How the IRS Tax 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.

 

How to File a Final Tax Return for Decedents

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.

 

A Guide to 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 StatusIncome 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.

 

Avoid Being a Victim of IRS Scams

a worried woman on the phone with an IRS scammer

Over my many years in this industry, I have encountered petrified taxpayers that reach out looking for help that feels the IRS is bearing down on them. This is what the IRS does, so in some cases, it is 100% valid to be scared. 

With others that contact me, I ask some simple questions and come to realize that they have been the victim of an IRS scammer. In any situation when people are vulnerable you will always have nefarious people in our society trying to take advantage. 

Thousands of people fall victim to these scammers every year. An FTC (Federal Trade Commission) report said that these scams have cost Americans some $667 million in 2016.  

In today’s article, I am going to discuss things to look out for when you feel you are communicating with the IRS to avoid falling victim to these scammers. I will go on to provide and describe some of the most common scams to look out for from people calling and posing as the IRS all the way to companies in our industry who scam taxpayers in need of help.

The IRS has provided a list they call “the dirty dozen”. The dirty dozen list focus’ on scams that target taxpayers. The IRS urges everyone to be on guard and look out for others.  Taxpayers should all be aware of these different scams and know that they are legally responsible for what is put on their tax returns even if it is prepared by someone else. 

Make sure when hiring a tax professional to look at their online reviews to see what previous clients have said about them and to make sure they have the correct licensing and educational background to properly help you. An Enrolled Agent and CPA (certified public accountant) are true tax professionals that can assist you. 

 

The Dirty Dozen IRS Scams

Phishing

Scammers utilize fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers through email about a tax bill, refund, or Economic Impact Payments. The IRS Criminal Investigations has seen a tremendous increase in phishing activity utilizing emails, letters, texts, and links. These schemes are blasted to large numbers of people to get personally identifying information or financial account information including account numbers and passwords.

Fake Charities

Criminals Frequently exploit natural disasters and other situations such as the current Covid-19 pandemic by setting up fake charities to steal from well-intentioned people trying to help in times of need. These schemes can start with a contact by telephone, text, social media, or in-person using a variety of tactics. They try to trick people into sending money or personal financial information. Legitimate charities will always be willing to provide their EIN (Employer Identification Number) which can be used to verify their legitimacy. You can search these directly on the IRS website. 

Threatening Impersonator Phone Calls

Scammers will call taxpayers posing as the IRS. They can threaten arrest, deportation, or license revocation if the person does not pay a bogus tax bill. These callers will often use robocalls which are text to speech recorded messages with instructions for returning the call. The IRS will never demand immediate payment, threaten, or ask for financial information over the phone or call about an unexpected refund or Economic Impact Payment.

Social Media Scams

Social media scams have also led to tax-related identity theft. The basic element of social media scams is convincing a potential victim that he or she is dealing with a person close to them that they trust via email text or social media messaging.

EIP or Refund Theft

Scammers will steal identity information and then file false tax returns or supply bogus information to the IRS to divert refunds to wrong addresses or bank accounts.

Senior Fraud

Seniors are more likely to be targeted and victimized by scammers than other segments of society. The IRS recognizes the pervasiveness of fraud targeting older Americans.

Scams Targeting Non-English Speakers

IRS impersonators and other scammers also target groups with limited English proficiency. These scams are often threatening in nature. Some scams also target those potentially receiving an Economic Impact Payment and request personal or financial information from the taxpayer.

Unscrupulous Tax Preparers

Dishonest tax preparers pop up every tax season committing fraud, harming innocent taxpayers, or talking taxpayers into doing illegal things that they regret later. Taxpayers should avoid what the IRS calls “ghost preparers”. This is where a tax preparer will not sign a tax return

All paid tax preparers must have a PTIN (Preparer Tax Identification Number) and must sign and include this PTIN on all returns. These types of preparers will promise inflated refunds by claiming fake tax credits, including education credits, the Earned Income Credit, and others. 

Taxpayers should avoid preparers who ask them to sign a blank return, promise a big refund before looking at the taxpayers’ records, or charge fees based on a percentage of the refund.

Offer in Compromise Mills

While there are many good tax relief companies out their anytime you have people in vulnerable situations you will have companies that prey on that. There is an extremely attractive IRS Program called the OIC (Offer In Compromise). This is where the IRS settles, takes a lesser amount, and forgives the remainder of the tax debt. This is a difficult program to qualify for. 

These unscrupulous companies oversell the program to unqualified candidates so they can collect hefty fees from taxpayers already struggling with debt. These companies will cast a wide net for taxpayers and charge them pricey fees and churn out applications for the program that they are unlikely to qualify for.

Fake Payments with Repayment Demands

A new method that scammers are tricking taxpayers with has emerged since the IRS has taken measures to crack down on identity theft. In the past scammers would steal a taxpayer’s personal information such as social security number and bank account information and then file fake returns with refunds directed to the scammer. With IRS cracking down and making sure refunds are going to the correct taxpayer these scammers will now make a call once the refund is issued posing as the IRS and tell the taxpayer they need to pay the money back to them to avoid trouble. These scammers typically demand payment with specific gift cards for the amount of the refund.

Payroll and HR Scams

These scammers use phishing techniques to steal Form W-2 and other tax information from tax professionals, employers, and taxpayers. They commonly use two methods which are business email compromise or business email spoofing. This has become more common since people have been working from home due to covid and more business communication is done through email.

Ransomware

Ransomware is malware targeting human and technical weaknesses to infect a potential victim’s computer, network, or server. Once infected ransomware looks for and locks critical or sensitive data with its own encryption. Victims typically are not aware of the attack until they try to access their data, or receive a ransom request in the form of a pop-up window.

 

How to Avoid Falling Victim to an IRS Scam

In conclusion, the IRS very rarely if ever makes phones calls or sends emails. They definitely do not do this as an initial interaction with a taxpayer. The IRS will never call you and threaten arrest nor will they send local police to arrest you. Ordinary taxpayers are not at risk of going to jail over unpaid taxes. If you receive contact from the IRS by these methods, it is most likely fraudulent. Even if the caller ID shows IRS does not mean it is really the IRS. Unfortunately, caller IDs can be easily spoofed to say whatever a caller wants.

