The American Jobs Plan–What Is It & How Will They Pay For It?

roadwork being done on a US Interstate

In a previous article, we discussed the Child Tax Credit and the major enhancements to that credit through the American Rescue Plan. This plan not only provided funding for this credit it also laid out the spending of all together $1.9 Trillion towards the recovery of America. 

Today I am going to discuss the next part of the “Build Back Better Agenda”.  I will start by laying out the provisions of this next step “The American Jobs Plan”.  Going through all of this you will see that this next package like the first is a plan for major spending. So, I will go into detail as to how they plan to pay for it by beefing up the IRS and their collections and audit process.

What is The American Jobs Plan?

The American Jobs Plan is focused on upgrading and repairing America’s physical infrastructure, investing in manufacturing, research and development, and expanding long term-health care services. The proposal calls for over $2 trillion to rebuild the nation’s crumbling infrastructure including roads bridges and airports, as well as spending on care infrastructure with a focus on long-term care for the elderly and disabled. $1 Trillion of this plan will be spent on families and education while also providing $800 billion in tax cuts to promote economic prosperity and security. This new proposal is designed to promote longer-term economic recovery and keep the United States competitive while responding to the economic devastation from the coronavirus pandemic and the climate crisis.

CBSNEWS.com has nicely laid out a breakdown of the spending proposed through the American Families Plan:

  • $200 billion for universal pre-K for all 3- and 4-year-olds
  • $225 billion for childcare including subsidies for low-and middle-income families and money for providers and workers
  • More than $100 billion for two years of free community college for all
  • $225 billion for a national paid family and medical leave program
  • Extends the expanded Child Tax Credit, which means families will receive monthly checks totaling $3,600 for children under six and $3,000 for kids ages six through 17 through 2025
  • Makes the increased Child and Dependent Care Tax Credit as well as the Earned Income Tax Credit permanent
  • Make recently expanded premium subsidies under the Affordable Care Act permanent
  • Also includes scholarships for teachers, increased Pell Grants, expanded nutrition programs.

Where Will the Money Come From?

With all this spending the major question is how it all is going to be paid for. We already have a growing deficit problem. Along with the proposal, there is a proposal for some major tax changes. They are promising not to have any tax increases on people making less than $400,000. They are proposing rolling back the drop in the top tax bracket from Donald Trump’s 2017 Tax Cuts. This would put the highest tax bracket back to 39.6% from 37%. It is also calling for Capital Gains to be taxed as regular income paying the same 39.6% tax rate up from the 20% paid now. It will also close common loopholes used to avoid paying taxes on different types of gains. 

The proposal is also calling for corporate tax increases to help pay for the plan. In the plan, the corporate tax rate would rise from 21% to 28%. The president also proposed expanding payroll taxes for high earners to help shore up the finances of the Social Security program and eliminating the “step-up” in basis on assets in an estate- a tax loophole that means unrealized capital gains held at death are never taxed.

 

How the IRS Is Involved

The president’s proposal is also calling for a major investment in the IRS that should produce major returns by increasing their ability to collect. Over the past 25 years, there has been a major decrease in funding allocated to the IRS for audits, exams, and collections. In the past 10 years, it has declined by almost 30%. The IRS has lost 17,436 positions working in enforcement and collections in the last 10 years. 

Consequently, between 2010 & 2018 the amount of individual tax examinations has decreased by 46% and examinations in corporate income tax returns has dropped by 37%. This has resulted in what they call a tax gap. This is the difference between what taxpayers owe and what they pay on time. 

According to IRS figures as an example, the tax gap for 2011-2013 was approximately $381 billion. As cited in an article on quart.com by Charles Rettig because of new sources of income like cryptocurrency the tax gap is growing year by year. “It would not be outlandish that the actual tax gap could approach and possibly exceed, $1 trillion a year,” Ruttig said.

Collecting a portion of this missed income could pay for a large part of the proposed plan. The president is calling for an $80 Billion investment into the IRS and thinks this can provide a return of $700 billion more collected over the next 10 years. In the recent “skinny budget” the White House requested $13.2 Billion a 10.4% increase to allow oversight of wealthy and corporate tax returns. It also already requested an additional $417 million for tax enforcement.

This is just a start. Over the next decade, the proposal would provide steady funding for the IRS after years of declining budgets which have forced steep cuts in employees conducting audits, examinations, and collecting money. It will also provide security over time so it makes sense to train these employees to ramp up collection effort and conduct more audits and examinations without the fear that future lawmakers will pull away from the funding. This allocation of $80 Billion should all the IRS to increase productivity in these departments by about 15% a year.

 

Possible Upcoming Changes to How Income is Reported

Another major change within the IRS would also change in how income is being reported. A significant problem at this point is tax evasion and the underreporting of income. Studies show that more than 20% of the income of the top 1% goes unreported. People and businesses avoid reporting income in many ways. Some by accepting cash, use of cryptocurrency, and offshore accounts.  

