a levy and request for a CDP (Collection Due Process) hearing. Then, you or your tax representative can negotiate a better deal with a settlement officer. This action also puts the brakes on the revenue officer, who can do nothing while you appeal. 

Note:

  • It is required by law an IRS Revenue Officer makes their first contact in person, so do not expect a heads-up phone call. 
  • An IRS Revenue Agent will most likely notify you that you are under examination by sending notices to you before a field agent schedules their visit to your business or home. 
  • If you are being visited by an IRS CID officer, call a tax attorney immediately. 
  • If an IRS Revenue Officer or field agent leaves a note or business card on your door, use the contact information on the card and have your representative (i.e., tax or law firm) get in touch with the Revenue Officer. You are either being assessed for (probably) an underpayment of employee withholding or have a tax debt. 

 

The Best Course of Action to Take with a Revenue Officer

Your best bet when an IRS Revenue Officer visits you is to hire a tax professional or tax attorney to help you with your tax issue. Unlike what many people think, this does NOT make you look “guilty” in the eyes of the IRS agent. In fact, most of the time, IRS Revenue Officers admit being glad the taxpayer hired a tax or legal representative because they, as government employees, are not allowed to give any advice (legal or otherwise) that could help resolve your case in an instance. Indeed, the best IRS Revenue Officers want you to be well taken care of and represented. 

But, even if an IRS agent tells you that it is a waste of money and time to hire representation (“You could use the money you pay the tax prep company to repay your taxes”), you definitely need somebody that is 100% on your side. No matter how great a guy an IRS Revenue Officer is, they are still far from being your advocates – their position does not give them such liberty. Nor can they offer tax-related or legal advice. Plus, you will most likely be visited by a government employee that enjoys mowing over taxpayers. It is always good to know that you can get some control back into your own hands with the help of tax experts or legal representation. Plus, you can likely save a great deal of money!

 

Finally, remember that…

IRS Revenue Officers and Agents are ordinary people like the rest of us. This means that they, too, have good and bad days. They also have a significant workload they are called to manage every single day. This can force them to make decisions and offer agreements that may not be of your best interest.

Without a doubt, though, having to handle the stress and anxiety that comes with back taxes and the presence of an IRS Revenue Officer at your premises can lead to even more trouble and problems. For that reason, it is best to ensure you have a tax professional to help you resolve your issue and have your rights as a taxpayer well protected. 

 

The Differences Between Tax Attorneys, CPAs, and IRS Enrolled Agents

team of tax professionals

With tax season usually being a challenging time for most businesses and individuals, you definitely need all the help you can get, whether you have let years of tax debt add up or are about to file complex taxes for the first time. Irrespective of your tax case, it is paramount to entrust the right tax professional, especially if you are called to cope with tax debt. 

Fortunately, in this “battle”, you are not alone. In fact, you have plenty of options, with the most popular ones being tax attorneys, certified public accountants (CPAs), and enrolled agents. Although they all help taxpayers, each has a different role. The status of your case with the IRS (Internal Revenue Service), as well as your unique goals and needs, will determine which tax expert you need to partner with. Read on to figure everything out so you can make the most informed decision. 


What Is a Tax Attorney and What Do They Do?

A tax attorney is a legal professional that has passed the state bar exam. They are law degree holders and specialize in tax law. Therefore, a tax attorney is the better choice if you are in trouble with tax authorities (i.e., you face levies or tax liens or owe thousands in back taxes) and need to deal with the legal aspect of tax preparation

A tax attorney will represent your best interest in IRS communication, pretty much in the same way a CPA (Certified Public Accountant) and Enrolled Agent (EA) will. However, tax attorneys have undergone many years of training and education in fields like dispute resolution and tax controversy, and know not only how to represent their clients during IRS proceedings, but also how to go up against the IRS when adverse tax actions take place. Plus, they are uniquely equipped to undo property liens, halt wage garnishments, come up with compromises with the IRS, help with unfiled returns, settle back taxes, and handle all legal tax matters you might be dealing with. 

Note: It is best to find a tax attorney that specializes in the specific type of tax help you need (i.e., tax attorneys with expert knowledge on estates and trusts). 

 

What Is a CPA and What Do They Do?

A Certified Public Accountant (CPA) has:

(1) 150+ hours of education, 

(2) a 5-year business degree, and 

(3) passed the intensive CPA exam.*

* The CPA exam consists of four sections (1) Regulation, (2) Financial Accounting & Reporting, (3) Business Environment and Concepts, and (4) Auditing & Attestation), totaling 1,000 questions. 

CPAs are more experienced and knowledgeable in tax preparation rather than a tax professional you would see for simple things. So, a CPA makes a good fit if your tax situation is complicated (i.e., you have high net worth investments, have children, are divorced, and own a business). Allowing a CPA to prepare your taxes, in such cases, is probably the best course of action you can take, especially if you have a lot of money coming in and out. Also, tasks like undergoing audits, creating a financial plan, and paying quarterly taxes are easier with a CPA, who can:

  • Assist you with monthly and yearly accounting services. 
  • Come up with a long-term tax plan.
  • Help you carry it through. 

At the end of the day, a CPA will make the tax process simpler for you year after year, especially if you develop an ongoing relationship with one.

Let’s also note that a CPA is required to complete 120+ hours of continuing education every three years while the average tax preparation professional has undergone between 60-80 hours of training. Plus, CPAs know how to comply with the federal laws and still maximize benefits while minimizing your tax liability. 

 

What Is an IRS Enrolled Agent and What Do They Do?

An IRS Enrolled Agent (EA) is a tax professional that can help you with your personal and business tax returns, except for Tax Court, where you need a tax attorney to represent you before the IRS.   A registered agent knows the ins and outs of the IRS because they are required to have worked for the IRS for a minimum of 5 years.

An enrolled agent’s role is pretty similar to tax attorneys and CPAs. Back in 1913, the responsibilities of an Enrolled Agent included claims for monetary relief for taxpayers with inequitable taxes. Over the years, the sources of tax collections (i.e., gift, estate tax, income tax, etc.) became even more complex, which gave additional duties to EAs, including tax preparation and taxpayer advocacy. 

Given that an IRS enrolled agent’s enrollment is a federal designation, Enrolled Agents have the right to work across state borders – something that tax attorneys and CPAs cannot do without meeting the desired state’s reciprocity requirements. 