If the contact is initiated via email do not respond or click any of the links. Forward any of these emails to phishing@irs.gov. If you receive a phone call, tell them you are busy and will call back shortly and ask for the caller’s badge number and name. Then contact the treasury department directly by calling its fraud hotline 1-800-366-4484.

If you receive a text that claims to be from the IRS, it is a scam. The IRS does not send text messages. If you receive a text claiming to be the IRS forward it to the IRS at 202-552-1226. If you feel you have been a victim of Identification theft, then you need to complete a form 14309 Identity theft affidavit.

If you really owe taxes, then make sure you are dealing directly with the IRS or have a legitimate tax professional working on your behalf. You can check if you owe right on the IRS website. 

If you feel that you want or need representation, make sure to investigate whatever company that you hire. Fortunately, with the internet, you can see through a company’s reviews how they have treated their previous clients. Also, make sure they have true tax professionals on staff who are licensed to communicate directly with the IRS on your behalf. Enrolled Agents, CPAs, and Tax Attorneys are your best choices to represent you.

 

What You Can Deduct from IRS, State, and Local Taxes

a 1040 tax return

When filing your taxes there are many ways to reduce your tax bill or ways to get yourself a bigger refund. This can happen using different credits and deductions that are available. 

This article will discuss different tax deductions that can be used on your tax return to reduce your taxable income. I will start off by discussing the choice of either using the standard deduction or itemizing your deductions. I will also discuss above the line deductions which can be used in addition to the standard deduction.

 

What is a Tax Deduction?

A tax deduction is a deduction that lowers a person’s or organization’s liability by lowering their taxable income. Deductions are typically expenses that the taxpayer incurs during the year that can be applied against or subtracted from their gross income to figure out how much they owed. There is always confusion about the difference between the deduction and a tax credit. Remember a deduction reduces your taxable income while a credit directly reduces your tax bill.

On a tax return, you can either take the standard deduction or you can itemize your deductions. You cannot do both. When making the decision to itemize your deductions or to take the standard deduction it is especially important that you evaluate your situation thoroughly to see which will better benefit you. 

It is much easier to take the standard deduction but if you qualify for many deductions the choice to itemize can equate to many tax dollars saved so take your time to review the different deductions that are available and which ones that you qualify for. If these deductions that you qualify for are greater than the standard for your filing status, then you have the answer to your question. 

Having a true tax professional to assist you in reviewing your situation to make this decision is recommended. I will start off with the standard deduction so you have the information on that choice to compare to the breakdown of the possible itemized deductions that you could qualify for.

 

What is the Standard Deduction?

The standard deduction is the portion of income not subject to tax that can be used to reduce your tax bill. Even if you have no other qualifying deductions the IRS allows you to take the standard deduction no questions ask. In the past, the decision to take the standard deduction or to itemize was much more difficult. In 2017, with the Tax Cuts and Jobs Act, the standard deduction was almost doubled making this decision much easier. This will remain in effect for 2018 through 2025. 

The amount of your standard deduction now is based on your filing status, age, and whether you are disabled or claimed as a dependent on someone else’s tax return. The standard deduction adjusts every year based on inflation. The allowable standard deduction for 2020 and 2021 is laid out below as seen on Nerd Wallet.

Filing status2020 tax year2021 tax year
Single$12,400$12,550
Married, filing jointly$24,800$25,100
Married, filing separately$12,400$12,550
Head of household$18,650$18,800

The standard deduction is higher for taxpayers who are 65 and older at the end of the year and/or blind. This extra deduction applies to taxpayers and spouses if married.  Increase the standard deduction by the following for each occurrence of the conditions above. 

For married filing jointly, married filing separately or qualified widow there would be an increase in the deduction by $1300 for 2020 and $1350 for 2021. 

For single or head of household filers, the increase would be $1650 for 2020 and $1700 for 2021. 

If a taxpayer is claimed as a dependent on someone else’s tax return is limited to the greater of $1,100 in 2020 or the individual’s earned income for the year plus $350.

 

Tax Deductions You Should Itemize

Itemized deductions are expenses that can be subtracted from adjusted gross income to reduce your taxable income and therefore reduce the amount of taxes owed. Such deductions would permit those who qualify the ability to pay less in taxes than if they had taken the standard deduction. Itemized deductions are listed on Schedule A of Form 1040. If you decide to itemize you must save all receipts in case the IRS decides to audit you because they can request proof. 

There are many different deductions that one may qualify for. If the amount of these deductions that you qualify for are more than the standard deduction and you have proof of all these deductions, then you should itemize.

State and Local Taxes

Taxpayers can deduct state and local real estate, personal property, and either income or sales taxes. For taxes 2018 through 2025 this deduction is limited to $10,000.

Mortgage Interest

Taxpayers can deduct home mortgage interest on the first $750,000 of mortgage debt. Homeowners can only deduct mortgage interest on home equity loans if the debt was used to buy, build, or substantially improve the taxpayer’s home that secures the loan. Homeowners may deduct mortgage interest on the primary and secondary properties.

Charitable Contributions

Taxpayers are allowed to deduct charitable contributions up to 60% of the adjusted gross income.

Medical Expenses

A taxpayer can deduct unreimbursed medical expenses that are more than 7.5% of their adjusted gross income for the tax year.

Long-Term Care Premiums

Long-term care insurance premiums are tax-deductible to the extent that the premiums exceed 20% of an individual’s adjusted gross income. There is a deduction limit based on your age and the insurance must be qualified.

Gambling Losses

A taxpayer can deduct gambling losses only to the extent of their winnings. You can not deduct more than you win.

IRA Contributions

A taxpayer can deduct qualified IRA Contributions from a Traditional IRA. The amount of the deduction may differ if a taxpayer or their spouse has a 401k as well.

Self-Employment Expenses

A self-employed taxpayer can deduct 50% of the amount that they are paying in self-employment taxes.

Student Loan Interest

A taxpayer can deduct up to $2500 of the interest paid on a student loan from their taxable income.

