Case Study: How We Helped a Realtor With a $160,000 Tax Bill

a female realtor

Many taxpayers conclude that if they are going to owe money to the IRS and cannot pay, they are better off just not filing. This is 100% the wrong thought process. 

There are a few different reasons why it is very important that a person files each year by the due date regardless of their ability to pay the tax debt. The first major reason it is important to always file is that there is a non-filing penalty. The failure to file penalty is usually five percent of the tax owed for each month or part of the month that your return is late, up to a maximum of 25%. If your return is over 60 days late the minimum failure to file penalty is $425 or 100% of the tax required to be shown on the return, whichever is less.

Another major reason for a taxpayer to make sure that they file every year is because in most cases the IRS will catch up with it and file the taxes on behalf of the taxpayer. When a taxpayer receives their income forms from employers and financial institutions every year, they are also sent to the IRS. If this income has been reported to the IRS and a taxpayer has filing requirements and fails to file, the IRS will do what they call a “Substitute for Return”. 

Typically, a Substitute for Return is completed three years after the return was due. The IRS will then send a letter to the taxpayer with a proposed tax debt plus penalties, fees, and interest all accrued since the original filing due date.

Now some may reason, “Why file if the IRS just comes in and does it for you?”. Again, this is a bad way to think. If the IRS files the taxes on behalf of the taxpayer, they will prepare the returns based on only the information that was provided to them from your employer’s banks and other payers. And SFR has a filing status of single or married filing separately. This means you would miss out on any possible deductions, exclusions, or credits that you may have had rights to.

In my time in this industry, I have seen many cases where people come to us with huge tax bills because the IRS has filed unfiled yeas and the taxpayer is in absolute panic mode. This year we have heard this a lot more than other years. A lot of people who had not filed in a long time either did the non-filer tab that was put on the IRS website or filed 2019 or 2020 so they could receive the stimulus checks that were being distributed. When this was done, it also updated their address with the IRS.  A lot of people who had thought they were flying under the radar with the IRS or getting away with not filing their taxes were shocked when they received a large tax bill. 

It does still happen where somebody can fly under the IRS’ radar but it is very rare. And when the IRS does not update addresses, many people who do not file are left in the dark of what the IRS has been doing since they are unable to receive the IRS letters that have been mailed to an old address.

This past year we took on a client that this happened to. We will call her Mrs. O to respect her privacy. 

 

Mrs. O Gets a $160,000 Tax Bill

Mrs. O is a realtor that had not filed her taxes in almost 8 years. During the beginning of the coronavirus pandemic, her work came to a screeching halt. She was fortunate that the government had made unemployment available to self-employed individuals but with a daughter to support, she needed more income. She admitted that when the government set up the non-filers tab on the IRS website, she submitted as a person not required to file so she could get the benefits of the stimulus checks that were being sent out. In doing so, she also updated her address with the IRS since she had moved a few times over the past 8 years. 

The good thing was that she received her stimulus checks and they really helped her and her daughter gets through the tough times. Then earlier this year when the IRS resumed sending notifications and collecting on the debt, she received a bill from the IRS for over $160,000. All this time she had been thinking she was getting away with not filing.

 

What The Tax Investigation Revealed

We started her case as we do for everybody with a full-on Tax Investigation directly with the IRS.  Within 10 days of her signing representation documents, we were able to retrieve all of her records directly from the IRS and show her exactly what had happened. 

In the real estate industry, the majority of taxpayers are considered self-employed. Her employers had been providing her and the IRS with 1099’s for all of the 8 years. Her records showed that she hadn’t filed in 8 years as she had informed us and that the IRS had done Substitute for Returns for 4 of these years where she had substantial income reported. She also still had 4 years that were left unfiled that had filing requirements.

Now in cases like this, there are different approaches that can be taken. These different options are really going to be based on her financial situation. At this time in her career, things had started to pick back up again but she was making nowhere close to the money that she made in the past. She also had depleted almost all of her savings during the time she was not working. 

Doing a review of her income vs. her expenses we found that she would definitely qualify for some sort of hardship program. Since we would be able to utilize the hardship programs, it would not make sense to go back and redo the tax returns that the IRS had already done. Since there is a ten-year statute of limitations on tax debt in cases of hardship, it does not always make sense to redo the tax returns because there would be more savings by keeping the existing assessment dates then adding expenses to reduce the tax debt. If somebody has a good income and shows the ability to pay the debt back, then you would definitely want to redo the Substitute for Returns with the proper deductions, exclusions, and credits to reduce the tax debt.

 

The Resolution

The first thing that had to be done to get her into one of these programs was to file all of the unfiled years. Being filed up to date is a requirement for all of the different programs the IRS offers. These years were filed correctly using all of her expenses for those years, keeping the additional debts down as low as possible. 

The IRS took a few months to assess the filings. During this time, we monitored collections to make sure that the IRS did not initiate any involuntary collections on the existing tax debt. These four years added an additional $30,000 to her tax debt.

The next step would be to present her financial situation to the IRS. In her case, this was the ideal time to do this because she was definitely living paycheck to paycheck. After a long back and forth with the IRS, approximately 6 months of proving and reproving her financial situation, it was agreed upon that she would only be expected to make a small payment of $100 a month. As long as she did this and did everything right moving forward, she would only end up paying $12,000 on a $190,000 tax debt.

Our job was not done yet. We had to set her up for success with some future tax planning. She had to make sure moving forward that she filed on time every year and she must pay any new taxes on time. 

When being paid as a 1099 employee, you are essentially running your own business, so it only makes sense to operate as a true business and get the benefits of operating as a business entity. By setting her up as an S-corporation, we could limit her exposure to self-employment taxes. Operating in this fashion will save her thousands moving forward especially if she starts making a lot of money again. 

So, in this case, we not only saved her almost $180,000 on her older tax debt but we also set her up to save thousands moving forward by running her business more effectively. Also, to make sure that she no longer owed the IRS, it was important that estimated tax payments were made quarterly throughout the year so that at the end of the year she didn’t have to worry about any sort of tax debt. As long as she followed through with the established plans, within 10 years she would never owe the IRS again.

If you have not filed taxes out of fear that you will owe the IRS money that you don’t have, contact us for a free tax consultation. Let’s see how we can help you resolve your situation so you can stop worrying about the IRS.

 

Case Study: How We Saved Mr. J $117,000

a happy older couple

I cannot stress enough how important it is to make sure that all different types of income that you received in a year are reported on your 1040 tax filing

Most entities that received income throughout the year will provide you with the correct income form, typically a W-2 or some form of a 1099. When these are sent to a taxpayer, they are also sent to the IRS. The IRS uses an automated computer program that matches this information to your tax return to ensure the income reported on these statements is also reported on your tax return. Unfortunately, if you do not report the income, the IRS will discover it 2 or 3 years later and then access the tax debt plus penalties and backdate the interest, possibly costing you thousands of dollars in addition to the tax debt that is owed. 

This is why consulting a good tax professional is so important. A big part of their job is to go through your financial situation to determine all the income that should be reported so you don’t have to worry about being in that situation.

 

How Some People Get Into Tax Debt

We take on a lot of these types of cases where people fail, for many different reasons, to accurately report their income. The taxpayer may be a disorganized self-employed contractor receiving multiple 1099’s from different entities that he performed services for. Sometimes it’s a person who worked multiple W-2 jobs throughout the year. 

Another situation that we see often is when somebody goes through a foreclosure or a short sale on their property. This is a horrible situation to go through and the last thing a person thinks about is the tax ramifications.

If a property is sold through foreclosure or a short sale and the proceeds do not completely satisfy the debt amount, then the financial institution has the right to report the cancellation of that portion of the debt to the IRS. The forgiven debt amount now becomes income for the taxpayer and must be reported on their tax return. 

If the taxpayer omits this or other forms of income off of their tax return, they will surely receive an IRS Notice CP-2000 at some point where the IRS has reassessed their filing with that income added. This letter can appear to be a bill and many times even has a due date on it. However, in smaller print, it does state that it is not a bill but is still a proposed debt. If you do not agree with the debt, you do have the right to dispute the IRS assessment. 

However, there are many different deductions and exclusions to income that may be able to be used to amend what the IRS is saying that you owe. If you are not sure what your rights are in this type of situation, it would be wise to contact either an Enrolled Agent or a CPA to advise you.