To become an IRS Enrolled Agent, one needs to pass a 3-part comprehensive IRS test* that covers business and individual tax returns. This test is significantly different from the one CPAs sit, as it is on tax law. On the other hand, the CPA exam is almost exclusively on auditing procedures and rules, as well as accounting and designed to make the interpretation of financial statements easier. This interpretation, though, does not refer to how taxes are calculated rather than how to present tax obligations in the financial statement.  

Nevertheless, prior experience as an IRS employee can also earn them Enrolled Agent status. Once they become classified as IRS Enrolled Agents, they need to complete 72 hours of a continuing education course every 36 months. Finally, all IRS Enrolled Agent candidates are subject to being thrown out (disbarred) from practice before the IRS if they have been found to perform illegal acts. For that reason, background checks are performed on Enrolled Agents on a regular basis. An Enrolled Agent can also be removed from their duties if they fail to meet the continuing education requirements. 

Note: IRS Enrolled Agents cannot perform all kinds of audits. According to regulations, they are not allowed to express an unqualified type of opinion (i.e., when a public company files their financial statements with the SEC – Securities & Exchange Commission). Also, EAs are not required to have prior knowledge of tax preparation. It is up to them if they will be preparing tax returns or not. 

*An EAs exam consists of (1) Tax Code for Individuals, (2) Tax Code for Businesses, and (3) Representation, Practice and Procedures (100 questions each).  

 

What’s the Difference Between a Tax Attorney, a CPA, and an Enrolled Agent?

As already mentioned above:

  • Certified Public Accountants (CPAs) are accounting experts, with one of their specialties being tax matters. They are fully capable of doing basic tax returns, provided no extensive legal analysis is required. 
  • Enrolled Agents (EAs) are particularly skilled tax practitioners authorized by the federal government and empowered to represent their clients before the IRS. They can handle tax audits, tax appeals, tax collections, and relevant matters, and are a great option for basic W2 tax preparation. 
  • Tax Attorneys are law specialists who can represent in court (but not always deal with the IRS). They are the best choice if you need assistance with complex tax-related matters (i.e., you are being audited or receive an IRS notice). 

All in all, your particular tax matter will help determine whether it would be best to hire a tax attorney, enrolled agent, or a certified public accountant. 

Seek the assistance of a CPA if:

  • You are called to figure your way through minimizing your tax liability while dealing with complex business or personal taxes. 
  • Need basic tax preparation. 
  • Want to be represented for a state or federal issue in any of the 50 states (for IRS representation and tax resolution). 
  • Want a qualified tax professional to handle highly complex financial statements.
  • Wish to get your audited financial statements and accounts in order. 
  • You are NOT focused purely on taxes. 

Seek the assistance of a tax attorney if:

  • You are involved in a tax controversy issue or are receiving debt collection notices or are, in any way, in trouble with the IRS.
  • You are a breath away from receiving a levy on your wages or bank accounts. You should be able to know this if your case has been assigned a revenue officer by the IRS. In this case, do turn to a tax lawyer to get valuable advice (and professional help) on how to protect your rights and stay out of trouble. 
  • You face tax fraud allegations or owe taxes. This is when you definitely need legal representation in discussions and negotiations with the IRS by a tax attorney. 
  • You have been contacted by the Criminal Investigation Division and are facing tax-related criminal charges, such as evasion or fraud. 

Seek the assistance of an IRS Enrolled Agent if:

  • You need basic tax preparation.
  • Want the most cost-effective solution. 
  • You are not involved in a tax dispute.
  • Need cross-state representation. 
  • Need a simple IRS status check.
  • You want a tax professional for routine matters, such as miscellaneous tax filings and tax planning
  • Need representation before any administrative level of BOE, IRS, CDTFA, FTB, EDD tax agencies. 
  • Want a tax professional to handle issues like IRS appeals, delinquent unfiled tax returns, back tax settlements, employment 941 payroll, liens, garnishments, levies, collections, and tax audits. 

 

So What is Innovative Tax Relief?

Most tax professionals fall into one of the three above categories. Our team at Innovative Tax Relief, however, includes all three! We are an IRS Enrolled Agent and have on staff tax attorneys and CPAs. So regardless of the tax issues you’re dealing with, we can help you.  

Get in touch with us for a free consultation with one of our tax experts and start finding some relief from your tax problems today.

Understanding Tax Returns

tax return

The tax return season usually causes headaches to many individuals, self-employed and corporations alike. Buzz words like tax returns, Form 1040, Form 1040X, Form 1120S, and Schedule A only come to confuse things some more. This comprehensive guide sheds light to key must-knows so you begin to have a clearer idea of tax preparation, tax returns, and what is required from you. 

 

What Is a Tax Return?

A tax return or income tax return is a document that you need to file with either the state tax board or the IRS (Internal Revenue Service) which reports your income, as well as your deductions (i.e., your business profits and losses) and other details about your tax liability or tax refund. A tax return allows you to:

  • Request a refund for tax overpayment.
  • Schedule tax payments.
  • Calculate your tax liability

Tax returns are filed annually for any business or individual with capital gains, interest, wages, and other reportable income/profits for the previous year, with the deadline being April 15. A tax return has the following three major sections:

  1. Income – It lists all your income sources. You need to report royalties, self-employment income, dividends, and wages, usually using a W-2 form. 
  2. Deductions – Things like interest deductions on specific loans, alimony paid, and contributions to retirement plans are typical examples of deductions that decrease tax liability. The final list, though, varies among jurisdictions. In general, the majority of business operations-related expenses are deductible (for business owners). You can also choose to itemize your deductions instead of using the standard deduction for your filing status.  
  3. Tax credits – These refer to the sum of the owed taxes or the amounts that reduce tax liabilities. More than often, education, pensions, and the care of dependent seniors and children are also attributed tax credits. However, they, too, vary among jurisdictions. 

At the end of the fiscal year and after filing your tax return, you will be able to tell whether you owe taxes or have overpaid taxes (hence, need to be refunded). If you choose not to get your overpaid taxes amount back, it will roll into the next tax year. Now, if you owe taxes, you can pay your debt in monthly (or quarterly) installments or as a single payment. As for self-employed individuals, most of them can reduce their tax burden by making advance payments every quarter

 

What Types of Tax Returns Are There? 

Of the many federal income tax return forms, the most commonly used ones are:

Form 1040 (for Individuals) 

Form 1040 is a long form, which means additional paperwork needs to be filed due to the many tax credits that show up only there. You can consider choosing this form if you (1) itemize deductions, (2) have other income to report, (3) have more complex investments to report, and (4) your earnings are larger. Nevertheless, this extra work that needs to be done with Form 1040 is offset by the extra savings specific credits can produce for you (i.e., taxes paid on a foreign country). Plus, you have a wealth of deductions ready to be claimed directly on the form (no adjustment needed) which enables you to reduce your gross income (i.e., alimony payments, incurred moving expenses, and self-employment taxes). This, in turn, can help you lower the income sum that will be eventually taxed. 