Casualty and Theft Losses

Any casualty or theft loss incurred because of a federally declared disaster can be reported on a Schedule A. Unfortunately, only losses of more than 10% of the taxpayer’s adjusted gross income are deductible.

Moving Expenses

If a taxpayer is in the military and the move is permanent and was ordered by the military then they can claim a deduction on unreimbursed moving expenses. They can claim travel and lodging expenses, the cost of moving household goods, and the cost of shipping cars and pets.

Educator Expense Deduction

If a taxpayer is a schoolteacher or other eligible educator, they can deduct up to $250 spent on classroom supplies.

 

Tax Deductions That Have Been Limited or Eliminated 

Many commonly used and well know deductions have been recently eliminated or limited. In the past, an employer could reimburse a taxpayer up to $20 a month tax-free for bicycle commuting expenses. There were also employer-related deductions for parking, transit, and carpooling. The 2017 Tax Cuts and Jobs Act suspended these benefits. 

Another common deduction was the expenses from a move. In the past when a taxpayer relocated for a new job, they could use the expenses not only from the cost of moving their possessions but the cost of travel as well. Beginning in 2018 this deduction is only allowable for specific situations and only allowable for taxpayers in the military. 

Also, in the past, a taxpayer that made alimony payments was able to receive a deduction for alimony paid and the person receiving the alimony would include the money as taxable income. With any divorce decree beginning in 2019 the payer will no longer receive a deduction and the spouse receiving no longer must claim alimony as income. 

The medical expense deduction has not gone away but the threshold has changed so that the expenses must exceed 7.5% of your adjusted gross income. In years past the threshold was 10%. 

The Tax Cuts and Jobs Act also set limitations on SALT Tax deductions. SALT Tax is state and local taxes. In the past the amount that a taxpayer could deduct was unlimited. Now the SALT deduction is limited to $10,000. 

 

Understand Which Tax Deductions You Are Eligible For

In conclusion with the rise in the standard deduction and the limitation in many of the itemized expenses the decision of which method to utilize has gotten easier but it is still difficult. Also, with the many recent changes, it is especially important that you understand what you are eligible for and what you are not if you are thinking about itemizing overtaking the standard deduction. Unless a taxpayer has mortgage interest and property taxes, significant charitable gifts, or a major medical event it would probably make more sense to take the standard deduction. 

As I always recommend when filing taxes and tax planning, it will always benefit a taxpayer to consult with somebody that has the knowledge and licensing to correctly advise them. An Enrolled Agent and a CPA (Certified Public Accountant) are the tax professionals that have the educational background to best advise a taxpayer.

 

How to Get the Child Tax Credit Early

parents with their two children

There have been many different programs made available by the government to help people get through these tough times. With the Covid-19 pandemic, there has been a record number of people on unemployment, and many small businesses and self-employed people had a serious loss of income. 

The government has provided benefits in the form of stimulus payments, adding an additional federal amount to people state unemployment and they have given many tax breaks as well.

This article will discuss the major changes to the Child Tax Credit through the American Rescue Plan. These changes may not only give taxpayers with qualified dependents a much larger amount, but it will also give them a portion of the money earlier. The American Rescue increased the amount received per qualified child from $2000 to $3000 or $3600 per child under the age of 6. It also makes this credit fully refundable. 

I discussed this increase in the amount possibly credited to taxpayers in a previous article.  Please refer to our June 2nd article on the Child Tax Credit for more information. The reason I am coming back to this topic today is to further discuss the efforts that the IRS is taking as we speak to disburse a portion of this early over the next six months to taxpayers in need.

Starting July 15, 2021, about 36 million American families will start receiving checks from the IRS. Taxpayers who are eligible for this credit will receive up to $1800 broken up equally over the next six months. They will be receiving half of the credit that they qualify for and then they can claim the other half when they file their tax return for 2021. This is a temporary change just for the 2021 tax year.

To qualify for advance Child Tax Credit payments, you, and your spouse if you filed a joint return must have:

  • Filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return: or
  • Given us your information in 2020 to receive the Economic Impact Payment using the Non-Filers: Enter Payment Info Here tool; and
  • A main home in the United States for more than half the year (the 50 states and the District of Columbia) or file a joint return with a spouse who has a main home in the United States for more than half the year; and
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number; and
  • Made less than certain income limits.

The IRS will use information that taxpayers have already provided to determine who qualifies and will automatically enroll you for advance payments. There is nothing the taxpayer must do to get these advance payments.

 

What Are the Income Limits For the Child Tax Credit?

Not all taxpayers with qualified children will receive the higher child tax credit. The taxpayers who will receive the maximum amount will be taxpayers who make $75,000 a year or less if filing single, $112,500 or less if filing head of household, and $150,000 or less if filing a joint return or are qualified widows or widowers. Taxpayers who make more than these amounts will receive a phased-out amount. They will receive $50 less for every $1000 of income over the thresholds until the payments are phased out for people who earn roughly $20,000 more than the salary thresholds. 

The IRS has set up a tool on their website where a taxpayer can see if they qualify. For parents that qualify payments can be up to $300 for children under six and $250 per month for each child between 6 & 17.

If you do not qualify because you earn more than the maximum income allowed for the credit then you still may qualify for the original Child Tax Credit. This Child Tax Credit of $2000 is available to single parents who earn up to $200,000 or married couples who earn up to $400,000. If you earn higher than these amounts, then you will not qualify for any Child Tax Credit.

Since the IRS is relying on previous years’ filings, they may not have information for some people that qualify. Low-income households that are not required to file tax returns may fall through the cracks. If you were not required to file in 2020 or 2019 and qualify for this credit the IRS has set up a Child Tax Credit non-filers tool. 

Non-filers will need to provide personal information such as their date of birth, as well as their social security numbers for themselves and the qualified child. 

 

What Is a Qualifying Child for the Child Tax Credit?

A qualifying child is a child who meets the four IRS requirements to be a dependent for tax purposes. These six requirements are the relationship, age, residence, support, joint return, and citizenship.

Relationship: The child must be a son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendent of any of them.

Age: To meet this test a child must be younger than the taxpayer (or spouse if filing jointly) and meet the following conditions.