I have seen many of these types of cases over the years but one, in particular, comes to mind. For the client’s privacy, we will call him Mr. J.

 

A Decade of Tax Struggles

When this taxpayer initially contacted us, he had been having issues with the IRS for almost a decade. Over the years he had tried many different avenues to resolve his tax debt. He had hired a few different companies but they failed to help him achieve any sort of resolution. He had tried payment arrangements directly with the IRS but could never keep up with the high payments they required. At one point he had even begun the bankruptcy process but was unable to complete that as well. 

He had used many different tax preparers to file his taxes throughout the years but the problems kept coming. On one occasion he received a letter from the IRS stating that he owed another $60,000 which essentially doubled what he had currently owed them. He didn’t understand how that was even possible. 

We talked about a few different possibilities of where the debt could have come from and possible programs that may be a solution for him. I explained to him how we work, our process, and how we always start by gathering the facts.

After dealing with so many different tax relief companies with their sales pitches and false promises over the years, he loved our approach and appreciated our honesty. He hired us immediately to begin his tax investigation. A Tax Investigation is where our Enrolled Agents contact the IRS on a client’s behalf and they provide us with their tax records. Once we have that, we know everything that is going on. This part of the process only takes about 10 days to complete. 

When and only when we have all of the facts is when we can lay out a strategy for a client. We were able to provide Mr. J with a good strategy to help him obtain an end date to his tax situation and into a program that he could afford with the IRS.

 

Results of the Tax Investigation

When we received his information from the IRS, his transcripts confirmed the story that he told us but more importantly filled in the blanks on the information that he did not know but was so very vital. 

We found out that the recent notice that he received was a CP-2000 notice. This was for unreported income a few years back. The income that he had left off of his tax filing was a 1099-C from his bank after a foreclosure he had gone through. 

It also appeared that this wasn’t the first time that he had received this type of notice. He owed the IRS for 4 other years as well, going back as far as 2008. Two of these years resulted in small tax debts due to a lack of withholdings and then there were two other years with fairly large tax debts. These particular years were from underreporting income just like the tax year he had just received the notice for.

Altogether, at this point he owed the IRS $120,000.

We took our time and educated him on what had been happening over the years and were able to show him everything with IRS documentation. By educating clients about their mistakes and by doing some future tax planning, we can set our clients up for success and prevent them from becoming repeat offenders as Mr. J had been for many years. 

Mr. J was blown away just by this part of the process. He said that of all the different companies and attorneys he had hired over the years, nobody had ever done this for him. He felt that if he had this conversation with us 10 years ago, he could have avoided 10 years of IRS problems and tax debts.

 

His $120,000 Tax Debt Gets Cut in Half

As important as educating Mr. J was, the next step in the process was fixing the mess that had compounded over the years. The first thing that had to be done was deal with the recently discovered unreported income. This is where knowing tax law is very important. 

When the IRS reassess a tax year due to unreported income, they do not give any deductions, credits, or exclusions that the taxpayer may qualify for. In this case, the income came from foreclosure on Mr. J’s primary residence. The Mortgage Forgiveness Debt Relief Act of 2007 provided an allowable exclusion to income which has been extended through many other acts and was available for the year in question. The provision allows taxpayers to exclude income from the discharge of debt on their principal residence. Up to $2 million of forgiven debt is eligible for exclusion for debt reduced through mortgage restructuring as well as the mortgage debt that is forgiven in connection with a foreclosure. So, in his case, by going back and amending this tax year and using this allowable exclusion, the $60,000 tax debt from this year was eliminated.

 

From Owing the IRS $60,000 to Only $3,000

The next part of the process would be to deal with the remaining older tax debt. Unfortunately, even if these types of exclusions or deductions are available on the older debts, you can only amend a tax return up to three years of the original filing date. In this situation, that wasn’t a big concern because the IRS programs that Mr. J qualified for were much more beneficial.

At this point, Mr. J was living off of retirement income and had almost no savings. His wife also had a very small social security distribution every month. They were truly living paycheck to paycheck. As I have mentioned many times in previous articles, a taxpayer does have the right to pay his or her allowable expenses before paying on a tax debt. By enforcing this right, we were able to get Mr. J into a program where he would only pay back approximately $3000 on the remaining $60,000 tax debt.

The last thing and most important thing that had to be done for Mr. J was future tax planning. Education is a huge part of our process. To keep the benefits we obtained for him and in order to remain in his payment program, he cannot accrue another tax debt and must file his taxes on time every year. 

We instructed him how to change his withholdings so that he will no longer owe taxes every year. He decided that he would have us file his taxes correctly every year going forward. He knew from his experience with us that we will definitely scrutinize his financial situation every year to make sure that no further income is underreported. 

As long as he does all of these things moving forward, Mr. J will end up saving close to $117,000.

If you have been struggling with a tax debt or other tax issues and have no idea what to do, contact us for a free, no-obligation tax consultation.

 

How the IRS Collections Process Works

man reading his notice from the IRS

The whole world has been in the grasp of the Coronavirus for the past two years. During this time, the government has done many things to try and aid people financially. There have been three different stimulus checks sent out, the federal government provided extra money for unemployment benefits on top of what the states normally provided, and they provided many other funding programs to assist those who were struggling financially. They even recently made $10,200 of the unemployment compensation that a person received during 2020 tax-free. 

The IRS also took a huge step back in collection activities and even suspended many active installment agreements. Beginning in 2020 however, they gradually resumed collection efforts but still left many of their collection systems idle including involuntary collections such as garnishments and levies.

In June of this year, the IRS released a notice stating they felt that the current economic situation deemed that they could resume full collection activity to maintain a fair and just taxing system. So, they began sending collection letters on June 15th. A sequence of letters is usually sent notifying the taxpayer where they are in the collections process in order to give the taxpayer an opportunity to either pay the tax debt, work out some sort of payment arrangement with the IRS, or hire representation to enforce their rights on the repayment of the tax debt.

 

The Notice of Balance Due

Typically, the sequence of these letters would begin with the filing of the taxes on or before April 15th. Once the IRS processes your tax return or if the IRS has made a change to your return, an initial notice is sent out. This is called a Notice of Balance Due and will either be a Notice CP501, CP503, or CP504. This year, the IRS started sending out these notices on June 15th.

These are not threatening letters. The notices explain how much you owe, when your payment is due, and your payment options. It also tells you how to contact them if you disagree with the amount owed. At this point, you can request a collection due process hearing using Form 12153. 

You typically have 30 days from receipt of the first letter to dispute the debt with the IRS. Afterward, notices are sent sequentially every 4 weeks until the balance is paid in full. If not, the IRS will begin taking collection action.

At this point, you have a few options. If you can afford to pay the tax debt in full, that is always the best course of action. Anytime there is an outstanding debt with the IRS, it is subject to penalties, fees, and interest that typically continue to accrue until the debt is satisfied. 

If you cannot pay the balance in full but you do have the means to pay over time, there are short-term and long-term payment arrangements available. 

If you do not have the income to support the payment required in these plans, there are also hardship programs available. If an inability to pay can be proven, you may qualify for a reduced payment or even a full-on hardship status, otherwise known as a “currently non-collectible” status or CNC. In a CNC status, you will not be required to make a payment on the tax debt until your financial situation improves and you can afford to pay. 

Another hardship program that is available with the IRS is the Offer in Compromise. This is where the IRS may agree to accept a lesser amount than what is owed and forgive the remainder of the tax debt.

A taxpayer can absolutely deal directly with the IRS on their own and try to take advantage of any of these programs. Like everything else in life, you can take a chance and try it on your own or you can hire a tax professional that does this every day and is thoroughly knowledgeable about tax law and the taxpayer rights involved.

 

The Notice of Intent to Levy

If a taxpayer ignores these letters and does not either hire representation to respond to the IRS or contacts them directly, they will then receive a Notice of Intent to Levy, known as Notice CP504. The IRS may give you this notice in person, leave it at your home or place of business, or send it to your last known address by certified or registered mail. 

This Notice of Intent to Levy is an important step and one to be taken seriously because it satisfies the requirement of the government to notify the taxpayer before it begins seizing assets. Interestingly, there is no actual requirement stating that the letter must be received by the taxpayer. If the IRS mails the notice to the taxpayer at their last known address, that action satisfies their legal obligation and they can then pursue collections. But until this notice is sent, the IRS cannot use involuntary collections against a person.