You should file Form 1040 if:

  • You have received income from a property sale.
  • You are self-employed.
  • You itemize deductions. 
  • Your combined incomes (for joint filers) or your personal income is over $100,000.

Important note: If your current situation is different from that of the previous year(s) (i.e., you can make itemizing more profitable for you because you now have more deductions), you will probably need to file a different form. There is no obligation to continue using a particular income tax form just because it suited you in the past. 

Form 1040X (for Individuals)

This is a form you need to file if you (1) found out that you qualify for credits or deductions you didn’t take or (2) have spotted an error on a tax return or (3) your tax return is missing some income. In other words, Form 1040X can be considered your formal claim for a refund. 

Preparing a Form 1040X does not necessarily require the completion of a new tax return. You only need to update the numbers that should be altered. Remember that you can amend your taxes if you have prepared your original tax return using Form 1040, 1040-SR, 1040A,1040NR-EZ, 1040NR, 1040EZ-T or 1040EZ. For business owners with net operating losses in one of the next two tax years, Form 1040X can help carry back these losses. Any refunds will show after 8-12 weeks from the time you made the amendment. 

To prepare Form 1040X, you need any documentation that relates you to the changes you have made (i.e., proof of payment for a newly claimed deduction) and a copy of your original tax return (the one you wish to amend). Beware, though, that you can file an amended tax return either within 24 months of actually paying the tax for that year or within 36 months of the original filing deadline. Depending on the circumstances, you may have more than three years, though (i.e., incapacitated individuals). 

Form 1040EZ (for Individuals)

The Form 1040EZ is the simplest IRS form (a single page), but limits your options when it comes to ways you can save on your tax bill as it restricts you to claiming the tax break called EITC (earned income tax credit), which has been designed to help out individuals with a low income. That being said, you should file it if:

  • Your interest income is below $1,500.
  • Your combined incomes (if a joint filer) or single income is no more than $100,000.
  • You are married but filing jointly, or single.
  • You have no dependents.
  • You are younger than 65. Note that in case you file a joint return, your spouse should also be below 65 years old. 
  • You are not legally bound during the previous tax year (this applies to your spouse, as well, if filing jointly). 

Form 1120 (for C-Corporations)

C corporations, as well as LLCs that file as corporations need to file their income taxes via the Form 1120. After successfully completing Form 1120, you will have a pretty good idea of how much the corporation will be called to pay in taxes. Remember that you will be required to pay quarterly estimated taxes rather than all the money in one lump sum. 

To file Form 1120, you need to enter:

  • Your total income.
  • The date you incorporated.
  • Your EIN (Employer Identification Number).
  • Your capital gains and earned royalties. 
  • The COGS (Cost of Goods Sold).
  • The gross receipts.
  • The total assets held by your corporation.
  • Any interest and dividends earned.
  • Your tax deductions
  • The business tax credits for which you want to apply. 

Form 1120-S (for S-Corporations)

If you are a corporation with an elected S status, you need to file a Form 1120-S tax return annually. In this case, the reported income usually flows through directly to you, the business owner. This means that these companies do not need to pay tax at the corporate level since any reported income is taxed on the business owner’s Form 1040 tax returns. For that reason, the individual does not pay additional taxes on their Form 1040 returns. 

Form 1065 (for Partnerships) 

This is typically filed by partnerships once a year and contains information related to their income, credits, deductions, losses, and more. The particularity of Form 1065 is that it has no federal tax (most of the time, at least). This is because the partners report income flows on their personal tax returns. 

 

What is a 1040 Schedule A?

Those considering to itemize their taxes will need to attach an IRS Schedule A to their Form 1040 so they can claim itemized deductions on their tax returns. For those not familiar with what itemizing taxes is, let’s say that instead of taking the flat-dollar standard deduction, you can choose from the many individual tax deductions out there at tax time. If the amount of your itemized deductions exceeds the standard deduction sum, you save money. for your reference, the standard deductions for 2020 tax year were as follows:

  • Single filing status ($12,400).
  • Married or filing jointly ($24,800).
  • Married or filing separately ($12,400)
  • Head of household ($18,650)

Schedule A is divided into the following sections (each having several subsections):

  • Medical and dental expenses.
  • Casualty and theft losses (in a disaster area declared as such by the federal government or of certain property that produces income).
  • Gifts to charity.
  • Interest you paid.
  • Taxes you paid.
  • Other itemized deductions (i.e., gambling losses, amortizable bond premiums, etc.).
  • Total itemized deductions.

As soon as you have tallied the itemized deductions you wish to claim, you should enter them (the total sum) on your Form 1040. Also, expect to be asked to provide:

  • Form 1098 to show the interest you paid for the year (ask your mortgage lender for it).
  • Your sales tax records.
  • Your state income tax records.
  • Your property tax bills.
  • Any charitable donations records.
  • Receipts for medical expenses that have not been reimbursed. 

 

What is a Schedule C? 

An IRS Schedule C (headlined Profit or Loss From Business (Sole Proprietorship)) is usually filed by self-employed individuals who need to report how much money they lost or made in their business. Schedule C must be completed and then attached to your income tax return. In the majority of cases, you will also be required to fill out Schedule SE (Self-Employment Tax) along with the five-part Schedule C. 

Note that sole proprietorships are companies that do not have a Partnership or Corporation status. They are small businesses operated and controlled by their owners rather than a legal business entity. It does not matter if you have employees or not (or even an office). As long as you get paid for work that you do, you run a sole proprietorship, provided that you earn at least $400 of net profit annually. 

 

What is a Schedule E? 

Schedule E is prepared by those that have income reported on a Schedule K-1 from an S corporation or partnership, receive royalties, build their own home, or earn rental income. You will need to report both your personal tax return and the gross income and losses from these activities. Depending on the type of activity you do, you should include different things. 

For example, for rental income, you need to report prorated rents when you bought the property, the refunds you have received for utilities, and the rental income. As for some of the expenses, these can include marketing and advertising costs (i.e., the cost to advertise on certain publications or sites), travel costs needed to maintain your rentals, cleaning and maintenance costs, repairs, depreciation expenses, and more. 