  • Younger than the age of 19 at the end of the year
  • Younger than age 24 at the end of the year and a full-time student
  • Any age if permanently and totally disabled (does not need to be younger than the taxpayer)

Residence: The child must live with the taxpayer more than half of the year. A child who is born or dies during the year qualifies if the home was the child’s home the entire time the child was alive. A child is considered to live with a taxpayer when at a hospital following birth, or temporary absences due to special circumstances such as illness, education, business, vacation, or military service.

Support: The child cannot provide more than half of their own support.

 

How Do You Opt-Out of Receiving the Advance Payments?

While this seems like how stimulus payments were distributed there is one major difference. With stimulus checks, if you received more than you were entitled to you did not have to pay the money back. With the Child Care Tax Credit that is not the case. If you are not eligible when you file your 2021 tax return, then you will have to repay the amounts advanced to you. This could happen if you had an increase in income from last year where you are now over the income threshold or if your qualified child is now older than the age limits. Also, a lot of marital situations changed during this rough year.

The IRS is doing all their qualifications from old information. They are using the information provided on 2020 tax filings. If that year has not been filed or processed, then they are using 2019. If you are a taxpayer that no longer qualifies it is important that you opt-out of these payments or you could have a hefty tax bill, come filing time.

The IRS has set up a tool on their website where taxpayers can opt out of receiving these payments. This tool will allow people who either do not want or no longer qualify for the credit to unenroll before the first payment is made on July 15th.  This tool can be used by families if they have internet access and a smartphone or computer. 

The IRS is planning on updating this portal to allow people to see payment history and change banking information or mailing addresses. They are also working on updating the tool to allow taxpayers who have had children in 2021 or if the child has aged out of qualification to update that information so they can begin receiving the advance or to correct the amount received.

If a taxpayer chooses to opt out they must notify the IRS before set deadlines for each payment. You must opt out by June 28th to skip the 1st payment. If they miss this opt-out before the 1st payment, then they can still opt-out prior to the next payments.

In conclusion, this is another step taken by the government to aid struggling families and to influx money back into our economy sooner than later. Vice President Harris was quoted as saying, “The proudest moment that I have experienced in this position was when President Joe Biden signed the American Rescue Plan into law. Because through tax credits and food assistance and housing assistance and health care coverage and direct checks the American Rescue Plan will lift half of America’s children out of poverty.” 

As much good as this will seem to do, I do have one reminder to point out where people need to be careful: If you no longer qualify for the tax credit, then it is especially important that you opt out. If you do not, then you can see yourself with a tax bill you may not be able to afford come tax time. If you can afford to pay it that is always best but if you can not you do need to remember that you have a lot of rights when it comes to owing delinquent taxes.  

If you find yourself in this tax situation reach out to a true tax professional for assistance to make sure your rights are enforced. In situations like this Enrolled Agents and CPAs have the educational background and licensing to best represent you.

 

Which Education Expenses Are Tax Deductible?

woman taking online courses

For many Americans, their years spent in college are a time when every little extra dollar counts. Fortunately, the government sees this, but they also value higher education so much that there are many different exclusions of income, tax deductions, and tax credits that can be utilized that are associated with different aspects of cost spent on education. 

This article will cover some of the savings programs that parents can utilize that have tax benefits. Then we will go through some of the exclusions and deductions from college expenses that can be utilized on the return to reduce taxable income as well as the different credits that can reduce the actual tax debt owed or maybe even get you a bigger refund. We all know that any sort of tax refund especially when things are tight helps.

 

Saving For Your Child’s College Expenses

There are many different programs and types of savings accounts that have specific tax benefits if the distributions from that account are for higher learning.

Education Savings Bond Program

A taxpayer may exclude all or part of the interest received on the redemption of qualified US savings bonds during the year if the taxpayer uses that interest to pay for qualified higher educational expenses during the same year.

Coverdell Education Savings Account

A Coverdell ESA is a trust or custodial account created or organized in the United State only for paying the qualified education expenses of the designated beneficiary of the account. While there is no tax deduction for contributions, earnings are tax-deferred. You can exclude distributions from a Coverdell ESA from income up to the number of qualified education expenses for the year, adjusted for other benefits received.

Qualified Tuition Programs

A qualified tuition program is a program set up to allow the taxpayer to either prepay or contribute to an account established for paying a student’s qualified expenses at an eligible educational institution. A state, a state agency, an instrumentality of a state, or an eligible educational institution can establish and maintain a QTP.

All these savings mechanisms can help you set aside a nice nest egg for your child’s college education while avoiding taxation. One major qualifier of each one is that the distributions must be spent on qualified education expenses.  

The qualified educational expense for these programs is the amounts paid for tuition, fees, books, supplies, and equipment required for enrollment or attendance to an eligible educational institution. They also include the reasonable costs of room and board for a designated beneficiary who is at least a half-time student. These are the qualified expenses for this type of savings program but remember different tax breaks have different criteria for what is considered a qualifying expense.

Another big way to save money while paying for college is by receiving scholarships and fellowships. These scholarships can provide a path to higher education that may not be feasible by other means. The government values this opportunity of higher education, so they provide a tax break on the income of a scholarship used for qualified educational expenses

When it comes to scholarships, qualified educational expenses included are tuition and fees to enroll at or attend an educational institution and any fees, books, supplies, and equipment required for courses at the educational institution. Amounts for room and board do not qualify for this exclusion. 

Another way some parents help their children pay for school is by doing early withdrawals from their IRAs. Typically, when you do an early withdrawal before the age of 59 ½ you must pay a 10% additional tax.  However, if you withdraw the funds to pay for qualified college expenses you can avoid the additional 10% tax. 

The educational expenses must be for yourself, your spouse, you or your spouse’s child, foster child or adopted child, or you or your spouse’s grandchild. Qualified educational expenses in this case include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.

 

What Educational Credits Can I Claim on my Taxes?

Outside of some income being used for paying for educational expenses being excluded many credits can be applied to your filing. A tax credit is designed to reduce taxable income. The amount of the credit that you qualify for comes right off the total payable tax. Sometimes these credits can turn your tax bill into a refund. 