One major step proposed to curb some of this underreporting of income would be requiring financial institutions to report more than just taxpayers’ interest earned, capital gains, and losses. Banks and other financial institutions would be required to report money coming in and going out of your accounts.  This would give IRS information on all your accounts whether you earned income from that account or not. This would obviously require a large effort from the financial institutions, but it would eliminate a huge blind spot that the IRS is currently dealing with.

Right now, a lot of self-employed individuals are on the honor system, unlike W-2 earners whose employers report their income to the IRS. The lack of information that the IRS has now makes it easy for self-employed individuals to lie about gross receipts and gross revenue to the business. Self-employed taxpayers who take outlandish write-offs and expense deductions are likely to be caught in an audit but the underreporting of income is much more difficult to track. Allowing the IRS to see how much was deposited and how much was withdrawn would help regulate the income being reported.  

With these major changes possibly coming to the IRS and their enforced collections and will be so important that you hire the correct tax professional. There is a provision in the plan that would give the IRS more rights to regulate paid tax preparers. There are certain types of tax preparers that are unregulated cannot really provide accurate tax assistance. These tax preparers make costly mistakes that subject their clients to costly audits and sometimes even intentionally defrauding taxpayers for their benefit. The president’s plan calls for giving the IRS the legal authority to implement safeguards in the tax preparation industry. It would also provide stiffer penalties for unscrupulous preparers who fail to identify themselves on tax returns and defraud taxpayers. 

With all this said it is so important for taxpayers to know who they are hiring. There are two levels of licensing that one can hire to ensure they have the correct representation. They are the Enrolled Agent and the CPA (Certified Public Accountant)

In conclusion, the President feels his new proposal is designed to promote longer-term economic recovery and keep the United States competitive while responding to the devastation from the coronavirus pandemic and the climate crisis. The plan would not only provide many much-needed services and rebuild a depleted and aging infrastructure, but it would also provide much-needed jobs.  With these adjustments in tax law and ramping up of the IRS and their collection efforts, this plan could pay for itself. Of course, the next step is trying to get something like this approved. Republicans are already putting up major roadblocks on the possibility of them voting for any tax hikes whatsoever to fund this plan. They are also looking at a much lower dollar figure closer to the range of $600 Billion to $800 billion more focused on just infrastructure. 

With a thin margin between republicans and democrats, the president would have every democrat on board for them to steamroll this plan through Congress as they did with the previous stimulus plan.

 

Commonly-Asked Questions About the IRS

an IRS office sign

How do I contact the IRS? What is their phone number?

You can get in touch with an IRS representative over the phone from Monday to Friday (7 am- 7 pm local time). Now, depending on your case, you can call any of the following numbers:

  • 800-829-1040 For IRS errors & individuals (main IRS number available 24 hours a day)
  • 800-829-4933 For businesses
  • 866-699-4096 For excise taxes
  • 866-699-4083 For estate and gift taxes
  • 877-829-5500 For non-profit taxes
  • 800-829-4059 For hearing impaired
  • 844-545-5640 For a face-to-face meeting

 

Is there another phone number that I can call?

Following are other telephone numbers/e-help Desk numbers available to specific groups of individuals or businesses:

  • 1-866-255-0654 Partnerships, Corporate taxpayers & Software vendors and developers and  with queries about e-filing
  • 1-800-829-4933 Taxpayers with tax law or account queries
  • 1-800-829-8374 Tax practitioners with law or account questions

 

How do I speak to someone at the IRS? When is the best time to call?

The best time to call the IRS is either when they open at 7 am or near closing time.

Note that you will be asked an automated question when you phone the IRS to select your language. As soon as you set your language, choose option 2 (Personal income Tax) and press 1 (form, tax, history, or payment) > 3 (all other questions) > 2 (other questions). Finally, let the system ask for your EIN or SSN number twice. Do NOT enter it, so you are forwarded to another menu. There, press 2 (personal or individual tax questions) and then 4 (other inquiries). You will then be able to speak with an IRS agent.

 

I mailed in my tax return, but I still haven’t heard from them. When will I get a response?

Usually, it takes about 6 weeks to get a Federal refund from the day you filed by mail. However, the coronavirus situation has created shortages in their personnel, so all bets are off. This means that there is limited processing of paper returns at the IRS.

The IRS has announced that it has suspended or significantly limited some of its services, such as processing paper tax returns. If it has been at least a month (4 weeks) since you mailed your tax return, you might find it using the Where is My Refund tool. If you use it, though, ensure you enter the amount in Form 1040 (the Federal refund sum on Line 21a, NOT the total refund sum).

Generally speaking, an e-file is a much faster way to have your tax return processed. You can e-file the three most recent years. Any older ones must be paper-filed. Again, before the Coronavirus situation, it would take between 4-6 months to hear back from them. Now, it is nearly double that time (around 8-10 months).