 

How Long Should You Keep Your Tax Returns? 

According to the IRS, just how long you need to keep your tax returns depends on several factors, such as the event, the type of expense, and the action the document records. Generally speaking, it is best to maintain a record of your tax returns for three years after you filed the return or, at least, until the period of limitations for the particular tax return (the item of credit, deduction income shown on the tax return) ends. 

However, we strongly advise taxpayers to keep records of their tax returns indefinitely if they have filed a fraudulent return or do not file a return at all. That being said, keeping copies of your filed tax returns will make preparing future tax returns much easier for you, in case you want to file an amended return. 

All About Tax Penalties

dealing with tax penalties

Tax Day is the date by which you need to submit your individual tax return to the IRS (usually April the 15th each year). If you have all the money to pay your debt, then all is great. But, what happens when you lack the necessary funds? In this case, the IRS may charge tax penalties. The same applies to some other occasions.

All of that will be discussed in depth here, so you know exactly what to expect and what to do if you are called on by the IRS to pay tax penalties. 

 

What is a Tax Penalty?

The IRS charges both interest and penalties in several different instances. For example, you will be called to pay some additional costs for:

  • Failure to file – This means that you did not manage to file your tax return by April 15. Do note, though, that you can request a deadline extension. If it is approved, you won’t be charged any failure-to-file tax penalties. 
  • Failure to pay – You don’t have the money to pay the taxes on your return or are unable to make the needed payment before the expiration of the due date (April 15). Beware, in this case, because you will still have to pay your taxes within the given deadline even if your deadline extension (to file your tax return) request has been approved. 
  • Failure to pay tax – If you don’t make tax payments as you earn income (quarterly), you are penalized for late estimated tax payments. 
  • Dishonored check – You have submitted a preferred payment form (i.e., check), but your bank does not honor it.  Or in other words, your check bounces. 

If you owe money to the IRS, the Internal Revenue Service will send you a Notice of Tax Due and Demand for Payment, which includes not only the owed taxes but also the penalties and interest. 

 

What is The Penalty for Filing Taxes Late?

There are two different scenarios here, according to the Internal Revenue Code §6651(a)(1). 

If you owe taxes and fail to file your tax return on time, the IRS will start charging 5% of every unpaid tax you have to report on your return for every month you are late to file (0.5% for not paying and 4.5% for not filing). The total penalty you may be asked to pay for not filing taxes on time can add up to nearly 48% of the tax owed, plus interest. 

So, basically, the IRS begins to accumulate charges in your name. If you are more than 60 days late, the minimum penalty you will be called to pay equals to the lesser of two sums – either a specific dollar amount (for 2020, it is set at $435) or 100% of the tax required to be paid on your return (plus interest). 

Now, if you are expecting a tax refund and do not file your tax return within the due date, you won’t be charged any fees. However, you won’t be able to receive your refund until you do file your tax return.

Bear in mind that the late filing penalty is NOT the same as the penalty you get for making late payments. You are charged a late filing penalty when you don’t turn in essential tax documents on time, such as your Form 1040. The late payment penalty is applied when you are late in making your tax payments and is 0.5% of your unpaid taxes for every 30 days you do not pay your outstanding taxes. 

 

What is the Penalty for Not Filing Taxes?

If you fail to file, the IRS may file a substitute return for you, which will NOT include your standard deductions included in your return. The only exception to the substitute return is married filing separately or single filing. Under IRC § 6651(a)(1), the penalty is 5% of the due balance, plus an extra 5% for every 30 days (or a fraction thereof) during which you continue to fail filing taxes. The maximum penalty is 25%. 

Notes:

  • As soon as you pay your balance, both interest and penalties stop accruing. 
  • Even if you pay your tax in full before the month ends, the IRS will still apply full monthly charges. 
  • If you cannot pay your balance in full, you could apply for an Installment Agreement to help repay the remaining debt
  • You may be eligible for penalty relief if you have complied with the law requirements but were not able to meet your obligations toward the IRS. 
  • If you disagree with your balance, you can call 1-800-829-1040. Make sure you have all the required paperwork ready (i.e., amended return, canceled checks, etc.) when you make that call to the IRS. 

 

Do You Have to File Taxes?

You must file a tax return if you:

Note that for individual taxpayers under 65 years of age, the standard deductions are $12,000 (single filers), $24,400 for joint filers, and $18,350 for single parents (2019 IRS rules). For single filers over 65 years old, the amount climbs to $13,850 or $20,000 if you are the head of the household. For joint filers where one or both spouses are over 65, the deduction is $25,700. 

 

How is the Tax Underpayment Penalty Calculated?

Taxpayers in America pay taxes the moment they make money rather than a lump amount. And, they can pay taxes either by making estimated tax payments or via withholding. The penalty for underpayment of estimated tax is usually applied to individuals that have skipped some tax payments the previous fiscal year. To put it simply, a tax underpayment penalty is a penalty that you owe if you fail to pay enough in estimated tax payments or through withholding during the year. 

Failure to pay proper estimated tax usually comes with a penalty if you owe at least $1,000 when you file the return, per the Internal Revenue Code §6654. You might be able to make unequal payments and annualize your income as a means to lower or even avoid the penalty, though. This typically happens when you receive your income unevenly during the year. 

In some instances, you can waive this penalty:

  1. Your tax payments were (1) 90% or more of the tax liability during the year or 
  2. Your tax payments were 100% of the tax liability of the previous year. 
  3. You did not make a payment due to an out-of-the-blue event, such as a disaster or casualty. 

The IRS may also waive a tax underpayment penalty for retirees over 62 years of age or individuals that became disabled either during the current or the previous tax year. Some exceptions apply for some household employers and fishers. Ask us to give you all the details or read the IRS Publication 505

The IRS calculates your penalty for every installment separately, where they first determine the number of days you are late and then multiply that number by the interest rate that is effective for the installment period. However, you may also check whether you owe a tax underpayment penalty by using Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts) or Form 2220 (Underpayment of Estimated Tax by Corporations) depending on your case – look for the flowchart. 

If you do owe a penalty, you will need to figure out what you owe in taxes per quarter (and what you have paid in taxes during this time) to calculate the per-quarter penalty sum. Then, you will get your total penalty amount by totaling your quarterly penalties. According to the IRS, the following interest rates on underpayments apply:

  • 2.5% for the portion of an overpayment over $10,000 (for corporations).
  • 5% for underpayments and overpayments (not for corporations).
  • 4% for corporation overpayments.
  • 7% for large corporate underpayments. 
  • The federal short-term rate + 3% for taxpayers besides corporations (for underpayments).
  • The federal short-term rate + 2% for taxpayers besides corporations (for overpayments). 