There are two major education tax credits that students can utilize to reduce their tax bill: the American Opportunity Tax Credit & The Lifetime Learning Credit. A student or the parent of the student can only claim one of these credits for that student on a tax filing. If you have more than one child, you can claim either of the credits for each child but not both.

The American Opportunity Tax Credit

This credit could reduce your tax bill by up to $2500 if you paid that much in qualified education expenses. You can claim 100% of the first $2000 that you spent on qualified educational expenses. After that, you can add 25% of the next $2000 spent for a total of $2500. 

To qualify for this, you must make under $180, 000 if filing Married Filing Jointly and $90,000 if filing Single, Head of Household or Qualified Widower. This is a partially refundable credit. It can be refundable up to 40% so up to $1000.

The Lifetime Learning Credit

This credit could reduce your tax bill up to $2000 if you paid for students enrolled in eligible educational institutions. The Lifetime Learning Credit is computed on a family-wide basis. The amount of the Lifetime Learning credit is up to 20% of the first $10,000 of qualified education expenses paid for all eligible students. 

To qualify you must make under $138,000 if Married Filing Jointly and $69.000 if filing Single, Head of Household or Qualified Widower. This is a non-refundable credit.

Qualified living expenses for these two credits must be required for enrollment or attendance at an eligible educational institution and include tuition and required enrollment fees. Expenses include amounts paid to the institution for course-related books, supplies, and equipment. Room and board, insurance, medical expenses, transportation, and other similar personal expenses do not qualify.

 

Can I Use Educational Expenses as a Deduction?

The American Tax Credit and the Lifetime Learning Credit will give you the biggest tax break available but if you do not qualify there are other possibilities to save some money. You still may be able to claim a tax deduction for college tuition and fees for yourself, your spouse, or your dependents. This education deduction can be worth up to $4000. 

You can get the full amount of your income is under $65,000 on a single return or under $130,000 if you file jointly. The write-off for singles drops to $200 if your income is more than $65,000 and it disappears when your income passes $80,000. For married couples, the max is $2000 when income passes $130,000 and it is wiped out when income exceeds $160,000.  

Qualified expenses that can be used for this deduction are tuition, student fees, and required expenses for course-related books, supplies, and equipment. Room and board, insurance, medical expenses, transportation, and similar personal living expenses do not qualify. 

If you are self-employed generally can deduct the cost of work-related educational expenses. This will reduce the amount of income subject to both the federal income tax and self-employment tax. The education must be required to keep your present salary, status, or job or to maintain or improve skills needed in your present work. 

Expenses cannot be used in the education is needed to meet the minimum educational requirements of your present trade or business or if the expenses are for a program that will qualify you for a new trade or business. The qualified expenses that can be written off by self-employed individuals are tuition, books, supplies, lab fees, certain transportation, and travel costs.

With all these exclusions, credits, and deductions you cannot double-dip. You cannot deduct tuition and fees if:

  • You also deduct those expenses for another reason (e.g., as a business expense);
  • You or anyone else claims an American Opportunity or Lifetime Learning Credit for the same student in the same year.
  • The expenses are used to figure the tax-free portion of the 529 plan or Coverdell ESA distribution.
  • The expenses are paid with tax-free interest on U.S. savings bonds; or
  • The expenses are paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer.

In conclusion, as you can see there are a lot of opportunities to save from some of your expenses derived from education. As you can see there are very definitive qualifications and distinct benefits to all these different credits, deductions, and exclusions. 

That is why it is important to reach out to a true tax professional for assistance, so you do not miss out on an opportunity to use them or filing them incorrectly. An IRS Enrolled Agent or CPA has the educational background and licensing to properly advise you and legally save you the most money possible.

 

Foreign-Earned Income Taxation

This is a question that comes up a lot with clients that work outside of the country either during portions of the year or are full-time residents of other countries. Estimates suggest that there are around 8 million US citizens living in other countries around the world. 

Some American citizens are there for employment and financial reasons, others are retired, while some may be born in these foreign countries, but they are the children of US citizens.  All these people are most likely required to file a US tax return every year.

The United States tax system is incredibly unique in that it is a citizenship-based tax system. With this system, it does not matter where in the world you live, if you are a US citizen you are required to file taxes by June 15th of each year. There are tax treaties in place with some countries so many citizens living abroad file their taxes and owe nothing. 

Whether you owe taxes or not all US citizens are required to file their tax returns if they have earned income over the minimum thresholds. With others that are living in foreign countries, they find themselves in a situation of double taxation. This is when you must pay taxes in the US because of your citizenship, and you are also required to pay taxes in the country where they are living. 

 

Foreign Earned Income Exclusion

This article will discuss a remedy to the possibility of double taxation. A lot of these taxpayers may qualify for the Foreign Earned Income Exclusion.  This is where a portion of your foreign earned income can be excluded from US taxation.

In 2020 the allowable exclusion cannot be more than the smaller of the following:

  • $107,600 for Single filers or if Married Filing Jointly it can be $107,600 for each spouse if they both qualify and meet the requirements.
  • Foreign earned income for the tax year minus the amount of foreign housing exclusion or housing deduction if taken.

 

How Do I Qualify?

This exclusion is the most common and widely used tax benefit for US citizens living abroad.  It allows Americans to exclude all or a portion of their foreign earned income from their US taxes. With such great benefit, this is not a blanket exclusion for all foreign earned income. There are some specific qualifiers that you must meet. 

The requirements to file minimum income thresholds are the same as for US residents. For Tax year 2020 the thresholds for total yearly income as laid out below as seen on the American Citizens Abroad website.

Minimum Income Requirements for Filing Foreign Earned Income

Marital StatusUnder 6565 or Older
 You are single (unmarried) $12,400 $14,050
You are married filing jointly $24,800 $27,400 (both over 65)
 You are married filing separately $5 $5
 You are filing as “Head of household” $18,650 $20,300
 You are a widow or widower $24,800 $26,100

 

Foreign earned income means wages, salaries, professional fees, or other amounts paid to you for personal services rendered by you. It does not include amounts received for personal services provided to a corporation that represent a distribution of earnings and profits rather than reasonable compensation. 