 

Does the IRS call you?

Rarely ever does the IRS call someone. Technically, they can but it is rarely the case. Most taxpayers never hear from the IRS over the phone unless they owe large sums of back taxes (normally over $100,000) or are subject to a field audit. Usually, the IRS sends notices (letters) due to a lack of personnel.

They also refrain from contacting taxpayers via the phone to fight the many IRS impersonators. To identify one, remember that the IRS will FIRST send you a notice and arrange a call or visit with you and THEN call you (if they call you at all). So if somebody calls claiming to be an IRS agent demanding payment and threatening criminal and legal consequences, rest assured that they are fraudsters trying to get your money that should be reported.

Note that the IRS will also NOT send any text messages or emails.

 

Does the IRS use private debt collectors?

Yes. The IRS has subcontracted debt collection with a few private collection agencies, such as Pioneer, ConServe, Performant and CBE, that work with taxpayers with tax debt and help them settle their debt. You can visit this IRS page for more details about the Private Debt Collection program.

 

Will the IRS come to my house or job?

Unless you have a very serious tax problem, the IRS won’t visit you. So, generally speaking, the IRS has the right to visit you, but they rarely ever do. Note, though, that when they do, they will let you know beforehand (it’s the standard operating process). So, it won’t be a surprise for you. This means that if you have NOT received a letter or call from the IRS scheduling a visit and an IRS agent or revenue officer shows up, they are IRS impersonators.

The only ones that may come announced are IRS special agents who conduct criminal investigations for tax evasion and other serious tax-related offenses. You will know if this is the case, though (if you are in major tax problems). In this case, it is best to contact a tax professional to help you with the IRS.

 

How can I get my IRS tax transcripts?

You will have to set up an e-services account. Then, you can ask to have your tax transcripts online or by mail to the address on file (one per year) here. It usually takes around 60 days to receive them. The new tax transcript format is even more advanced as it is designed to protect your personal data more efficiently. It partially covers your personal ID details while keeping your financial data fully visible for income verification, tax representation, and tax preparation.

Note that the IRS will NEVER ask for your personal information via email, phone, or text messages. It will also NOT require that you log in to update your profile or get a transcript over the same means. So, if somebody calls or messages or emails you requesting any of the above, make sure you report them.

 

How can I track my stimulus payment?

You will need to create an IRS online account. Alternatively, you can refer to IRS Notices 1444-B and 1444 emailed to you after your first and second stimulus check. Then, you can access the updated Get My Payment tool that will ask you to provide some details, such as your ITIN (Individual Tax ID), SSN (Social Security Number), street address, date of birth, and postal code or ZIP code.

Please note that we at Innovative Tax Relief do not have and cannot obtain any information about your stimulus payment or tax refund.

 

Does the IRS have a Spanish department?

You can visit the Spanish IRS site that allows Spanish-speaking taxpayers to access information, tools, publications, forms, online payment agreements, and many more, including the Where’s My Refund tool. You may also call 800-829-1040 for assistance in Spanish.

 

Can I go to a local IRS office and speak with someone?

At this time, the IRS only accepts scheduled appointments with taxpayers that need in-person assistance from an IRS Taxpayer Assistance Center. Note that you may not get a same-day appointment rather than one several days later. Also, not all local offices are open to the public due to the Coronavirus situation.

Generally speaking, though, our experience has shown that it is unwise to go to a local office if you have a tax debt. This is because the IRS agents there can collect information about you that could be used against you, such as income information, bank information, and where you work. So, unless you have the money to pay your tax debt (if you have one), try to refrain from walking into an IRS Taxpayer Assistance Center.

 

Where is the local IRS office located?

You can find a local IRS office here. If you want to visit it, you will need to make an appointment by calling the specific office’s appointment number.

 

How do I change my address that’s on file with the IRS?

You may notify the IRS about your address change when you file your tax return. You simply enter the new address on it before you file it. When the IRS processes your return, they will update your records. Just make sure the tax return preparer is also aware of this change. You could visit the IRS platform and update your address from there.

Another way is to notify the post office that services your previous address AND notify the IRS directly as some post offices don’t forward government checks. To do that, access Form 8822 (for individuals) or Form 8822-B (for businesses) and send them to the address you will find on these forms. For addresses related to an employment tax return, you need to fill out Notices 148B or 148A.

You may even write to the IRS to let them know that your address has changed. The overall processing of the claim can take between 4-6 weeks.

 

Can I change my direct deposit information with the IRS?

The Get My Payment tool enables taxpayers to update their bank account information. However, you can do so only if the IRS has sent you a payment and it was returned to the IRS. This is the only time you can enter an account and routing number for your bank account, an alternative financial product, or debit/prepaid cards with an account and routing number tied to it. In any other case, please contact the IRS.