Remember that all rates are determined on a quarterly basis. 

 

How Much Is the Penalty For Not Paying Estimated Taxes?

The estimated tax penalty is, at its core, an interest charge for not making estimated payments throughout the year (or sufficient estimated payments). The IRS-set quarterly rate for underpayments was 5% in the first and second quarter of 2020 and 3% in the third. This shows that taxpayers were called to pay a higher percentage quarterly rate on the first two quarter balances in 2020. It should be noted that interest is accumulated on a daily basis and is usually added to any tax you have not paid from the time of the due payment to the date you eventually pay the tax. As for the rates, they are set every three months and range around the federal short-term rate plus 3%. 

 

What Is the Tax Penalty For an Early Pension Withdrawal?

Tax breaks such as the Retirement Savings Contribution Credit comes with penalties for early withdrawal. This is the government’s measure to prevent individuals from using their retirement savings for things other than their retirement income. Generally speaking, an early withdrawal or distribution of your retirement plan is any money you cash out before you reach 59 ½ years of age. 

Note that qualified retirement plans do NOT include local or state government 457 plans, rather than:

  • A 403(b) plan (or anything similar) for public school employees and organizations that are tax exempt. 
  • A 403(a) or similar employee annuity plan.
  • A 401(k) or similar employee plan.
  • A Roth IRA
  • A Traditional IRA

The amount you withdraw from your retirement plan (a qualified one, that is) is added to your gross income. This means that you will owe the normal income tax PLUS an extra tax 10% tax penalty on the amount you have withdrawn from your retirement plan. Of course, there are exceptions for early withdrawal as well, where this is not applied. 

Note that not all distributions are taxable and subject to the 10% extra tax penalty, such as the ones you roll over to another retirement plan. Also, the following exceptions to the 10% additional tax penalty for early pension withdrawals apply (these are only some of the existing exceptions – contact us for more details):

  • You made a series of periodic and equal payments over your life expectancy, and the distribution was an installment in them. This provides that you have left employment before starting the payments if your retirement plan is not an IRA. 
  • You made a series of periodic and equal payments over the life expectancy of your beneficiary (or beneficiaries) and yourself, and the distribution was an installment in them. This provides that you have left employment before starting the payments if your retirement plan is not an IRA. 
  • You made the distribution to pay for an IRS levy.
  • You made the withdrawal to cover deductible medical expenses.
  • You made the withdrawal to cover post-secondary education expenses (applies to IRAs only).
  • You made the distribution due to permanent or total disability.
  • A beneficiary made the distribution after your death. 

Note: Reporting your withdrawal is income is still required even if you qualify for any of the exceptions. 

Here is the current tax regime of penalties for withdrawing from 401k and IRA accounts:

For distributions of up to $100,000 related to the coronavirus, the 10% is waived. The same applies to higher education expenses, first-time home purchases or new builds, medical expenses or insurance, or family circumstances (i.e., provide funds to a divorced spouse). The distributions may still be considered as income, though. Early withdrawals from these accounts are expensive unless you are over 59 ½ years old. In any other case, you may pay a 10% penalty on the account you cashed out money and federal income tax. Exceptions apply to the 10% penalty rule, though. Ask us for more details. 

 

Civil Tax Penalties

Taxpayers that are late on filing tax returns and paying tax, not prepay a sufficient sum of tax liability, or face accuracy-related problems are called to pay penalties for not meeting the given deadlines. 

In detail, the penalty for late filing applies to both non-filing and late filing and is the rate of 5% per month of the tax due (up to 25% max). For failing to pay the tax shown on the return by the due date of the payment and not paying an asserted deficiency within a short time frame after notice and demand, taxpayers face section 6651(a)(3) and 6651(a)(2) penalties, which are 0.5% per month of the sum shown as tax due (up to 25% max). Finally, taxpayers that do not prepay 90% of their tax liability via applying a prior year’s tax refund, making voluntary installment payments throughout the year, or withholding fall under Section 6654. The estimated tax penalty, in this case, applies automatically unless you can prove that you qualify for an exception (i.e., the paid sum during the subject year was greater than or equal to the tax liability for the previous year).

The failure to file penalty depends on the net tax sum required to be shown on the return, the penalty period, and the penalty rate (usually 5%). Plus, it is imposed according to the number of months during which the taxpayer has not filed, with the maximum being 4 months and one day. 

As for time extensions to file or pay, they do not affect the period for calculating the penalty for the late payment as they do not extend the due date to pay. Nevertheless, if you have paid at least 90% of the tax shown on the return by the due date, an automatic extension of time to file a tax return is treated as a time extension to repay the tax (Form 4868). This also entails that the balance is paid with the tax return as well. In any other case, the penalty applies to the total balance due from the initial due date. 

Lastly, if the IRS decides that you need to pay an additional tax that was not shown on a return. You will receive a notice that the Service has assessed an extra sum on top of what you have paid. Failure to pay this tax is subject to additional tax (0.5% for each month that the assessment is unpaid) for failure to pay (it should be paid within 21 days after your notice was issued).

Exception to Apply – General Requirements 

You can demonstrate an absence of willful neglect (reckless indifference or intentional failure) and reasonable cause for the failure to file a return.  The IRS considers the following factors, among others, to decide whether to abate the penalties or not:

  • The length of time between the event incident that was regarded as reason for noncompliance and the following compliance.
  • The taxpayer’s penalty history.
  • The taxpayer’s payment history. 
  • Whether the reasons of the taxpayer address the imposed penalty. 

Note: Record unavailability is usually not considered a reasonable cause, nor does ignorance of the law. You can also NOT claim things like unavailability of the needed information to complete the return, invalid extension, time or business pressures, forgetfulness or mistake, or a belief that no tax was due. The IRS might consider the following as constituting reasonable cause:

  • Unavoidable absence
  • Serious illness or death of the taxpayer
  • Natural disasters
  • Fire
  • Casualty

Accuracy-Related Civil Penalties

These are a group of civil penalties, including those imposed for substantially misstated valuations, those for reporting positions without adequate disclosure or substantial authority, or those for negligent reporting positions. In these cases, the taxpayer is called to pay an accuracy-related penalty. However, exceptions apply while there are several possible defenses tax practitioners can raise to help avoid these penalties.

 

Are Tax Penalties Tax Deductible?