A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce your regular income tax but will not reduce your self-employment tax.

There are some forms of income that do not qualify for the exclusion such as:

  • Pay received as a military or civilian employee of the US government or any of its agencies.
  • Pay for services conducted in international water or airspace (not a foreign country)
  • Payments received after the end of the tax year following the year in which the services that earned the income were performed.
  • Pay otherwise excludable from income, such as the value of meals and lodging furnished for the convenience of your employer on the premises.
  • Pension or annuity payments including social security benefits

To claim the foreign earned income exclusion a taxpayer must meet all three of the following requirements:

  1. Their tax home must be in a foreign country. A tax home is a place where a taxpayer permanently or indefinitely engages to work as an employee or self-employed individual. A tax home is not in a foreign country for any period in which a taxpayer’s abode is in the United States. An abode is one’s home, habitation, residence, domicile, or place of dwelling.
  2. The Taxpayer must have foreign earned income.
  3. The Taxpayer must meet either the Bona Fide Residence Test or the Physical Presence Test.

Bona Fide Resident Test

A taxpayer does not automatically acquire bone fide resident’s status merely by living in a foreign country for one year. The length of the stay and nature of the job are additional factors that determine whether a taxpayer meets the test. 

A taxpayer who travels to a foreign country to work on a particular construction job for a specified period of time ordinarily is not a bona fide resident of that country even if working there for more than one tax year.

To be a bona fide resident a taxpayer must be:

A US citizen who is a resident of a freeing country or country for an uninterrupted period that includes an entire tax year.

or

A US resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or country for an uninterrupted period that includes an entire tax year.

Physical Presence Test

A US citizen or a US resident alien physically present in a foreign country or country for at least 330 full days during any period of 12 consecutive months. 

The physical presence test is based only on how long the taxpayer is in a foreign country. The test does not depend on the kind of residence established, intentions about returning, or the nature and purpose of the stay abroad.

 

How to File for the Foreign Earned Income Exclusion?

If you qualify for the foreign earned income exclusion, then you must submit a Form 2555 with your Form 1040 or 1040x. Do not submit this form by itself. Form 2555 shows how you qualify for the bona fide residence test or the physical presence test, how much of your foreign earned income is excluded and how to figure out the amount of your allowable foreign housing exclusion or deduction. 

If you and your spouse both qualify to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you and your spouse must file separate 2555 Forms to claim these benefits.

 

What if I do not qualify for the Foreign Earned Income Exclusion?

If you do not meet these requirements for the exclusion, it is not the end of the road. It does not mean you will have to pay tax on all your income. 

Another option is the Foreign Tax Credit. The foreign tax credit is a non-refundable tax credit for income taxes paid to a foreign government because of foreign income tax withholdings. The foreign tax credit is available to anyone who either works in a foreign country or has investment income from a foreign source. Generally, only income, war profits, and excess profit taxes qualify for this credit. You can not claim the foreign tax credit on the same income.

Another option for a US citizen living abroad is the Foreign Housing Exclusion. This deduction was created by the IRS to offset the expenses that go hand in hand with living overseas, this exclusion decreases a taxpayer’s tax liability by allowing certain housing expenses to be deducted from taxable income. This exclusion can be used if your housing costs were over 16% of the FEIE amount for that year. If you live in a city that is identified by the IRS as ultra-high cost, you may be able to use an additional amount for the foreign housing exclusion.

In conclusion, if you had not realized that as a citizen you are still required to file a Federal Tax Return it is not too late to take advantage of the exclusion if you qualify. To take this exclusion you generally must file within one year of the due date of your return or by amending a timely filed return. However, if the IRS has not discovered your failure to file or if you owe no tax after taking the exclusion you may still be able to exclude your foreign earned income from your US taxes. 

As we have recommended in many other articles, any time you are dealing with these more complex filings it is smart to hire a true tax professional who has the education and licensing to take advantage of everything within tax law that can save you money. In a situation like this, an Enrolled Agent or a CPA is a trusted source that you can turn to.

 

IRS Resumes All Tax Collections and Doubles Workforce to Snag Tax Cheats

woman upset over a collection letter from the IRS

Last March the United States and the rest of the world basically came to a screeching halt. The Covid-19 pandemic swept through society forcing the biggest halt to business, government, and people’s lives in modern history. Many people were forced out of work and were in fear of not being able to pay their bills. 

During this time, the IRS took a step back in their collection activity to take some pressure off taxpayers. The IRS since this time has slowly begun to restart many different processes. Now a year and a half later the IRS has announced that it will resume many of the collection processes that have been idle in the past year and a half. 

In this article, I will start by explaining the efforts the IRS took to take this pressure off Americans that owed money to the IRS. I will follow that up by further explaining the collections activities that the IRS is immediately resuming and detail the future and proposals by the IRS and the President to seriously beef up the Investigation and Collections Departments within the IRS.

 

The People First Initiative

On March 25, 2020, the IRS began its People First Initiative to help people facing the challenges of Covid-19. The IRS announces that they would take a series of steps to assist taxpayers by providing relief on a variety of issues ranging from easing payment guidelines to postponing compliance actions. 

IRS Commissioner Chuck Rettig said, ”The IRS is taking extraordinary steps to help the people of our country. In addition to extending tax deadlines and working on new legislation, the IRS is pursuing unprecedented actions to ease the burden on people facing tax issues. During this difficult time, we want people working together, focused on their well-being, helping each other and the less fortunate.”

The IRS made major changes such as postponing the filing deadline from April until July 15th.  They also suspended payments for any taxpayers in agreed-upon Installment Arrangements between April 1 and July 15th, 2020. They agreed they would not default any taxpayers who fail to make these payments during this time. 

They also suspended payments and deadlines for taxpayers in or applying for the Offer in Compromise Program. Also, all liens and levies either through the automated system or in place by active field agents were all suspended as well.

 

Resuming Collections

On July 15,  2020, the IRS slowly began resuming its processes. They announced to taxpayers that if you suspended your installment agreements you must make your first monthly payment due after July 15th. If you had your bank suspend direct debits, then you needed to contact your bank immediately to avoid a penalty. The same was required with all payments for people in the OIC program. At this point, they did resume some involuntary collections, but they kept most of the automated collections systems idle. 