A Notice of Intent to Levy may appear to be very threatening but it is not meant to scare a taxpayer to pay the amount they owe. It is simply a legal notice from the IRS stating that they plan to use involuntary collections to collect on the tax debt. 

If a taxpayer has received this notice, their situation is now very serious. This is the point when a taxpayer must either take steps to resolve the matter directly with the IRS or hire representation because the IRS is literally telling the individual what they are about to do–enforce collections. 

If the taxpayer does not respond to this notice, the taxpayer’s case is either sent to the Automated Collection System (ACS) or to a Revenue Officer for collections. Some accounts may initially be assigned to ACS only to be transferred to a Revenue Officer later.

 

The IRS Automated Collection System

The Automated Collection System is comprised of many large call centers located in multiple cities where ACS Agents take incoming calls from taxpayers, review cases, and issue notices of tax debt and collection actions on behalf of the IRS. Most tax debts below $100,000 are assigned to ACS. 

The cases that are in ACS are not assigned to specific agents but exist within the system and are fielded by agents when the need arises. The system uses a computer program that ranks and selects tax debts based on the amount owed and the age of the debt. This means that the collection process of the ACS can be very sporadic.

I have helped clients that owed large amounts of money to the IRS and also had unfiled taxes but somehow flew under the radar of the ACS for years. I have also spoken to many sweet little old ladies living solely on social security income barely making it by that owed very small balances to the IRS but were being garnished. So, there is no real rhyme or reason as to who the system selects and who flies under the radar.

The Automated Collection System contains computerized records of a taxpayer’s sources of income and assets such as their wages, bank accounts, certificates of deposit, and accounts receivable, all of which can be seized administratively from them. Since the Notice of Intent has already been sent to the person, the system can issue wage garnishments and bank account levies without any further warning. 

ACS may also file a Federal Tax Lien against a taxpayer to secure their interests in any property that they may hold. The lien is put in place so that if the taxpayer tries to sell or refinance a property such as their house, the IRS will receive the proceeds to pay the tax debt.

 

When a Revenue Officer Gets Involved

If ACS is unable to recover the debt, the debt may then be assigned to a Revenue Officer for further collections. In cases that involve large tax debts of $100,000 or more, the case typically goes directly to a Revenue Officer and completely skips ACS. If you get to this point in the process and a Revenue Officer has been assigned to your case, there is no more ignoring the situation. 

A Revenue Officer also gets involved when the tax debt stems from payroll taxes. If an employer withholds taxes but does not turn them over to the IRS, this is generally viewed by the IRS as stealing. If not paid upon demand, these debts are typically assigned directly to a Revenue Officer. 

Revenue Officers have the power to issue summons to a taxpayer or business and demand the taxpayer show up at their office at a certain time with records in hand. They are also usually local and can make surprise visits to a taxpayer’s home or place of employment. If you refuse to respond to a Revenue Officer, they can involve IRS district counsel who then can get a court order and force you to comply with the summons. 

If your case gets to this point, it is at the highest level within the IRS Collections System and I highly recommend that you hire a legitimate tax professional immediately to represent you or your business.

 

Be Proactive, Not Reactive

Throughout my time in this industry, I have dealt with many different types of people. I have always used one main classifier to describe how a person deals with the IRS: a taxpayer is either proactive or reactive. 

Proactive people don’t get themselves into these types of situations or if they do they immediately deal with the situation when a notice arrives. During this part of the collections process when notices are being sent, you have a lot of rights. You can either deal directly with the IRS on your own or hire a true tax professional to represent your rights in the collections process. 

Then there is the reactive person. This is the type of person that ignores all of the IRS letters either out of fear or with the thought that the IRS really won’t do anything about their debt. This type of taxpayer tries to deal with the situation after the IRS has begun a garnishment, froze their bank account, or a Revenue Officer is knocking at their door. At this point, they still have rights but these cases are much harder to deal with. 

The most important piece of advice I can give is to be proactive when it comes to dealing with the IRS. In their recent budgets, the government has allocated extra funding to the IRS to enhance their collections, so the chance of flying under the radar is a lot lower now.

And if you do have a large tax debt, it will always financially benefit you to hire a legitimate tax professional to be your advocate.

If you have received a notice from the IRS or they have already begun taking collection action against you, contact us today for a free consultation so that we can protect your rights and finances and help you resolve your tax issues ASAP.

 

Case Study: How We Saved Mrs. B $27,000

a female police officer client

After helping countless individuals with their tax issues, one thing I have learned is that no two situations are exactly alike. Any good tax professional knows that there are so many moving parts to qualifying for the different IRS programs available. Which is why we at Innovative Tax Relief start every case by doing what is called a Tax Investigation. This is where one of our Enrolled Agents contacts the IRS in behalf of a client and really puts in some work to figure out what the person will truly qualify for in terms of reducing their tax debt.

For example, you can have two people that owe the IRS $50,000 each. This does not mean they will qualify for the same type of tax relief. One of them may make $25,000 a year and qualify for some sort of hardship settlement with the IRS while the other person may make $100,000 a year and in the eyes of the IRS has a strong ability to pay the tax debt back in its entirety. 

Or in another example, two individuals may both make $100,000 a year while one lives in California which has a high cost of living and the other lives in rural Maine which has a very low cost of living. Or somebody might have many dependents or medical expenses that change their ability to pay back the tax debt. The list of the differences go on and on. There is no one-size-fits-all when it comes to tax relief.

Only after having a conversation with a potential client are we able to determine if it is worth it for them to hire us to do a Tax Investigation. That is why we offer free consultations with an experienced tax professional. This is how I met a new client that I will refer to as Mrs. B.

 

Mrs. B and Her IRS Monthly Payments

A few years ago, Mrs. B called me and really didn’t know what to do about her tax problems. She had tried to handle things on her own with the IRS, so the result was they required her to make a $400 a month payment on a $16,000 tax debt. She told me that she had eliminated many expenses from her budget in order to make her IRS payment because not only was she afraid of the IRS but she was also in law enforcement and did not want to jeopardize her job by missing a payment. So I asked her some questions to help me better understand her financial situation. 

When I speak to a potential client and I find that they are currently in the best situation possible with the IRS, I immediately let them know that. I don’t want to waste my time or theirs if I know nothing more can be done. But if I know for a fact that I can help them and save them money, I tell them so–as long as everything that the IRS has matches up with what they have told me because many times it does not. 

Then there is the taxpayer like Mrs. B. When somebody has already made an agreement with the IRS and is currently paying them, it makes it a lot more difficult to change course and get the person into a better situation. When she told me her income and informed me that she was also supporting her daughter, I felt that it was worth the time and effort to do a Tax Investigation for her. A taxpayer always has the right to pay their allowable monthly expenses before paying the IRS, so there was a chance that we could get her monthly payments reduced. And even if the payments were affordable for her, a $400 a month payment on a $16,000 tax debt was extremely high for that debt amount.

 

The Results of Our Tax Investigation

She was able to sign and send back the 8821 IRS tax form that we need to access her information from the IRS. Within 10 days we had all the information we needed directly from the IRS. 

It turns out that she made more money than she had told us, and she also had a much bigger problem than the existing tax debt. In fear of falling behind on the payment arrangement she had set up with the IRS, she had gone completely exempt from withholdings at work. So no taxes were being taken out of her paycheck. On top of that, she hadn’t filed taxes in the last two years because she knew that she would owe the IRS more money and there was no way she could afford a larger payment. She did have a daughter but even if she had claimed her daughter as a dependent for those two years, she would still owe the IRS a significant amount more.

It was very surprising that the IRS had not yet defaulted her out of her existing plan because of the unfiled years. When the IRS offers you a payment arrangement and you accept, you agree not to accrue any new tax debt and to file taxes on time every year. Mrs. B had not complied with either of those two requirements. 

At this point, we had to discuss her expenses. As I just mentioned, she did make more money than she had originally told me. From our research, we found that she lived in a part of Wisconsin that had a high cost of living. This means that the allowable expenses in her area are much higher than in some other areas. She also had her daughter as a dependent and thus could claim her expenses as well. And she had medical bills and prescription medications to purchase both for herself and her daughter, so those expenses could be used as well. 