According to the Code, no deductions can be taken for a penalty or fine that is issued for any law violation, including claiming false tax credits or deductions or misreporting income. It should be noted that a fine refers to both civil penalties and sums paid in settlement of potential liability for a penalty or fine that is not deductible. Compensatory damages paid to the government, though, is not considered as a penalty or fine. The IRS usually assesses penalties along with interest (not tax-deductible) on the due balance owed by the taxpayer. 

Let us note, at this point, that taxpayers may qualify for relief despite the fact that they cannot deduct penalties. For extenuating circumstances, and only if the IRS approves it, taxpayers may see some or all of their penalty being relieved. Nevertheless, until the due amount is paid in full, they will have to pay interest. 

What is also known is that legal expenses incurred in trying to collect or produce taxable income are not deductible anymore, according to IRS Publication 529. You can, however, fill out Schedule C to deduct expenses related to resolving tax problems linked to loss or profit from your business, or Schedule E for farm expenses and income, or Schedule E for royalties and rentals on the appropriate schedule. Nonbusiness-related expenses used to resolve tax issues are no longer deductible. 

 

How to Get a Tax Penalty Waived

Taxpayers that fail to file, pay, or deposit penalties may qualify for the first-time penalty abatement (FTA) waiver (only applies if there is reasonable cause for not paying or filing taxes on time). The IRS may grant relief to relieve this administrative waiver if certain criteria are met, such as having a clean compliance history (no penalties owed) for at least three years. You may also be eligible for the FTA waiver if you have:

  • Paid all tax due.
  • Made arrangements to pay all tax due (i.e., via an installment agreement – applies to current payments). 
  • Filed all necessary returns and cannot file an outstanding claim for a tax return.
  • Filed a valid extension for the necessary returns and cannot make an outstanding request for a tax return. 

To request penalty abatement over the telephone, you need to provide your tax practitioner with a Power of Attorney authorization to request the penalty on your behalf, especially if your case is being handled by a specific compliance unit. If you don’t receive a letter from the IRS indicating that you meet the FTA criteria and that your penalties have been removed within 30 days from the day you (or your tax practitioner) called them, it is strongly advised to follow up with the IRS. You may, nevertheless, request a penalty abatement by letter or mail, provided that you attach all relevant documents and information, such as transcripts that prove payment or filing compliance and/or a valid power of attorney, among others. 

Important Notes:.

  • If you have paid the penalty, you can file Form 843 and ask for a refund
  • First-time penalty abatement applies to one tax period. If you request for penalty relief for more than one year, your penalty relief will apply to the earliest tax period, as long as you meet the FTA criteria. The subsequent tax years may have a penalty relief based on reasonable cause criteria and other relief provisions. 
  • You may take your case to Appeals if you believe that you can receive penalty relief on hazards of litigation on other factors.

 

Conclusion 

Filing your tax returns and paying your tax bill on time is key to avoiding getting penalties. Nevertheless, in any other case, there are always reasonable IRS payment plans that you could consider. These offer significantly lower interest rates and may even allow you to settle your bill for less than the due amount, such as the Offer in Compromise.

Let’s talk about your options and see what is the best course of action based on your individual case so that you can enjoy a happier and more stress (and debt)-free life from now on. Contact us now and schedule your appointment for a free consultation

All About Tax Liens

IRS tax lien

If you owe back taxes, tax liens (and their siblings, tax levies) can affect you seriously if you don’t take proper action. In this guide, we give you all the details you need to know about tax liens, as well as ways to remove them if you get caught in their net. 

 

What Is a Tax Lien?

In simple terms, a tax lien is a claim the government makes on your financial assets (usually your real estate – see a house or another property) when you have not paid your income taxes on time. A tax lien is the first red flag you will get for failing to take care of your income tax obligations. At this point, you don’t risk having your assets seized. However, if you decide to sell the asset, you can expect the government to claim some of the proceeds (or all of them, depending on the sum you owe). However, do bear in mind that a tax lien may appear on your credit report and could:

  • Affect your ability to get a loan or keep a security clearance
  • Stick with you even if you file for bankruptcy.
  • Be a blockage for you when on a job hunt. 
  • Cause your creditworthiness to take a nosedive (the IRS will notify creditors of your financial situation by filing a public notice of the tax lien).
  • Prevent you from refinancing or selling your home (during title searches, things like tax liens do surface). 
  • Cost you a lot of time if you need to go through the IRS automated collection system (ACS) or a revenue officer that requires you to pay them a visit in person. 

A tax levy comes right after a tax lien and has the power to seize your property and bank accounts or even garnish your wages so that the government can eventually get its owed taxes from you. Note that you may receive a lien immediately after the IRS has assessed the tax. Nevertheless, it may take up to several months before the IRS figures out that you have not paid your taxes.

 

What Is a Federal Tax Lien?

Just like a tax lien, a federal tax lien is a federally-authorized lien placed against your assets (or any of them) for back taxes that have not been paid. It gives the US government the right to take or keep your personal property until you pay your due federal taxes. The steps involved from the moment the IRS realizes that you owe money to the government to the point they finally collect their money, are as follows. The IRS will:

  1. Assess the liability.
  2. Notify you with a Notice and Demand for Payment. 
  3. After that comes a public Notice of Federal Tax Lien that all creditors will be able to see. 
  4. Secure your property to secure payment if you continue to have your taxes unpaid, be it an estate, gift, self-employment, income tax, or another.  

Remember that when served a federal tax lien, any assets you may acquire during the lien may also be placed on a tax lien. Overall, a federal tax lien will most likely downgrade your credit score substantially, given that the IRS notifies creditors and individual states that you owe back taxes and that they are the first in line to receive payment for these unpaid taxes. In many instances, you may even be required to pay your due taxes in full so that you can regain your ability to receive any kind of financing. 

 

What Is a State Tax Lien?

This is slightly different from a federal tax lien as it is imposed by the state government. However, it still gives the government authority to secure the owed tax by exercising a legal right over your property, be it personal or real estate. Before any action is taken, the state issues a Notice of State Tax Lien after your tax liabilities are assessed, and a Final Bill for Taxes Due (or a Bill for Taxes Due) is then sent to you. The waiting period between the Bill for Taxes Due and the Notice of State Tax Lien is 35 days. Within that time, you need to reach some sort of appropriate resolution (if you cannot settle your tax debt). Until you do, though, the lien will remain on the property in question. 