On June 14, 2021, the IRS announced that due to the recent progress the country has made in controlling the Covid-19 pandemic, economic activity is returning to normal. Therefore, the IRS plans to return to its normal collection casework processes in the summer of 2021 to support the integrity of the nation’s tax system. 

Beginning June 2021, the IRS will start mailing balance due notices through the Automated Collection System. If taxpayers fail to respond to these letters they could be subject to levies or notice of Federal Tax Lien Filings beginning August 15, 2021. 

 

Proposal to Double the IRS Workforce

Not only has the IRS resumed their normal collections but there have been proposals made to seriously expand the IRS budget to help reduce what they call the tax gap. 

The tax gap is the difference between what taxpayers should pay and what they pay on time. The tax gap, about $458 billion based on updated estimates, represents the amount of noncompliance with the tax laws. President Biden plans to propose an $80 billion funding boost for the Internal Revenue Service over the next decade. This budget increase would allow the IRS to hire nearly 87,000 new workers which would double its enforcement staffing and give it new tools to combat tax-dodging by wealthy Americans. 

This proposal being a multi-year commitment would allow the IRS to hire and properly train enforcement staff and ramp up audits with less risk of lawmakers stopping such an initiative halfway through. The plan would allocate about $30 billion of this money towards advancements for new tools and technology to execute collections and crackdown on avoidance. 

 

Proposal to Change How Income Is Reported to the IRS

A big change to the system would be how income is being reported. Right now, with the way that individual income is reported, there is almost 100% compliance. Where the problem lies is with self-employed individuals and business income. Estimated compliance with these individuals and entities is around 50%. Under the plan, banks and other payment providers would be required to report to the IRS how much money is coming in and out of an individuals’ and business’ account each year. This information would give the IRS much more information as it decides who to audit.

Also, the proposal would increase oversight on all paid tax return preparers. This would give the IRS explicit authority to regulate all paid preparers of Federal tax returns, including by establishing minimum competency standards. Unfortunately, at this time in our industry, there are people without the educational background needed to correctly file taxes for people. Many of these types of preparers also do a lot on the tax filings to increase one’s tax refunds through erroneous means. 

Most taxpayers are unaware of the methods these tax preparers use to help them get larger refunds and those same methods could get them into trouble with the IRS. Regulating this part of our industry will cut the tax gap down significantly.

 

What the Proposed Changes Would Accomplish

This major investment would be over the long term and the administration projects that the plan would generate over $700 billion over 10 years in net revenue. In the short term, the President included in his 2022 budget proposal $13.2 billion, an increase of 1.2 billion from 2021 for the IRS to administer the nation’s tax system fairly. 

In addition to this base amount the budget also proposes another $417 million in 2022 to fund investments in expanding and improving the effectiveness and efficiency of the IRS’ overall tax enforcement program. This would be a total of $13.6 billion in funding for the IRS. The budget requests a total program increase of $915.5 million including the following:

  • Taxpayer First Act (TFA): $176.1 million for implementing major TFA initiatives, including a Taxpayer Experience Strategy to improve the American taxpayer’s experience with the IRS through expanded digital services, increased multilingual services, and an increased presence in hard-to-reach, historically underserved communities. Another major TFA initiative involves enhancing identity proofing and authentication tools, to ensure taxpayers have secure access to online services.
  • Enforcement: $340 million for continuing to establish enforcement strategies that will ensure a fair tax system, by allowing the IRS eventually to double its compliance efforts on partnerships and high-wealth returns and devote more resources to examining large corporations with balance sheet assets greater than $10 million. Other initiatives supported by this investment include The Cross Border and Treaty and Transfer Pricing Operations; expansion of oversight efforts against cybercrime; increased use of applied data analytics in enforcement activities; and enhancing taxpayer confidence in the tax-exempt sector.
  • Taxpayer Service: $318 million to increase taxpayer assistance via the various communication channels taxpayers use to reach us, including phone calls, correspondence, and in-person visits. This investment provides a projected phone level of service (LOS) of 75 percent in FY 2022, assuming phone demand returns to pre-pandemic levels and the IRS is able to provide in-person services at pre-pandemic levels. These funds will also be used to reduce the current projected FY 2022 ending correspondence inventory by about 400,000 pieces.
  • Modernization: $78.1 million for IT modernization activities. This investment will support IRS efforts to continue implementing its Integrated Modernization Business plan for upgrading IT systems and retiring legacy applications. With this funding, the IRS will be able to take the next steps on such significant modernization initiatives as Enterprise Case Management, Taxpayer Digital Communications, and customer callback on its taxpayer phone lines. 

With all these changes coming to the IRS it is particularly important that all delinquent taxpayers have themselves into some sort of program to protect themselves.  When it comes to owing taxes, a compliant taxpayer has a lot of rights that can be enforced to save them a lot of money. It is important that someone in this situation gets the proper representation. Enrolled Agents and CPAs have the educational background and licensing to best represent you in these types of situations. 

With billions being funneled into the IRS to make sure that these tax dollars are recovered it is especially important that a taxpayer is proactive so the repayment of tax debt can be on their terms and so they are not seriously overpaying on their tax debt. It sounds like with these improvements to the IRS the days of flying under the radar are done and gone.

 

A Guide to Avoiding, Stopping, Fighting, or Settling Tax Levies

screenshot of the webpage about tax levies on irs.gov

Do you owe the IRS back taxes? If so, and you’re unable to pay the debt, you could be in danger of a tax levy. This means losing much more than money.

The government has the power to claim whatever’s needed when settling tax debt. This means utilizing a tax levy to reconcile unpaid taxes. Any property you own can be levied, starting with a hold called a tax lien. Money, property, and many other things can be taken by the government, and it can get serious. It can also become hard to settle the debt and clear a tax levy.

 

What is a Tax Levy?

Basically, a tax levy is used to collect a tax debt by seizing your property or the contents of your bank account by utilizing a lien. A tax levy and lien are two different things. While a lien only secures the property as an option for collection, the levy takes the property to satisfy the money that’s owed to the IRS. It’s a completed process that’s easier to avoid than fix.