With her high income, we really had to dig deep and put together a strong case that demonstrated her inability to pay. Anybody else that had her income, lived in a much less expensive area of the United States, and didn’t have a dependent or medical bills would likely end up with a very high monthly payment to the IRS once the tax debt was assessed for the two unfiled years. 

She was so happy once we laid out the strategy and then worked within her budget to make our tax relief work affordable for her. She understood that this would not be an overnight fix and that she would have to put in some work on her end to help us achieve the desired results.

 

Filing Her Unfiled Taxes

The first thing that had to be taken care of was the two unfiled years. Our Enrolled Agents filed these taxes using everything possible within tax law to keep the tax debt as low as possible. 

We also made sure that she immediately contacted her human resource department and corrected the amount withheld for taxes on her paycheck so that she would not owe the IRS more once we were finished. 

Once the two tax returns were submitted, we had to wait a few months for the IRS to assess the new tax debt balances. During this time, we left representation on file so that we could monitor collections and protect her income. The last thing we wanted was for the IRS to move forward with any involuntary collections that could make her financial situation worse. She ended up owing approximately $14,000 for those two years, primarily because she had gone tax exempt. 

Once we received the response from the IRS, we now had to begin presenting her financial situation and enforcing her rights on the repayment of the tax debt.

This part of the process isn’t simple. We must prove and reprove the taxpayer’s financial situation. The taxpayer also has to play a big part in this by providing the necessary documented proof to our agents so they can convey the situation correctly to the IRS. 

 

$400 Monthly Payments Reduced to $25 and $27,000 Saved

After several months of back and forth with the IRS, we were able to come to an amazing resolution for Mrs. B: the IRS agreed to accept payments of $25 a month for her entire tax debt. She would pay that amount for 10 years and if she did everything right moving forward, meaning filed her taxes on time and not accrued any new tax debt, she would be completely out of tax debt and would have paid back only $3,000 on a $30,000 tax debt–a small fraction of what she would’ve paid without our help. She would end up saving $27,000.

Mrs. B was beyond thankful. She had come to us stuck in a payment arrangement that she couldn’t afford while accumulating more tax debt every year. She said she felt like she was in quicksand and now somebody had handed her a stick and pulled her out. In a way, she was right–if she had kept going as she had been, she would have never seen an end to owing the IRS. 

With cases like this, it isn’t rocket science how we achieve such great results for clients. It’s about knowing tax law and also knowing what rights a client has and can be enforced to get them into a payment situation which they can afford. By doing that, we can save a client thousands of dollars on the tax debt alone not to mention the penalties, fees, and interest that accumulate when a person attempts to deal with the IRS on their own.

If you have tried dealing with the IRS unsuccessfully or are not sure how to deal with your tax problems, contact us for a free tax relief consultation. We’ll listen, share some information and advice, and let you know how we can help you, with absolutely no obligation on your part.

 

Case Study: From Owing the IRS $36,000 to Only $3,000

a father and his teenage daughter

There are many different types of situations that force people to come out of “hiding” from their tax issues and make them face the IRS to get themselves back on track. 

Many times it is the result of some sort of involuntary collection action by the IRS or at least the threat of such. 

Other times people have changes in life where they need to get their past in order, especially with the IRS. This can be when they are about to get married and a future spouse demands they rectify any problems with the IRS prior to tying the knot. Or sometimes people are at the point in life where they want to buy a home but they are being held back by their situation with the IRS.

 

A Father’s Tax Situation Affects His Entire Family

In the particular case I’m going to share with you, Mr. H’s daughter was accepted to college and needed proof of her father’s tax filings in order to be accepted for financial aid to pay for her schooling. Mr. H had not filed in many years but did not want to let his daughter down. He was also very embarrassed that his past had caught up to him in this way.

Mr. H reached out to us and needed to get his tax issues resolved quickly, at least regarding the filings that the school was looking for so that his daughter could obtain financial aid. He knew he had to get those years filed in order to help his daughter, but he also knew he could not leave the rest of his tax situation as it was. 

He understood that with a situation like his there would be no overnight fix. He was very honest and explained that he had been speaking to a few different companies and they all wanted large lump sums upfront without even really knowing anything about his situation or what could be done. Personally, I have no clue what these other companies could have possibly based their cost on considering they knew very little about his tax situation. 

All Mr. H knew was that he had not filed taxes for approximately 6-10 years but was not exactly sure. He had none of his W-2’s or any other income information. He was also very honest and told us that he had gone tax-exempt during a good portion of that time, so he knew he would be owing a good amount of money to the IRS. He also mentioned that he had moved around quite a bit and it was very unlikely that the IRS had his correct address.

 

Step 1: The Tax Investigation

I explained our process to him and why it was 100% necessary to start with a Tax Investigation. I explained to him that in most cases when somebody fails to file for such a length of time as he did, the IRS may have done what they call “substitute returns”. This is where the IRS will file those unfiled tax returns for you. Since he had gone tax-exempt as well, there was a very good chance that the IRS filed substitute returns for at least some of the years. 

I explained to him that if the IRS has filed those years, they will not be giving him any of the credits or tax deductions that he may have qualified for. But there are also provisions set up where we may not have to file returns for some of the older years. By not having to file those years, not only would it save him on the cost of filing but it would also eliminate the chance of him owing any tax debt from those years. And if that period included some of the years in which he went exempt, there could be substantial savings right from the start. The only way to figure all of this out for him was by having our agents put representation on file and get his tax records directly from the IRS.

He was excited about how we do things and loved all of our great reviews online. He immediately hired us for the Tax Investigation. He sent back his signed representation forms quickly, so we were able to contact the IRS and request his transcripts.

 

We Saved Him $15,000 Right Off the Bat

We were back on the phone with him within 10 days ready to go over everything we discovered. He was correct that he had not filed in quite some time. There were 10 years of unfiled tax returns. He had gotten lucky, though, and the IRS had never filed any of those years. The good news was that he would only be required to file 6 of the 10 years. If he had been required to file the other 4 years, he would have accrued an additional $15,000 of tax debt. So just by doing this preliminary work and knowing tax law, the savings had already begun. 

Unfortunately, I speak to many clients that have tried to figure these things out on their own first and they typically use tax software to file all of the missing returns. They then contact us with massive tax debt and I inform them that they probably would not have had to file all of those years. But once they are filed and the debt is assessed by the IRS, there is no backtracking. The debt is owed. 

It is especially important in these cases to figure out a full game plan and strategy first so that all tax law provisions can be used throughout the entire process to save a client as much money as possible.

The first step in his case would be filing all those years. We filed the years required for his daughter’s financial aid as quickly as possible. This was particularly important to him since his daughter meant everything to him. Once all the years were filed, we now had to wait for the IRS to assess the filings. 

For the years that he was required to file, he was correct about the fact that he had gone tax-exempt for most of that time. This meant that he was going to owe the IRS a substantial amount of money. The IRS took a few months to respond and during that time they kept everything on hold until they had assessed all filings.

 

The IRS Wanted $36,000

Mr. H ended up owing $36,000 which included the assessed tax debt plus penalties, fees, and interest. This was expected and we were very ready to deal with this debt for him to see how much we could get it reduced. 

Mr. H was not a low-income earner and thus a person that would be a sure fit for one of the hardship programs the IRS offers. But his wife was not working and his daughter was still living in his household as a dependent. 

The backbone of all the hardship programs that are available is one’s ability to pay the debt back. A taxpayer has the right to pay their allowable monthly expenses and the expenses of those that are dependent on him or her prior to paying the IRS. This is where our agents get involved. Our Enrolled Agents can represent a taxpayer’s rights on the repayment of tax debt.

 

From Owing $36,000 to Only $3,000

Over months of going back and forth with the IRS, proving and reproving exactly where Mr. H was financially, our agents were able to come to terms with the IRS. He would be responsible to pay back only $3,000 through monthly payments over a long period of time and the remainder of the tax debt would eventually be forgiven.

Mr. H and his family were excited that they were finally able to stop looking over their shoulders, so to speak, wondering when the IRS would come after them. He had come to us as an embarrassed man in jeopardy of preventing his daughter from getting the funding she needed to further her education. Now, not only was he completely compliant in terms of his filing requirements but he was also in a payment plan that he could afford. 