Note that the tool mentioned above does not allow changes in direct deposit details at this moment until further notice.

 

How do I update my bank information with the IRS?

If you have already filed your tax return, you will need to contact the IRS directly to update your bank information. The IRS notes that if your bank account has changed, they will mail your payment (the one that the bank returned to the IRS) by check at the address you have on file. This gives no alternative to change your bank details at this given moment.

 

IRS Collection FAQs

the IRS seal

What can the IRS do if you owe them money?

According to the IRS, their job is to find ways to recuperate their money. In doing so, they may seize (levy) your assets, such as retirement income, social security benefits, bank accounts, and wages. They may even seize your real estate, boat, car, and any other property you may have and sell it to satisfy the debt.

The first way to collect their money comes from garnishments. For example, if you are self-employed and 1099’d, they can take 100% out of your paycheck. W-2’d individuals, on the other hand, are in a slightly better position, especially those married with kids. The IRS can take most, but not all, depending on their filing status.

Aside from that, the IRS can garnish income through a business’ merchant account, such as PayPal, Stripe, and Square. In this case, they can take it all (100%). As for self-employed with personal tax debt, the IRS will send a garnishment letter to the business to garnish the owner’s wages. So, although they cannot take money from the business, they have figured out a way to get their owed money back since almost nobody chooses to garnish themselves.

That aside, if you have any state income tax refunds or future federal tax refunds, the IRS may seize them and then apply them to your federal tax liability.

Can the IRS put you in jail?

Generally, no. There is no such thing as a debtor’s prison, although an unfiled tax return is punishable by 12 months in jail, at least on paper. The IRS chooses not to pursue criminal tax evasion cases for many individuals annually. However, those that are caught are called to pay harsh penalties. These cases have to do with criminal intent, such as blatant tax evasion, and start with an audit of the filed tax return.

If the IRS identifies a pattern of willful evasion (i.e., large error sums occurring for several years), they have a strong indication that the taxpayer has willingly and knowingly committed serious tax evasion. This, consequently brings them under criminal investigation. The same applies to unreported income (i.e., from a side hustle) and dodgy behavior during an audit (i.e., purposely hide bank accounts or other records).

So, even though the IRS itself cannot put you behind bars, the court can if the IRS initiates a criminal investigation and you are found guilty. Although this is rarely the case (very few taxpayers face criminal charges for tax fraud annually), it still is a possible scenario.

Can the IRS levy your bank account?

Yes. An IRS levy gives the service the right to seize your property to satisfy a tax debt. Besides garnishing your wage and seizing your personal property, they can also take money from a financial account, such as a bank account. To do this, they first freeze the account for 21 days. Whatever money you have in that account is turned over to the IRS at the end of the 21-day period. This is an automated process done by the bank. Note that the IRS can levy any bank account in which your name appears, whether you are the sole owner or co-owner.

This is a serious situation that can put the taxpayer in a very tough spot. Nevertheless, Innovative Tax Relief knows how to fix it if you act fast. Although it is a difficult task, there is a good chance that you can get the account funds unfrozen and the levy lifted if we have enough time in the 21-day window. Our expertise can help achieve this outcome and make the IRS change course.

Can the IRS place a lien on your property?

Yes. The IRS can place a lien on your property, which means that you will have to pay the due amount when you sell it. It should be noted that the IRA cannot force a foreclosure on your primary home. But they can take your second home or an investment property and force a sale. Generally speaking, they do it when the tax debt is over $25k.

This is because a lien is a legal claim against your property to satisfy a tax debt as opposed to a levy which is a legal seizure of your property for the same reasons. In other words, a levy allows the IRS to take your property while a lien does not.

If you get a lien, though, all creditors are alert that the government has a legal right to your property as the IRS files the Notice of Federal Tax Lien, a public document that informs creditors that there is a secure claim against your assets. This can affect your credit report as credit reporting agencies can find the Notice and include it in your credit report. A levy is nothing like that as it is not a public record.

Can the IRS seize your business property?

In short, yes. The IRS can seize your business property to get paid the amount you owe them. They cannot seize business assets tied to no net recovery for the IRS. This means that they can get their hands only on business property that has equity. In doing so, they start the collection process by sending you a Notice and Demand for Payment letter.

At this time, you may be offered installment payment plans to repay your due taxes, depending on your financial circumstances. Or, you could file an Offer in Compromise, which will allow the IRS to consider the tax bill as fully repaid by making a partial tax payment. If you refuse to pay your taxes or don’t respond to the letter, the IRS sends a Notice of Federal Tax Lien, which enables them to claim your business property (both present and future).

The Notice of Levy is the final step before your business property is seized for back taxes. Usually, you have 30 days before they actually seize your business assets. During this time, you can make some efforts to stop the levy (i.e., set up an installment payment plan, discuss your case with an IRS manager, etc.).