 

Requirements of the IRS before a Tax Levy

There are 4 requirements that usually must be met by the Internal Revenue Service before a levy can go into effect. These requirements ensure the taxpayer has a fair chance at paying off the debt without further consequences. After all, everyone deserves an early warning that they’re in debt territory. Here’s what the IRS must do before implementing a tax levy.

  1. A tax bill is sent to the taxpayer. This bill includes a notice and demand for payment of the debt.
  2. After the bill is received, the individual or organization has a choice: Either pay the debt or refuse/neglect the payment request, basically avoiding the responsibility in many causes.
  3. When the payment is refused in any way, this triggers the next step or requirement of the IRS. The Internal Revenue Service sends a Final Notice of Intent to Levy and a Notice to Your Rights to a Hearing. This notice gives you 30 days to decide or amends before the levy starts. There are several ways you may receive this final notice. It may come by registered or certified mail to your last known location address. It can also be delivered to your job or handed to you personally. This depends on the circumstances. However, the IRS may levy your tax refund regardless, and you can request a hearing after the tax levy on this refund.
  4. The IRS contacts a third party concerning the collection of a debt. You will receive notice of this third-party contact from the beginning. This is used to help the government determine your tax liability.

 

How a Tax Levy Affects You

If you’re, unfortunately, hit with a tax levy, you can expect serious consequences that can affect you and your loved ones. Once things pass a threshold, you’ll start losing possessions that are worth more than just money. This can include your home and automobile.

The first hard hit comes from wage garnishment. If you’ve never gone through this process before, you’re in for a big surprise. And it will not be a pleasant one either. While many people do experience wage garnishments, they’re usually not tax garnishments. Many times, old student loan debts or child support debts are garnished from wages and have a limit as to how much they can pull.

With the government, this limit is completely different. If your wages are garnished for back taxes, you can lose more than half your paycheck to satisfy the government.

The IRS can also contact your bank and place a 21-day hold (lien) on your money, all of it. If this happens, they can levy the money from your bank to retain the tax debt that’s owed to them. This could mean all the money in your bank. There is no threshold in this case. However, they won’t take what’s in your bank account if you work out a better plan with the government.

As a last resort, the government can seize your property, including your home and automobile. Although they do not like doing this, it may be necessary to fix the situation. Other property or payments can also be taken by the IRS to settle a debt.

 

Tax Levy Immunities

But some payments are generally immune from this seizure. Although the IRS can sometimes seem harsh, they are lenient when it comes to economic support funds. The following payments are immune:

  • any unemployment benefits
  • annuities
  • disability payments
  • household items, mainly large furniture items
  • personal valuable small items like jewelry
  • child support payments
  • assistance payments from the public
  • pension benefits
  • work or school items necessary to function properly

 

How to Avoid a Tax Levy

One of the easiest ways to avoid a tax levy is to make sure enough money is being withheld from your paycheck. Not doing this properly can cause you to get behind on your taxes. Creating a tax debt is how it starts, so making sure everything is up to date avoids ever getting involved with a tax levying situation.

 

How to Stop a Tax Levy

As soon as you realize you’re in danger of a tax levy, it’s smart to try and remedy the situation before it gets worse, and it can get quite bad. Taking care of this problem early lowers the chances of losing even more money or property. There are steps to stopping a tax levy, and you should take advantage of these options.

First, try your best to pay your back taxes when you’re facing a lien on your assets. The IRS is willing to communicate with you to solve this issue quickly. If they ask for any information, be ready to provide everything they need. Most importantly, cooperation with the IRS shows they can trust you to remedy the debt through collection actions.

 

Working with the IRS to Settle a Tax Levy

There is a way to possibly get the lien taken off your record. If you’re willing to use an IRS payment plan, you must make 3 successive payments from your bank account. This is called a direct debit installment agreement. You can set up this installment plan on the IRS website since there is no need for any professional help. But there is usually a fee of up to $225 associated with the installment plan depending on how much you make in wages and the amount you owe.

There’s always a possibility that you can compromise with the IRS via an Offer in Compromise and the government may be willing to take a lesser amount than what you owe. Unfortunately, the government usually only approves less than half of these applications for reduced debt. You will not be considered if you’re filing bankruptcy or if you’re being audited. To be considered, make sure all your tax returns are filed and current taxes paid.

 

How to Fight an IRS Tax Levy

You can always ask for an appeal and due process hearing from the IRS if you think there’s been a mistake. If you disagree with government employees on a decision for a tax levy, you can speak with the IRS employee’s manager. The office of appeals can review your case if you still don’t agree with the manager’s decision. Although it’s not that common, you can win the case with proof that the debt was indeed paid.

While it’s almost always the last resort, you can file bankruptcy to try and settle your tax debts. I say try because this doesn’t always work, and it takes quite a bit of time and paperwork to complete. Also, a lawyer usually takes care of bankruptcy proceedings, and this costs even more money.

 

How to Request a Tax Levy Release

Once a tax levy has begun, it may be worse than you thought. You may wonder if a tax levy release is possible. The good news is, there is a possibility that you can get the levy released. 

One way to request a tax levy release is to prove that the levy is causing you an economic hardship. 

Here are other ways you could possibly have the tax levy released:

  • Your property may be worth much more than the amount requested by the government.
  • You agreed to a government installment plan that doesn’t include the tax levy
  • You’ve paid the owed amount
  • It would be easier to pay taxes with the levy released
  • When the levy was issued, the collection period already ended

Even with the levy released, if you still owe taxes, you’re required to continue paying what you owe to the government. If you continue to communicate with the IRS and properly pay on your installment plan, this will keep the government from putting a lien back on your property or bank account.

Once money leaves your bank account, going to the IRS for tax payments, it’s extremely hard to retrieve those funds. This is true even if an installment plan was the agreement.

 

Your Best Options

Obviously, it’s best to avoid a tax levy. But should you find yourself engrossed in this process, a tax expert at Innovative Tax Relief can guide you with the next steps you should take. Just request a free tax consultation from us.

In the future, always make sure your taxes are paid to the government because the IRS will eventually come knocking if you don’t.