If Mr. H remained compliant with the IRS moving forward, he would save close to $33,000 not to mention the $15,000 we saved him for knowing which years did not need to be filed. Sad to say, many other tax preparation companies would have just filed those years for him simply in order to charge him more money or because they don’t understand the tax law. He also told us that because we were willing to investigate and clearly assess his situation first, we were much more affordable than the other tax relief companies he had originally spoken to, saving him even more money.

This was not the end of the case for us, though. We had to do everything possible to make sure that he was set up for success and did not lose the amazing benefits we worked so hard to obtain for him. In his case, he needed to make sure that the correct amount was withheld from his paycheck for taxes so he would never again owe the IRS. If he did that and was sure to file his taxes on time every year, he would be out of debt with the IRS in no time.

 

Case Study: A $180,000 Tax Debt Reduced to $9,600

elderly retired man

In speaking with potential clients, I have always held a firm line when it comes to promising results. Many people want promises and guarantees of a substantial reduction of their tax debt right away when they contact us. In essence, they just want to be sold on false promises. 

But if you as a tax expert have any ethics or integrity, you realize that making any guarantees immediately is an impossible thing to do. Many tax relief companies out there have no problem putting a salesperson on the phone to make huge false promises. Without knowing the facts of a case, doing that is simply unfair to the potential client. This would be the same as a doctor diagnosing somebody without examining them or a mechanic diagnosing issues without opening the vehicle’s hood.

I have had too many conversations with clients where they tell me one thing but when I get their file from the IRS, it provides a whole different picture. Sometimes, people outright lie about their situation but that is not always the case. Sometimes, people simply do not know everything that is going on and how serious their situation is. 

Additionally, when a person does not understand how IRS programs work they may exaggerate their situation. Or sometimes an individual is just so bad at managing their money that their view of their financial situation is entirely different than the IRS’. 

These are just some of the many reasons is why it is so important for us to put in some heavy lifting in the beginning and figure out what is truly going on with a person’s tax debt and financial situation. Then I can predict a resolution based on an educated approach. I also stress to every potential client that this is a long process and the facts will eventually be revealed, so from the start, they need to be 100% honest with me and everyone at my firm.

 

Mr. E Contacts Us For Some Help

One particular case comes to mind that always reminds me to stress to potential clients the importance of being 100% honest and forthright with us. This client was as nice as it gets and I do not want to imply that he ever intentionally lied to me. 

Owing to the IRS a little bit of money can be scary enough, but this elderly man came in thinking that he owed close to $100,000. At the time, he had a good income, but he was 75 years old and needed to retire. He felt he owed the IRS more at one point but thought a lot of the older tax debt had been included in a bankruptcy judgment. He had tried many different payment arrangements directly with the IRS but without having somebody knowledgeable of his rights to negotiate with the IRS on his behalf, the payments were never affordable for him.

 

A Tax Investigation: Getting the Facts First

Just like every case that we take on, we started the process with a Tax Investigation. Within a few days, the IRS sent us his information. The information we received from the IRS was much different than what Mr. E had shared with us during his original consultation and is a prime example of why these investigations are so necessary. 

The biggest difference was the debt amount. He owed the IRS $180,000, not $100,000 as he believed, from as far back as 2002. The IRS records did show a record of his bankruptcy but none of the IRS debt was included in it. The bankruptcy did affect the tax debt, though–it put a hold on his expiration dates, giving the IRS longer to collect on the debt. The transcripts also showed that in 2016 the client had filed tax returns for many older years and that the IRS had done substitute returns on a few of those years. This timeline of events is especially important to the tax resolution because the processing of the filings, NOT the tax year, is what sets the final expiration date of tax debts.

Once we had this information from the IRS and did our initial discovery, we were back on the phone with this client ready to go over everything. We thoroughly educated him on his situation with the IRS and then began getting more in-depth information from him about his financial situation. At that time, he was employed in the oil drilling industry and his 1099’s showed a good income. Most of his income though went to cover his expenses. 

He told us that he had a little money in savings and that he owned nothing except an old truck.  After a thorough conversation, based on what he was telling us it was determined that he could qualify for a long-term settlement on the debt but because of his high income, he would still be required to pay back a large portion of that debt. 

A client in this situation has the right to pay his cost-of-living expenses and the cost of doing business expenses prior to paying the IRS. In his case, he still had a large net disposable income, or in other words, a lot of money left over after expenses.

Mr. E was 75 at this time and had been needing to retire for a few years but had continued to work because he had this large tax debt hanging over his head. Now that he knew his rights as a taxpayer, we started discussing the resolution that could be obtained based on the income he would have if he retired. As long as everything matched up with what he was telling us, he was a sure fit for one of the many hardship programs available with the IRS. He decided that he would retire and we would pursue one of these hardship programs for him. 

With the lack of savings and assets, we began the process for an Offer in Compromise. This is a program where the IRS will accept a lump sum that is less than the amount owed and completely forgive the remainder of the debt.

 

The Situation Was Much Worse Than Expected

It is so important that we as a tax relief firm know everything about a client’s situation and that the client is completely honest and forthright with us. I do not think that Mr. E was trying to be outright dishonest with us but more facts did come out during the process. 

Many times clients think they can hide things from us or the IRS in order to achieve a better result. They must remember that this is the IRS we are dealing with. About six months into the process, the IRS found a property that was owned outright by Mr. E. This changed everything in terms of what he would qualify for and what he would not. A major disqualifier for the Offer in Compromise is the ownership of property. 

This made things extremely difficult. Not only did our agents have to completely change course on the determined resolution but they also had done a months’ worth of work towards a program that Mr. E did not qualify for. This work of course had to be paid for and we had to start from the beginning on a new resolution for him. Unfortunately, the cost of Mr. E’s case almost doubled because he failed to disclose this detail to us. This was not to penalize him but it was to simply pay for the work that had already been done by our team and the work that now needed to be done to get him into the resolution that he qualified for.  

The IRS program we then began focusing on would provide nearly the same type of savings to the client but just would not be the lump sum that he had hoped for. If he had just been forthright from the beginning, we would not only have obtained a resolution for him much sooner but he would have saved himself a lot of money.

Again, I want to stress that Mr. E was not a bad or dishonest person. These situations can be very scary and when people are backed into a corner with the IRS, they sometimes make bad decisions. Luckily in this situation, our agents were able to change course very quickly and kept a good working relationship with the IRS, so they did not move forward with any collection actions like garnishments or levies

 

A $180,000 Tax Debt Becomes $9,600

Even though he owned his property outright, our agents were still able to show his inability to pay the full tax debt. They were able to prove, based on his current income, that all he could afford to pay was $100 a month. With this resolution, Mr. E would ultimately be responsible to pay back only $9600 on his $180,000 tax debt. He would be completely out of debt with the IRS in less than ten years if he remained compliant moving forward. 

From here we further educated him on tax planning based on his new financial situation. We made sure he had the correct withholdings on his retirement income so that he would not owe the IRS again or get defaulted out of his plan. After a case like this and still being able to achieve such great results, the last thing we would want to see is our client lose this great tax debt resolution.

Mr. E was very thankful that we stuck with him throughout the process. He told us that he thought he was done learning at his age but that he definitely learned a lot from our process. He acknowledged he should have been more honest from the beginning and wishes he had contacted us years sooner. 

He was now finally in a place where he could retire, which he should have done years ago, and could afford to pay the IRS back but on his terms.

 

Case Study: After a Long Uphill Battle, We Saved Mr. B $28k

example of a tax relief client

Throughout my many years of working with clients that have profoundly serious situations with the IRS, I have met many different types of people.

For example, I have been contacted by people that owe small balances and call immediately after they receive their first letter from the IRS. They insist on hiring representation to make sure that they are in the best program possible with the IRS and want some tax education so they never find themselves in that situation again. I would describe these people as being very proactive. As much as they are already in a tough situation owing money to the IRS, they hired us at a point that we know we can keep them protected and work at their pace and our pace to fix the situation.

Then you have the person that has let their situation with the IRS get so bad that their back is against the wall and time is not on their side. One client that comes to mind when I think of the person that really came to us with their back against the wall is a client that I will call Mr. B for his privacy.

This was a case that many times during representation we were fighting the IRS AND our client to provide us with the information we needed to get him into the best situation possible with the IRS. This was also a case where time was not on our side.