Notes:

  • It may take up to three years for the IRS to assess liabilities on federal income taxes (from the date you are required to file or file a tax return). This legal time frame is called a Statute of Limitations, during which the IRS can bring legal action against you. 
  • A statute of limitations can be extended to six years if you underestimate your gross income by over 25%.
  • A statute of limitations can have no time limit if you fail to file a return (fraudulent or not). 
  • Some states follow the 3-year statute of limitations rule (see Ohio, Wisconsin, Michigan, Kentucky, Colorado, California, and Arizona) while others follow the 3-year plan for income taxes owed to the state (i.e., Tennessee, Oregon, New Mexico, Louisiana, and Kansas). 

If you find yourself dealing with a state lien, it is advised to consult with a tax professional to have all your questions about things like the statute of limitations in your state answered. 

A tax professional is undeniably your best line of defense when you want to protect yourself against liens and levies placed on your wages, assets, property, and bank accounts (and get out of the troubles brought by a state or federal tax lien). It is critical that you reach a settlement with the IRS (or appeal a lien) before they place a levy on your property or bank account, to prevent your assets from being seized. 

 

How to Find Out If You Have a Tax Lien

As already mentioned above, the IRS will most likely notify you if a federal tax lien has been filed by sending you a Notice of Federal Tax Lien. In general, a federal lien is effective almost immediately after the IRS issues a written demand for payment of due taxes (within the next 10 days or so). 

Nevertheless, you could find out whether you have a federal lien tax on your own. Given that tax liens are placed with local authorities, we suggest you visit your state’s Secretary of State website. There should be an option that reads UCC Search or Lien Filing. In either case, you will be called to enter some personal details, such as your filing name and other ID information, so you can retrieve the data you seek. 

Other than that, another great resource to figure out if you have a lien is legal databases, which usually offer access to up-to-date information on tax liens for a fee. Now, since your state may also place a lien on your property if you fail to pay the local taxes on time, you may want to check with the county in which your financial asset (the one that a lien may have been placed on) is located. The process varies among states. However, you will need the assistance of your state government offices to help lift your lien and pay your back taxes. In New York, for example, this procedure entails you call (518) 457-5434 or use your online services account to pay your tax bill. Other states offer a wide range of payment options – even provide you with the chance to set up a payment plan for a small fee (see California). 

Note: As soon as you pay your tax debt, remember to request a copy of your credit report so that you can check that the lien has indeed been lifted. If it has not been removed, do contact the relevant credit bureaus to sort this issue out with them. 

 

Can You Sell a House With a Tax Lien?

Yes, it is possible to still be able to sell your home if you have a lien on it. Of course, some conditions need to be met. For instance, you should ensure that you pay your tax lien first and then refinance or sell your home. 

You have two options here (1) pay the lien before you close the deal (you add the lien amount to your expenses) or (2) clear the lien by paying the taxes on your own before selling your house. If the latter is not doable (though, it is the best course of action since a property lien is listed on the title report, which may trouble or worry potential buyers), you could consider the following:

  • File For Chapter 13 Bankruptcy – This is a handy solution that will give you a greater negotiating power. But, that’s all there is to it. Although it will NOT clear your debt, it may open the road for a payment plan that serves you so you can repay your due taxes over a period of time. 
  • Dispute The Lien – Pursue this option if you believe that a lien has been wrongly placed on your property. In this case, the creditor may be willing to lift the lien. In any other case, you can bring your case to the court. If you win, your lien will be released. If you lose, you may be able to work something out with the creditor (some sort of settlement) to reduce the due amount. 
  • Apply For a Subordination – The IRS may discharge the sum of your back taxes so that you can sell or refinance your property or restructure your mortgage.  This means that the IRS will sell (subordinate) your debt to other creditors, who will wait for the closing of the deal to get paid. So, basically, your debt goes from the IRS to another creditor. That way, the title of your home is clear (and is passed on to the buyer clear) while you will still be called to pay the back taxes to the 3rd-party creditor. To apply for a subordination, you could use the services of creditors with liens (i.e., a mortgage company) or apply for a program like the Direct Debit Installment Agreement to have your lien withdrawn after making the needed payments. 
  • Increase The Selling Price – If nothing of the above works, you could add the amount you owe to the IRS to the selling price of your home to cover the property tax lien. Just ensure that the real estate market supports the asked price (the current market value should be around the price at which you are selling your house so that it is attractive to potential buyers). Also, don’t forget to pay your lien before you transfer the ownership of the house. That way, your buyer will get a clear title. 

 

How to Remove a Tax Lien

If you cannot afford to pay your back taxes, which is the single most effective way to stop a tax lien, you could come to some sort of agreement with the IRS. We suggest exploring options like an Offer in Compromise, which may help you settle your back taxes for less than what you really owe. In this case, though, take note that being accepted is quite a long shot. You will also need to fulfill certain conditions:

  • You have filled all of your tax returns.
  • You are not being audited.
  • You are not in bankruptcy.
  • You have made the needed estimated tax payments for the current fiscal year.

You may use this handy tool to check whether you qualify for an Offer in Compromise or not. 

Alternatively, you could consider getting on an IRS payment plan, such as the Direct Debit Installment Agreement, where you grant the IRS the right to take three or more consecutive payments out of your bank account. That way, you may be able to convince them to remove your tax lien from public records. That being said, you will still have to pay penalties and interest (and your tax debt, of course) until your tax balance is paid off. 

This list could go on forever. So, do reach out to us. Let’s sit down and go through your options together. Our expert tax relief professionals know the way to get you out of debt or at least relieve you of your financial strains considerably. Contact us today for a free tax consultation

What Is Tax Relief?

happy business person after tax relief

A relatively recent government study showed that more than 20% of tax filers had a 2018 IRS tax bill. This means that one out of every four Americans may not have had enough taxes withheld in the 2018 fiscal year. Things can get quite challenging for taxpayers who owe taxes but have no money to pay their tax bill(s). When that happens, the IRS may offer several tax relief options to help you get out of this unpleasant situation as pain-free as possible.

In this guide, we give you all the details about what tax relief really is, how it works, how much of your due taxes you might be able to reduce, how we can help you find the appropriate tax relief plan for your particular situation, and more.

What Is Tax Relief?

Tax relief is an arrangement where you either negotiate a settlement with the IRS or set up a payment plan with them. So in the end, you get to reduce the tax amount you pay to the government or break down your debt into payments. However, note that this is NOT about relieving you from your tax obligations. It will NOT eliminate your tax bill, either. Nevertheless, it IS a convenient (and much more manageable) way to pay the tax debt you owe to the government.