If you reach no resolution within the 30-day window, the IRS will seize your business property, including rental income and accounts receivables, and force a sheriff’s sale of the business property and business items.

Also, if you operate as a sole proprietorship (have personal liability for the owed business taxes), the IRS may even garnish your Social Security benefits, retirement payments, and wages to pay the tax bill.

Innovative Tax Relief can help you stop the seizure by trying to appeal the levy., which is a time-consuming process and often overwhelming for business owners.

Can the IRS repo your vehicle?

The IRS has the legal right to take your vehicle’s title, right, and interest. This means that they can seize a vehicle you own. However, this is an option that is left as a last resort. The IRS will only consider seizing your car or another vehicle if there is equity in it.

For instance, if you have purchased a $15,000 car and are making payments on it and still owe $12,000, it will be highly unlikely for the IRS to take it. If you have paid off a $25,000 vehicle, though, they will seize it. This is because there should be equity so the IRS can keep it (the equity) after they auction off the vehicle and repay the lien holder. If there is no equity, they are not interested in seizing your car.

In general, the IRS will not pursue repossessing your vehicle unless there is around 20% equity they can get from the sale of your vehicle. And, this is after they take out 20% of your asset of the fair market price. So, a $30,000 vehicle they seize is actually worth $24,000.

Aside from that, the Congress passed the Taxpayer Bill of Rights in 1988, which gives taxpayers more rights concerning what the IRS can seize. The same bill also limits the IRS’ actions in regards to the process in which they can seize it. In other words, the IRS won’t just show up one day at your business or home and seize your vehicle. They are obliged to give you a 30-day notice of the intent. Plus, you have the legal right to be represented by a CPA or attorney and appeal an IRS decision.

All in all, the IRS does not favor repossessions of taxpayers’ assets, like their vehicle. They will, instead, want to work out any issues related to back taxes as they usually understand that seizing your vehicle can severely affect your day-to-day life. There is also a code that does not allow the IRS to put an additional economic burden on you (or cause one).

However, the IRS CAN seize and sell your second and third vehicles. If you find yourself in such a situation, please contact Innovative Tax Relief to assist you in keeping your vehicle and settling with the IRS.

 

IRS Notices–What They Mean & What You Should Do

couple receives IRS notice

If you have received a notice from the IRS, don’t panic. Yes, it can derail your plans and throw you off balance both in your personal and business life. However, in most cases, there are solutions to help make the IRS offer you a reasonable way out of the unwanted situation you have found yourself in and a good deal. This means, of course, that you will have to settle. Here are some details about the four most common notices the IRS sends, as well as ways to tackle them so you can heave a sigh of relief.

 

What Are IRS Notices?

They are letters the IRS sends you when they think you owe them taxes. There is a specific sequence followed when it comes to the types of letters you receive. Each one proposes interest, penalties, and taxes the Internal Revenue Service says you owe per tax period and each has its own significance.

 

Notice of Deficiency – What is it?

Also referred to as ticket-to-Tax Court, 90-day letter, letter 531, SNOD, CP3219A or Statutory Notice of Deficiency, the Notice of Deficiency is sent due to under-reporting income and the underpayment of tax. You usually receive it about 6 months after filing via certified mail from the IRS. Nevertheless, it may take up to 3 years after filing before you get one.

This first notice gives you significant appeal rights. If you disagree with the IRS, you have 90 days to petition to the U.S. Tax Court (after getting the Notice of Deficiency). This, automatically, gives you extra appeal rights as your case goes to the IRS Office of Appeals. Then, you might be able to skip going to Tax Court and work something out with the IRS.

Or, you could contact your local Taxpayer Advocate Service office and let them assist you in case you have received a Notice of Deficiency in error or feel that your taxpayer rights have been violated. This is also a good option if your financial situation has worsened, causing you financial hardship after getting the Notice of Deficiency or if you have tried to speak with the IRS repeatedly and have not received a response from them. However, this is where getting help from professional tax experts could make a big difference in the outcome.

What You Should Do

First of all, act quickly because you only have 90 days to do whatever needs to be done. After the 90-day deadline has passed, you won’t be getting any extensions. Remember that during this 90-day period, the IRS can NOT collect your taxes. Now, if you must appeal an IRS decision, do consider filing a petition with the Tax Court. Otherwise, the IRS will send you a bill and charge you the taxes.

Truth be told, it is quite likely for taxpayers receiving a Notice of Deficiency to miss the 90-day window or fail to make any kind of arrangements with the IRS. This always results in the IRS initiating their collection procedure through tax levies, tax liens, and other tools. For that reason, we firmly recommend contacting Innovative Tax Relief and requesting a free tax consultation for help, advice, and protection. You may even have options to reduce Notice of Deficiency-related penalties or even remove them in their entirety.

 

Notice of Intent – What is it?