 

Ignoring the IRS & the Notice of Intent

This client had come to us owing about $13,000 to the IRS from the tax years 2007-2013. While that is not a huge amount to owe relatively speaking, Mr. B also had not filed his taxes for a few years and assumed he would owe the IRS more. He admitted that he had been just trying to ignore the situation in hopes that it would go away. Unfortunately, with the IRS, if you do nothing, the situation only gets worse.

He contacted us at this point because he had received the dreaded Notice of Intent to Levy from the IRS. The IRS was making him aware that unless he paid the balance in full within 30 days, they would begin garnishing his income to recover the debt. 

He originally contacted us right after he received that letter and we had a great conversation about how we can help him if he allows us the time to get representation on file and get him protected. He wanted to take his time and investigate us to make sure he was hiring the right company. I absolutely encouraged him to do this. We have worked extremely hard to maintain the amazing reputation that we have and always want our clients to feel confident about who they are hiring. I did let him know that the Notice of Intent to Levy was a serious letter and that he needed to get back to me as soon as possible so that we can get him into a protected status with the IRS.

The next time I heard from Mr. B was 30 days later. He was now in a panic hoping that it was not too late to do something. I explained to him it would have been preferable to have more time to work on his case but we would be able to rush the file and get him protected.

 

We Start Helping Mr. B

We began his process by first doing a Tax Investigation to get all the facts from the IRS first. This is where our agents put representation on file with the IRS and then the IRS provides us with tax transcripts of everything that needs to be dealt with. We were able to complete this within a few days which is lightning fast when dealing with the IRS.

The IRS made us aware that the situation was a lot more serious than the client thought. To start with, based on the years in which he had filed he owed almost $20,000. His debt came from the tax years of 2007-2013. After 2013, he had stopped filing. 

One big thing that he did not make me aware of is throughout recent years he had taken large early withdrawals from his 401k without the proper withholdings. Once these years were filed, his IRS tax debt would significantly increase. It’s important to note that in order to qualify for any of the programs available from the IRS, you absolutely must be filed up-to-date with your tax returns. So that would be the first step in Mr. B’s case.

To file these overdue tax returns, Mr. B was assigned a case manager to help facilitate the process. The case manager explained all of the information we need directly from Mr. B so that the filings could be completed. We sent him all of the information via email. This is where the uphill battle began. 

A lot of clients, once they know they are protected, go back to their old ways. Luckily for him, our case managers take these cases very seriously and after about a month of chasing him, he finally started sending over the information we needed. Our agents were able to file all the required years and they used everything within the tax law to keep the tax debts as low as possible. But he ended up owing another $28,000 from the lack of withholdings. Between the previously accrued tax debt already owed and this new amount, he collectively owed $48,000 to the IRS.

At this point, there is nothing more that can be done but wait for the IRS to assess these tax years. This typically takes a few months. During this time, our agents leave representation on file and monitor collections so that we immediately know once these debts are assessed. Once these debts are assessed, we begin the process of enforcing the client’s right on the repayment of the tax debt.

 

Our Persistence Pays Off

Just like the filing process, our case managers and Enrolled Agents do most of the work but the client must be involved as well. Mr. B’s case manager began trying to reach out to him but got no response whatsoever. Because of the persistence of the case manager and a month of emails, texts, and phone calls, Mr. B finally responded and began providing the information needed to get him into the best program available to take care of his tax debt.

The main qualifier for all of these IRS programs is a client’s ability to pay the debt back. Mr. B had gone through some tough times in years past but at this point he was doing better financially but he still could not pay that debt back in full. The next part of the process was proving this. 

In some cases, this part of the process can take a few months but sometimes the IRS will very closely scrutinize the taxpayer’s financials and ask for resubmission of the proof month after month after month. This was one of those cases. 

When the IRS decides to do this AND you have a client that is not quick to respond, this can become a very difficult task. Fortunately, our case managers are very serious about helping our clients and in many cases want to get great results more than it seems the client does. With the persistence of our case managers, we were able to jump through the hoops the IRS provided and come to a final resolution.

 

A Low Payment Plan & Tax Debt Reduced by $28,000

The final determination, in this case, ended up saving Mr. B almost $28,000. This was largely based on the fact that he had gone through very tough times financially and he also had no savings set aside to be able to pay the lump sum. The great news was that we were able to get him into a payment plan and he would be able to pay his tax debt through payments of approximately $200 a month. 

After a long uphill battle, Mr. B was ecstatic not only to finally have the IRS off his back but that he was also going to be able to afford the payments without falling behind on any of his other monthly bills.

But our job was not done yet. From here we explained to him that moving forward he must do the right thing with the IRS. To keep these benefits including his payment plan, we explained to him that he must file his taxes on time every year and cannot accrue any further tax debt. If he does these things, he will remain in this program until the debt is gone. 

A few days later, Mr. B called us. He wanted to make sure that everyone here knew how great his case manager was. He admitted that without the persistence of the case manager, he knows that he would never be in the good spot he is in now with the IRS. I explained to him that we know this is a big part of our job. A lot of people that get themselves into situations like this need to turn the reins over to tax professionals to make sure things are done and done right.

If you can relate to Mr. B and have either accrued a tax debt with the IRS, have unfiled taxes, or are ignoring your tax situation in hopes that it will go away (it won’t), contact us for a free, no-obligation tax relief consultation and let’s start eliminating your tax problems today.

 

How to File a Decedent’s Final Tax Return

a widow filing taxes for her late husband

The last thing that anybody wants to think about when they lose a loved one is filing their taxes. Unfortunately, if the deceased were normally required to file, then someone would be required to file a final tax return on their behalf.

In many of these situations, the decedent may be leaving a spouse behind that is unaware of how the decedent handled their taxes. In other cases when there is not a spouse or the spouse is unable to handle the situation, the courts or the will of the decedent will appoint an executor. This person would then be responsible to file the final return or in some cases multiple returns if some had not been filed. 

In this article, we will discuss when a decedent is required to file a tax return and what forms must be filed. We will also talk about some of the credits and exemptions that can be utilized on estate returns when those are required.

 

When Is a Decedent Tax Return Filing Required?

The first step for either the spouse or executor would be figuring out what needs to be filed. The requirements to file for a decedent are the same as for a normal tax year. The decedent would be required to file if they make more than the standard deduction for that year. 

The standard deduction changes every year but for the 2020 tax year, you most likely must file if income was above $12,400 or $24,800 for those married filed jointly. This includes all money, goods, and property the deceased received from a job, pension, investments, disability payments, IRA’s, and retirement plans. For people with larger incomes, a decedent’s social security may also be taxable. 

The final tax return of an individual should only cover income received up to the date of death. Income received after that, such as income received from the sale of assets sold after the date of death may have to be reported on a separate return for the deceased person’s estate or trust.  If the decedent has income below the threshold, then they are not required to file but be sure to look at credits and withholdings to see if any refund would be due.

It is also especially important to make sure that tax returns for the previous years have been filed. If the decedent has not done so and has requirements, you may also have to file individual income tax returns for the years preceding the death. In such cases, you can hire a tax professional and they can do a Tax Investigation. This is when either an Enrolled Agent, CPA, or Tax Attorney can contact the IRS on behalf of the decedent and do a full compliance check and request the master tax file. If you are trying to sort this out on your own, you can also obtain verification of non-filing and certain income documents of the decedent from the IRS using IRS Form 4506-T which is called the Request for Transcript of Tax Return.

 

How Do You File a Decedent’s Final Tax Return?

The final tax return would be for the year of death beginning January 1st until the date of death and whatever income was received during that time up to the date of death. The filing must be done by the due date of April 15th. If this deadline cannot be met then the same extension of six months is allowed. This extension only changes the due date of the filing. If taxes are owed, they are still due by April 15th. The same 1040 tax form is used for filing and the person’s income is still taxed just as if the person was alive. The same tax rates apply and they can claim the same deductions and credits as normal.

The difference from a normal tax filing is that the word “Deceased” must be written across the top of the 1040 form along with the person’s name and date of death. If the court has appointed a personal representative, that person must sign the return. If it is a joint return, the surviving spouse must sign it. If the court has not appointed a personal representative, the surviving spouse would need to sign the return and write in the signature area “Filing as the surviving spouse”. 