The IRS also offers special tax relief to victims of natural disasters, such as wildfires and hurricanes. This could include deadline extensions or enable those eligible for tax relief to claim casualty losses on their tax returns. The recent coronavirus pandemic has also forced the government to take tax relief measures for businesses, families, and individuals.

Some states also have tax relief programs for vehicles locally registered within their state borders. You may also find tax relief programs that offer a deferral or exemption of real estate taxes for qualified homeowners that meet certain eligibility criteria.

How Does Tax Relief Work?

You can get tax relief via several different ways, such as tax deductions (i.e., home mortgage interest), exclusion, and credits. Tax liens may also be forgiven – this is quite rare, though. The goal of a tax relief program is to reduce the tax liability of an individual taxpayer or a business. It may also target specific taxpayers, such as those that have suffered material loss due to a natural disaster.

Some forms of tax relief are:

  • A tax deduction that lowers a taxpayer’s taxable income. 
  • A tax credit that reimburses taxpayers for certain expenditures. It is subtracted from the taxpayer’s overall sum of due tax after making all the deductions.
  • A tax exclusion which reduces the taxpayer’s reported gross income amount.

There is also the Fresh Start Program that enables taxpayers to pay reduced tax amounts over time. This applies to outstanding tax debts. 

Tax Relief Options

Below are three strategies/options to help you manage the taxes you cannot pay in full by the given deadline. 

  • The Repayment Plan

You might be allowed to break your balance down into smaller payments. This could be a short-term (paying over in less than 120 days) or a long-term payment plan, depending on the sum you owe in combined taxes, interest, and penalties. So, for debts $50,000 or less, you may qualify for a short-term payment plan while long-term payment plans can include tax bills that reach $100,000 or more. 

A payment plan is an agreement you make with the IRS to repay your due taxes by a certain deadline. Also, note that the IRS applies a user fee to those that qualify for a long-term installment agreement/payment plan in the following situations:

  • If you enable automatic monthly payments from your checking account, you will be asked to pay $31 for online application and $107 if you apply in-person, by mail, or phone. Low-income individuals are excluded from setup fees. This plan is also called the Direct Debit Installment Agreement. 
  • If you decide you want to make monthly payments from your savings/checking account (Direct Pay), then the setup fee for online applications is $149 and $225 if you apply in-person, by mail or phone. The same applies to monthly payments made using the Electronic Federal Tax Payment System (you will need to enroll first), either by phone or online. For low-income individuals, this fee is set at $43, which could be waived if they meet certain conditions. If you prefer to pay via your credit/debit card, some extra fees may also apply, depending on the card issuer. 

In both cases, you should add accrued interest and penalties to the applicable fees until you pay the balance in full. So, this may, indeed, be a helpful plan to consider if you don’t have the money to cover your entire tax bill. However, you should also take into account the fact that setting up the payment plan involves additional fees. 

  • Offer in Compromise

You might be given the chance to pay less than the due amount with an Offer in Compromise tax relief program. So, you may not need to pay your full tax bill if you meet certain criteria. It is important to be able to prove that paying your full tax liability “creates a financial hardship for you” per the IRS description of the program. To determine whether you are eligible for this particular tax relief program, the IRS will probably go through your assets, expenses, income, and ability to pay. 

You could check out if you qualify for this program by using the IRS Offer in Compromise Pre-Qualifier tool. You can find much more details on the Offer in Compromise page. 

  • Penalty Relief

This is an IRS program that opens the way for penalty relief. In other words, whatever penalties have been imposed on your tax bill can be forgiven if you fulfill some conditions.  Among the criteria the IRS uses to evaluate whether you might be eligible for penalty relief is:

  • Arranging payment for the due taxes.
  • Paying for any taxes owed.
  • Not having any penalties for the past 3 years.

Note that even if you qualify, you will still need to pay your taxes, unlike with the Offer in Compromise program. The difference is that after the penalties are removed from your balance, you will then owe less. You may qualify for it if your inability to meet your tax obligations derives from circumstances that are beyond your control, such as a death in the immediate family, a natural disaster, or a house fire.

Note: Getting a personal loan is also an alternative way to help you pay your taxes. This option should be used as a last resort, though, if you don’t have the money to pay your tax bill. In this case, do ensure that the personal loan you secure gives you the best possible rates and that these rates are less than an IRS payment plan/program. To determine that, make sure you conduct your own research on things like personal loan terms and rates. 

And, don’t forget to check your credit reports so that you know what your financial profile looks like. The tax bill you owe the government will not show on your credit reports (so having unpaid taxes doesn’t affect your credit score), but they may be included in public records reports. 

What Do Tax Relief Companies Do?

A tax relief company negotiates with the IRS on your behalf, utilizing their expertise in the area of taxes and tax laws. Of course, this is not a free service. However, it saves you time and worries since these companies handle hundreds of cases every year and know exactly how to work out the best deal between you and the IRS. 

Struggling taxpayers, therefore, can benefit from the experience of these tax relief professionals. At the same time, though, nothing is guaranteed, and you may end up with an unsuccessful outcome. For that reason, it is best to trust respected organizations with a proven track record of successful negotiations with the IRS.   

Note that not all tax relief companies have the authority to become your voice and try to make a financial arrangement with the IRS on your behalf. These tax professionals should either be tax attorneys, certified public accountants, or federally authorized Enrolled Agents that have been given the role of representing taxpayers before the IRS. 

Some of the things you definitely need to pay attention to when considering using a tax relief company are:

  • Any default billing rates that may apply (these are usually activated if you cancel their services).
  • Any upfront fees.
  • The applicable refund policy (some agencies offer unfavorable refund policies for the taxpayer). 

When you book an in-person or over-the-phone meeting with the selected tax professional, feel free to ask as many questions as you feel necessary until you gain a full understanding of your options and the company’s fee structure. Proceed once everything checks out and based on your research you’ve found them to be a trustworthy company.

How Much Tax Relief Can You Get?

How much tax relief you can get depends on your particular case and the program you qualify for. You see, there is a wide range of tax relief programs you might find useful and each one offers a different type of tax relief. For instance, if you are eligible for the Earned Income Tax Credit program (applicable to low-to-moderate income earners), you may have your due tax amount reduced to zero (or even lower and the IRS may owe YOU!). 

So, our advice is to give us a call or request a free tax consultation and have your options assessed by one of our qualified tax professionals. And, if you do qualify for a tax relief program, rest assured that our experienced staff will negotiate the best possible outcome for you with the IRS so that you can finally heave a sigh of relief.