The IRS will send you a Notice of Intent when you have not paid a balance. This type of letter informs you that the IRS will start the process to collect to satisfy your tax debt. This letter may also represent the IRS’s intent to seize your property (levy) if you don’t pay or set up a payment arrangement. Most of the time, a Notice of Intent is sent when you have missed at least three payments in a row or failed to file on time. This is why it is critical that you stay current with filling your taxes. In the opposite case, you are regarded as in default even if you have paid all of the arranged payments. Then, the IRS considers you as an agreement breaker and sends you into Collections. This means that they will garnish your wages. Whether they continue accepting your payments or not is up to them, though

When taxpayers receive a Notice of Intent, they usually panic. However, in reality, a Notice of Intent is just a heads up from the IRS that they are about to start the process to collect if you do not try to set up a payment arrangement or pay. Nevertheless, don’t take it lightly because you are heading down the path to a levy. So, it is best to take some sort of action pronto before it is too late.

Beware, though, at this point, as there are two different types of Notices, the (1) Notice of Intent to Levy and the (2) Final Notice of Intent to Levy. The second one is the last notice the IRS will send you before they seize your assets, and gives the Service the legal right to do so. This means that you have very little time before the Internal Revenue Services can levy your bank account. On some rare occasions, the IRS will only issue a Final Notice of Intent to Levy. If you find yourself in this situation, seek professional assistance immediately because a levy is about to happen.

What You Should Do

First of all, know your rights. The IRS is obliged by law to give taxpayers proper written notice before they do anything with your bank account (i.e., levy the account), per the Internal Revenue Code Section 6330. That notice should definitely include details about your right to appeal the imminent collection action within a month’s time (30 days). In the majority of cases, the Notice of Intent and the Final Notice of Intent are around 4-5 months apart, which means you have more than 4 months to prepare for the Final Notice of Intent.

Nevertheless, if you receive any of these letters, please have a tax professional handle your case. We have seen too many taxpayers disclosing information that hurt them (or not disclosing the right details). So, their attempt to manage their own case actually backfired.

 

Notice of Default – What is it?

A Notice of Default (aka Notice of Demand or CP523) is sent when you have been in an agreement with the IRS and has defaulted. It informs you that you have missed several payments to a creditor or lender (normally more than three in a row). You may also receive a Notice of Default if you did not file on time from that point forward when you set up the payment agreement.

When you have reached the point of defaulting payments and receiving a Notice of Default, the IRS stops accepting your payments. Even worse, they continue accepting your payment and, at the same time, send you into Collections AND garnish your wages because you broke the agreement. It should also be noted that the IRS may terminate your installment agreement without letting you know first if the Secretary (or an authorized representative) considers the collection of the due tax is in jeopardy.

What You Should Do

Respond to it within 90 days of receiving the notice so the IRS does not file a federal tax lien (or a levy) that will enable them to seize your assets. So, ensure you (or your tax professional) contact the IRS to reinstate your payment plan. It is also paramount that you make a payment before the payment deadline or termination date listed on the Notice of Default – you might be able to get your installment plan back in good standing again. You may need to provide some information about your assets, though, in this case or even be asked to fill out a new Installment Agreement (Form 433-D).

You should also contact the IRS if you believe that they have terminated your payment agreement by mistake or if you disagree with the due amount. You will find all contact details in the letter.

 

Notice of Garnishment – What is it?

The IRS is free to garnish your wages if you have tax debt and may even do so without getting a judgment first. It should be noted that the IRS is the only creditor that has this kind of power – all other types of creditors need a court ruling first. Plus, the sum any other regular collector takes is a fraction of what the IRS can take. Fortunately, the IRS provides several different options for you to repay your tax debt and skip the unwanted wage garnishment process.

When it comes to the max sum creditors (judgment creditors and others) can take from your wages, these are defined by federal and state laws. However, the tax code enables the IRS to take as much as it can and leave you with the necessary amount you need (per the tax code) to pay for your basic living essentials. As for the sum you can keep (protected wage), it is directly related to the number of exemptions you claim for tax purposes. For instance, a married individual filing jointly (paid monthly) that claims two exemptions can keep $1,625. A single individual claiming five exemptions (gets paid weekly) is allowed to keep slightly less than $480. the IRS garnishes anything above these sums.

What Should You Do

Since the IRS sends out several notices before garnishing your wages, once garnishment begins your options are limited. You can either pay off the tax debt, prove to the IRS that the garnishment is creating a financial hardship for you and attempt to get it reduced, or file an Offer in Compromise.

And, if you are wondering whether you could plead with your employer to get your wages back, the answer is no. Since there is a court order to garnish your salary, they won’t risk facing a penalty of law for not abiding by it. It is not up to them, and it is not their choice – just something they are obliged to do.

Also, don’t think that quitting your current job and getting a new one will save you from having your wage garnished. The court order follows you wherever you go, including your new position. Finally, disputing the Notice of Garnishment won’t get you anywhere if you truly owe the tax debt. You will only waste money and time that you could spend elsewhere (i.e., to reduce or get rid of your debt).