If the court has not appointed a personal representative and there is no surviving spouse, the person in charge of the decedent’s property must file and sign the return as the personal representative. If you are signing the tax return and are not the surviving spouse, you would have to attach the IRS Form 56 and attach it to the 1040 form. This form is used to notify the IRS of the creation or termination of a fiduciary relationship. Also, you must attach to the 1040 form a copy of the certificate that shows the official appointment as executor and a copy of the death certificate.

If the decedent was married at the time of death, the decedent and surviving spouse are considered married for the whole year for filing status purposes. A surviving spouse who does not remarry before the end of the tax year in which the decedent died may file a joint return with the decedent. The return can include the full standard deduction based on the filing status of the decedent. If the surviving spouse remarries during the year, they must file apart from the decedent. The decedent must file separately but the surviving spouse can file a joint return with the new spouse.

 

What If the Decedent Owes Taxes or Is Owed a Refund?

If there are taxes owed after filing, then they must be paid prior to distributing one’s estate. This can be done with a payment by check, debit card, credit card, or electronic funds transfer. 

If the decedent is owed a refund and has a surviving spouse, then the spouse can claim the refund. If the taxes are being filed by an executor, the executor may claim the refund using IRS Form 1310.

 

Can You Take Deductions and Credits for a Decedent?

When it comes to filing the final return, the same rules apply when it comes to deductions and credits. The full standard deduction may be claimed if deductions are not itemized.  Medical expenses that were paid before the decedent’s death are deductible, subject to limits on the final income tax return if deductions are itemized. This includes expenses for the decedent as well as for the decedent’s spouse and dependents.

Medical expenses that were not paid before death are liabilities of the estate and appear on the federal estate tax return, IRS Form 706. If the estate pays medical expenses for the decedent during the one-year period beginning with the day after death, the executor may elect to treat all or part of the expenses as paid by the decedent at the time the decedent incurred them. An executor making this election may claim all or part of the expenses on the decedent’s income tax return as an itemized deduction rather than on the federal tax return.

A decedent’s net operating loss deduction from a prior year and any capital losses including capital loss carryovers can be deducted only on the decedent’s final income tax return. An unused net operating loss or capital loss is not deductible on the estate’s income tax return. The individual filing a decedent’s tax return may claim any tax credits that applied to the decedent before death on the decedent’s final income tax return. Certain credits like the Earned Income Tax Credit and the Child Tax Credit would still apply even though the return covers a period of fewer than 12 months.

 

If the Decedent Died During Military Action

If the decedent is a member of the US Armed Forces at the time of death and dies from wounds or injury incurred while a member of the US Armed Forces due to a terrorist or military action, the decedent may qualify for forgiveness of his or her tax debt. The forgiveness applies to the tax year the death occurred and any earlier tax year in the period beginning with the year before the year in which the wounds or injury occurred. The beneficiary or trustee of the estate of a deceased service member does not have to pay taxes on any amount received that would have been included in the deceased member’s gross income for the year of death.

 

Getting Help

In conclusion, it is an emotional time when losing a loved one, and dealing with their tax situation can be challenging. I always recommend seeking the help of a true tax professional. An Enrolled Agent or a CPA has the knowledge and licensing to properly advise you and assist you in the final filing for the decedent. 

If you are still trying to navigate this on your own and need more information, please check out the IRS Publication 559. This publication is designed to help those in charge of the property of an individual who has died.

 

What Is the Qualified Business Income Deduction?

screenshot of the Section 199A page on irs.gov

In 2017, there were major changes to tax law. The Tax Cuts and Jobs Act included reductions in tax rates for businesses and individuals, increasing the standard deduction and family tax credits, eliminating personal exemptions, and making it less beneficial to itemize deductions, limiting deductions for state and local income taxes and property taxes. 

With these reductions of tax rates for businesses, it was felt that this would be very fair for small businesses. Most small businesses are set up as pass-through entities. This is where the income tax is passed through the entity and the tax responsibility is left on the owner or owners as individual taxpayers. To level the playing field, Section 199A was added to the Act.

 

What Is Section 199A?

Section 199A details an individual taxpayer deduction for qualified business income. It is called the Qualified Business Income Deduction. This deduction allows eligible self-employed and small business owners to deduct up to 20% of their business income, REIT dividends, or qualified publicly traded partnership (PTP) income on their individual tax returns. The Qualified Business Income Deduction lowers your taxable income, which is the amount used to determine how much you owe in taxes. Unless changes to this law are made, it is to be available for tax years 2018-2025.

The 20% Qualified Business Income Deduction is calculated as the lesser of 20% of the taxpayer’s qualified business income, plus (if applicable) 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income or 20% of the taxpayer’s taxable income minus net capital gains. The 20% deduction reduces federal income tax but not Social Security or Medicare taxes. It also does not reduce self-employment tax.

 

Who Qualifies for the Qualified Business Income Deduction?

The 199A deduction is provided for sole-proprietorships, partnerships, S-corporations, trusts, or estates. Income from C-corporations, any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners or services you performed as an employee of another person or business does not qualify. 

This does not mean that any business income from these entities qualifies for the 20% deduction. This deduction comes with significant qualifications. This is what they call an “above-the-line” deduction, so it does not matter if you take the standard deduction or if you itemize on a Schedule A. The deduction is only for pass-through entities and qualified business income from these entities. It is not available for wage income and can be limited by which type of business in which you are engaged, your taxable income, W-2 wages paid, and the unadjusted basis immediately after acquisition of qualified property.

The Qualified Business Income Deduction is the net number of qualified items of income, gain, deduction, and loss from any qualified trade or business. This includes but is not limited to the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans. The Qualified Business Income Deduction is the taxable income that comes from a domestic business. If a business has both domestic and foreign income only the domestic income qualifies.

 

What Does Not Qualify For the Qualified Business Income Deduction?

The Qualified Business Income Deduction does not include items such as:

  • Items that are not properly includable in taxable income
  • Investment items such as capital gains or losses or dividends
  • Interest income not properly allocable to a trade or business
  • Wage income
  • Income that is not effectively connected with the conduct of business within the United States
  • Commodities transactions or foreign currency gains or losses
  • Certain dividends and payments in lieu of dividends
  • Income, loss, or deductions from notional principal contracts
  • Annuities, unless received in connection with the trade or business
  • Amounts received as reasonable compensation from an S corporation
  • Amounts received as guaranteed payments from a partnership
  • Payments received by a partner for services other than in a capacity as a partner.
  • Qualified REIT dividends
  • Publicly traded partnership (PTP) income

There is a safe harbor rule for 199A purposes available to individuals and owners of pass-through entities who seek to claim the deduction under section 199A with respect to a rental real estate enterprise. Under the safe harbor, a rental real estate enterprise will be treated as a trade or business for the purposes of the Qualified Business Income Deduction if certain requirements are met.

Also, there are income limitations to qualify for the deduction.

 

2020 Qualified Business Income Deduction Income Thresholds

 

Filing Status Income Threshold (limit for the full deduction) Income Limit for a partial deduction
Single $163,300 $213,300
Head of household $163,300 $213,300
Married filing jointly $326,600 $426,600
Married filing separately $163,300 $213,300

 

If you are below these thresholds, it is very straightforward and you should qualify for the 20% deduction on your taxable business income. 

If you are above these limits, it gets confusing as to who qualifies and who does not. Above those limits, your ability to claim the deduction depends on the precise nature of your business. Even if your business qualifies, you may not get to enjoy the full 20% break as the deduction phases out for certain types of businesses.

 

Determining If Your Business is an SSTB

If the business owner’s taxable income is above the income limits, you will need to determine if the business is a specified service trade or business (SSTB). An SSTB is a trade or business involving the performance of services in the fields below:

  • Accounting
  • Actuarial science
  • Athletics
  • Brokerage services
  • Consulting
  • Financial services
  • Health services, such as performed by doctors and nurses
  • Investing and investment management
  • Law, including lawyers
  • Performing arts
  • Trading

Many businesses offer a multitude of services or products. A business will not be considered an SSTB if less than 10 percent of the gross receipts, (5 percent if gross receipts are greater than $25 million) of the trade or business are attributable to the performance of specified services. 

Many business owners are trying workarounds to restructure their businesses by splitting up their business into two or more entities with the same owner to separate the SSTB income and non-SSTB income and avoid missing out on part or all the Qualified Business Income Deduction. 

To prevent this workaround there are set rules that if a non-SSTB has 50% or more common ownership with an SSTB and the non-SSTB provides 80% or more of its property or services to the SSTB, the non- SSTB will by regulation be treated as part of the SSTB.

 

What If Your Taxable Income is Above the Threshold?

If your taxable income is equal to or higher than the threshold, your maximum possible deduction is subject to limitations. How much you can get will decrease based on your income. 

The deduction considers multiple factors, and the instructions will walk you through them. If the income is from a specified service trade or business (an SSTB), it does not qualify for the deduction once it passes the maximum threshold. 

If you are between the thresholds and an SSTB, the deduction will be phased out until it no longer exists. If you are not an SSTB and you go over the phase-in range, your deduction could be limited by your W-2 wages paid or the UBIA of qualified property held by a trade or business.

There are many more factors that affect a taxpayer’s qualifications for the deduction and factors that set limitations on the percentage one can deduct. The IRS has noted that 95 percent of small business owners will fall below the thresholds and not have to worry about the limitations. If you are below the threshold, you would use IRS Form 8995 (Qualified Business Income Deduction Simplified Computation). 

If your taxable income is more than the income threshold then you would use IRS Form 8995-A (Qualified Business Income Deduction). Both of these forms take you through the process of adding up your qualified business income, qualified REIT dividends, and qualified PTP income. This will determine the amount of your deduction.

 

Are You Taking Advantage of the Deductions Available to You?

I am sure many questions are still left unanswered. This is one of the most complex tax laws not only from the 2017 Tax Cuts and Jobs Act but in all of the tax codes. The IRS website provides a lot more information if you’d like to dig in further.

The Treasury Inspector General for Tax Administration has identified nearly 900,000 returns filed for 2018 that did not take the Qualified Business Income Deduction even though it appeared that they qualified. In my past articles, I have always recommended that a taxpayer seeks advice and assistance from a true tax professional. 

When it comes to the 199A deduction, it is imperative that a business owner has the correct tax professional assisting them especially if they are above the limitations. Enrolled Agents, CPA’s and Tax Attorneys can make sure you are not missing out on this valuable deduction and formulate strategies in the operation of the business that will increase the likelihood of you being able to benefit from the Qualified Business Income Deduction. Most importantly, as complex as it is, they can make sure that your tax return is filed correctly so that you get the correct deductions and don’t have to worry about a future IRS examination or an IRS audit.

 

Case Study: IRS Payments Completely Eliminated

an older female tax relief client

Throughout my years in this industry, it is always tough speaking to people in awful situations with the IRS. When someone’s financial situation is so tight, I always try to steer them to try to contact the IRS directly first in hopes that the IRS would see how bad their situation really is and try to help them. The programs that companies of our nature utilize are programs that all people have the right to. 

I can understand the cases where people are making good money but have large tax debts and of course, the IRS being a debt collector will try to get as much money as quickly as possible. But when a client clearly has no ability to pay the tax debt back and the IRS still forces them to pay hefty amounts every month, it bothers me. This has happened many times over the years but there was one client that will always stick out when I think of these situations. For her privacy, we will call her Ms. B.

 

Small Tax Debts That Kept Getting Bigger

Ms. B reached out to us a few years ago and explained her situation to me. She owed about $14,000 to the IRS. Compared to a lot of other cases that I have handled, this is not a huge amount of money to owe the IRS. I may have even told her that she might want to try to contact them directly and they should be able to work with her. She explained to me that she had tried that and then told me her experience dealing with them. 

Beginning in 2006 when she accrued a tax debt, she worked with the IRS in setting up payment arrangements to try to pay her debt. Now though, she was getting older and was not able to work as much as she used to, so her income was decreasing each year. 

Every time she spoke to the IRS, the only remedy they offered was payment arrangements that consisted of high payments she felt she could not afford. She said that they were very intimidating when she spoke to them and she was afraid to fall behind so she would accept their payment terms. She did without many times in order to make those payments but in doing so failed to set aside money for taxes for the present tax year because she simply could not afford to do both. She explained to me how the tax debt balance was barely going down but year after year she ended up owing the IRS more.

 

Forced to Give the IRS 30% of Her Social Security

In 2010 she was forced to retire for health reasons. At this point, all she had was a small amount in savings and a social security income of $1200 a month. She described her situation to me as being in quicksand with the IRS. Things had gotten so bad that she defaulted on her payment and was barely able to pay her living expenses with the money she had leftover. 

She was not a bad person trying to avoid paying the IRS back; she just truly could not afford to do so. She tried to contact the IRS many times for help but they always only wanted a payment. At this point, she figured the only thing she could do was ignore all of it because the stress had been eating her alive.

She was able to stay under the radar for a few years but then one day she received a letter from the IRS stating that they were going to garnish her social security if the tax debt was not paid. She contacted the IRS again and it was the same story–all they wanted was a payment that she could not afford. Knowing that she would not be able to survive if she lost her social security each month, she agreed to a $350 a month payment. This payment very quickly ate up the remainder of her savings and so she was forced to pay this amount out of the $1200 a month she received from social security, leaving her with only $850 a month to survive. Knowing she could no longer go on like this, she reached out to us at Innovative Tax Relief.

 

Ms. B Reaches Out to Us for Help

All I could think about when hearing her explain her situation is that she should not have to hire representation. She was so obviously qualified for one of the many hardship programs the IRS offers that I was shocked that the IRS would not just put her into one. I also wished we had spoken many years ago because if everything matched up with what she was telling me, we could have saved her years of anguish and struggling to make that high payment.

I explained to her the first thing we needed to do was get the facts from the IRS. We started off the case by doing a Tax Investigation for her. When we received her transcripts from the IRS, everything matched up with what she had told us. We could see these were all originally small tax debts that had gotten larger because of penalties and fees. We could also see her best attempts to make the payments over the years. 

Through her wage and income reports, we could also see that her income had reduced over time to the point that it was amazing she was even able to make a payment! Now that I had the facts, I was able to put her at ease and explain her rights in this type of case. The biggest right she had was the right to pay her monthly expenses prior to paying the IRS.

This would not be an overnight fix but I assured her that we could get her into a program where she would not be required to pay the IRS back because of what they call a hardship. She had stopped making her monthly payment to the IRS, so we kept our representation on file so that we could monitor collections, making sure that the IRS did not proceed with any type of the threatened involuntary actions. From here we began the process of presenting her financial situation to the IRS. 

 

IRS Payments Completely Eliminated

Through this process, we were able to prove that after allowable expenses there was simply nothing left over to afford any sort of payment to the IRS. As a result, she was officially put into a “currently non-collectible status” which is a hardship program that protects a person from the IRS’ involuntary collection actions when they have proven that they cannot afford to pay the tax debt back.

After years of anguish, Ms. B was ecstatic that she could finally stop worrying about the IRS on a daily basis and lose sleep. She was even happier when I explained to her how the IRS only has 10 years to collect on a tax debt. In her case, this is probably the reason why the IRS had been demanding such high payments–they were trying to get as much money as possible from her while they had the right to collect on the debt. 

I explained to her how in just a few more years, based on the statute of limitations, the tax debts would start to be forgiven year after year until they were all gone. Unless she had a big jump in income or won the lottery, she would not have to make any sort of payment to the IRS ever again and it would soon all be forgiven and wiped away. I gave her all the information and dates, so she finally had an end date to this situation that had plagued her for so long.

The very next day Ms. B contacted me just to thank me again and to let me know she had the best night of sleep she had in years since her troubles with the IRS began. I still hear from her every so often with more thanks as her final IRS debts are getting close to expiring. 

I will never try to tell somebody that they must get representation such as from us. In fact, I advise so many potential clients in situations like hers to try to deal with the IRS on their own first. Unfortunately, there are too many stories like Ms. B’s. 

 

We Protect Your Rights With the IRS

It is so important for people to know their rights when it comes to owing money to the IRS. If the IRS is not willing to work with you and you are falling behind on other bills and debts, please reach out to a true tax professional. We will do everything possible to make our process affordable for you and do everything legally possible to get you into an affordable situation with the IRS where you will most likely save a lot of money not to mention eliminate the stress from your life.

If you have been losing sleep worrying about your tax problems, we can help. Contact us for a free tax relief consultation today.