 

If You’ve Received a Notice From the IRS, We Can Help

No matter the situation you are facing, know that there are ways out and solutions to consider. Just contact the tax relief experts at Innovative Tax Relief and ask for a free consultation. Let’s find the best way out of these stressful circumstances, always with your best financial interest in mind.

 

Can the IRS Send Me to Jail?

main in jail

Cheating on your taxes is a crime. No doubt about that. However, a mere 0.002% of all taxpayers are convicted of tax crimes, even though roughly 16% of Americans are found not complying with the tax laws every year, in one way or another. 

As for the number of convictions for tax crimes, it has stayed relatively stable over the most recent 5-year period (less than 1% increase). This means that a person is rarely sent to jail for tax fraud. 

However, there is some fine print you do need to read, as not all cases end up being punished with penalties and fines. Some may as well put you behind bars. This is a topic that we get asked about a lot so we wrote this article to answer some commonly-asked questions.

 

Can You Go to Jail For Lying to The IRS?

The majority of cheating cases comes from tax evasion, which is the deliberate underreporting of income (willful or actual). This is the type of tax crime that is charged the most often. Truth be told, it can be tempting for some taxpayers to fudge the numbers to improve their tax refund. Nevertheless, misrepresenting yourself on your tax return can get you into trouble as it is considered tax fraud. So, you could be (1) audited, (2) fined considerable amounts, or (3) put to jail.

Remember that the IRS knows whether you report all of your income or not as it gets all of the 1099s and W-2s you receive. Your financial activity may also raise some red flags with the IRS (in case you are thinking of hiding income in the form of cash payments). All these may trigger a tax audit, which is an in-depth review of your financial records and taxes to make sure everything has been reported accurately. 

Although there is less than a 1% chance of being audited, most of the time, at least, undergoing an audit is simply not worth the risk as it involves a costly and time-consuming procedure, where you are called to present years of documentation. You may even be called in for multiple in-person interviews. 

Now, whether you go to jail for an IRS audit or not, it all depends on how the IRS finds you – guilty of tax fraud or evasion (so charged with an offense that carries jail time) or not. In general, an incorrect tax return case (i.e., under-reporting your income) comes with late payment penalties, while you may also be charged interest on the underpayment but you will not go to jail for it.

And, don’t fool yourself into thinking that tax fraud or evasion affects high earners only. Everybody should be careful, even those with low income. This is because the IRS does NOT differentiate its cases based on how much you underpaid your taxes or between income amounts. Falsifying any information on a tax return can end up with you being fined up to $250,000. 

 

Can the IRS Put You In Jail?

In a nutshell, no. The IRS cannot send you to jail. However, the court can. When an IRS auditor audits your tax returns and detects possible fraud, they can initiate a criminal investigation. It should be noted that around 3,000 taxpayers are convicted of tax fraud every year. So, lying on your taxes is, indeed, a big deal for the IRS. Overall, though, the IRS rarely charges taxpayers with fraud. Therefore, even if you are investigated, you will probably not face a criminal charge.

That being said, though, lying on a tax return carries potentially severe consequences that are just not worth the risk; you may end up having to pay way more than the sum you are attempting to hide. 

 

How Much Taxes Do You Have to Owe To Be Sent to Jail?

As already mentioned, the chances of facing criminal fraud penalties are very slim. In the overwhelming majority of cases (at least 98%), the IRS punishes this type of fraud with CIVIL penalties. This simply means that you will be called to pay a 75% fine that will be added to the tax due, plus interest on both the fraud penalty and the tax. So, if you owe $10,000 from tax fraud, you will have to pay an extra $7,500 as a penalty. 

Things change dramatically, though, when the IRS suspects that you have gone too far. In this case, it may call the CID (Criminal Investigation Department) to investigate your situation. The CID then has two options: (1) recommend that the Justice Department prosecute you or (2) drop it forever, depending on its findings. The good news is that the CID does not usually recommend prosecution except in very rare cases. 

Of course, the larger the sum you tried to hide, the more likely CID agents will recommend prosecution. In criminal cases, the typical amount of taxes owed is at least $70,000 and usually refers to tax cheating activities over a three-year time span (or more). 

To sum up, the IRS itself can NOT prosecute you, but the CID can recommend prosecution. If  it does, and you get convicted by the Justice Department, you may be fined, put on probation, imprisoned, or all three. The bad news is that if you are brought to court, there is more than an 80% chance of getting convicted and a high chance of going to prison even if you have a spotless criminal record. 

 

 

Tax Crimes That CAN Put You In Jail

Individuals that are recommended prosecution by a CID agent are typically charged with one of the following three crimes: (1) failing to file a tax return, (2) filing a false return, or (3) tax evasion. Here are some details about each:

Failing to file a tax return. This is the least serious tax crime of the three and is defined as not filing a return intentionally. So, if you must file tax returns and you do not, the maximum prison time you can get is 12 months and/or a $25,000 fine for each year you have not filed. However, most non-filers only get civil penalties and are rarely prosecuted criminally.

Filing a false return. This is the case where you file a tax return that contains a material misstatement. This is less serious than tax evasion and can get you behind bars for up to 36 months. Also, according to the Internal Revenue Code §7206 (1), you will be fined a maximum of $100,000. 

Tax evasion or fraud. This is the most serious thing you can be charged with as it is considered a felony rather than a misdemeanor, which is the case with the two situations mentioned above. Tax fraud or evasion is when you try to defeat the income tax laws intentionally, and carries a maximum prison sentence of five years. The fine you will also be called to pay per the Internal Revenue Code §7201 is up to $100,000. 

Important Note: The CID can also recommend prosecution for filing false claims against the IRS and for money laundering. Although these are not tax crimes in a technical sense, they tend to be charged in the same case as a tax crime against the same taxpayer (entity or individual). 

 

 

When Can the IRS Send You to Jail?

The truth is that failing to pay your taxes can eventually initiate a process to send you to prison. But, the IRS does not have the power to put you behind bars or file criminal charges against you if you have not paid your taxes, as already explained. Nevertheless, some exceptions apply. 

It all depends on the reason for not paying the due amount. If you can’t because you do not have the money, you are in the clear. But, if you intentionally try to deceive the IRS or lie on your tax return, this is regarded as tax fraud, and you could end up serving jail time. 

Let’s take things from the beginning, though. Bear in mind that most tax crimes are NOT criminal cases; they are considered civil cases. This is because the IRS understands that taxes can be confusing, and you could fill out your return incorrectly due to the complexity revolving around filing tax returns. So, if you get confused or forget to include an important document on your tax return, the IRS will most likely send you a letter asking you to address your mistakes and amend them. 

If you made a more serious error, the IRS will probably audit you and place a civil judgment against you. Again, this will NOT put you in jail as it is NOT a criminal act. It is simply a notice that you need to change your tax return and pay back your unpaid taxes. 

This is not the case when you intentionally change your taxes or file fraudulent taxes or fail to file. If the IRS thinks that you are failing to file your return altogether or intentionally fill out your tax return incorrectly (which is tax evasion in any case), you may face jail time. 

 

Should You Be Concerned That the IRS Is Going to Send You to Jail?

Generally speaking, it is extremely rare for the IRS to charge a person with a tax crime and attempt to send them to jail.  So for the most part, you don’t have to worry about the IRS sending you to jail.

But with that said, not filing your tax return or trying to hide income from the IRS is not worth it in the long run, as you will probably end up paying much more than the taxes you want to evade. And, if you are in a tight financial situation where you cannot meet your tax obligations, there are several tax relief strategies to help you get out of it. Feel free to contact us and we’ll help you find the best solution to your problem. 

How a 1099-C Affects Your Taxes

form 1099-C Cancellation of Debt

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

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

 

What Is a 1099-C?

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

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

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

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

 

What Is the 1099-C Tax Rate?

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

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

 

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

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

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

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

 

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

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

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

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

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

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

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

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

 

You May Be Able to Avoid Paying Tax on Canceled Debt

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

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

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

 

The Mortgage Forgiveness Debt Relief Act

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

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

 

Avoiding Tax Debt After Insolvency and Bankruptcy 

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

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

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

Truck Driver Tax Deductions

truck driver owner-operator

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

 

How Much Tax Does a Truck Driver Pay?

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

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

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

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

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

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

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

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

 

What Expenses Can a Truck Driver Write Off?

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

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

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

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

 

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

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

 

What Tax Forms Should Truck Drivers Use?

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

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

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

 

Tips for Filing Truck Driver Taxes

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

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

 

Having a Tax Home – A Key Requirement for Truck Drivers

Before you can claim a tax deduction, the IRS requires that you have a general area or city in which you work. This is referred to as a Tax Home and has nothing to do with where you reside. It is just the address you list on your tax returns and usually where all your mail goes to. This could be your personal residence, your business’ headquarters, or a dispatch center. The only prerequisite is that you contribute towards the selected tax home regularly while on the road, especially if you are an owner-operator using a residence as your tax home. 

Why do you need a tax home? To be able to deduct travel and business expenses. In other words, without a tax home, the IRS won’t allow you to claim certain long-haul expenses. Note that failing to have a tax home or contributing financially to the registered tax home can end up with you facing substantial penalties for underpaid taxes.

  

Tax Moves to Make to Reduce the Due Sum of your Tax Return

Here are some things you could do to help minimize the amount you will owe after filing your tax return. 

  1. Take advantage of the new depreciation rules

Purchasing assets for your business (i.e., a new piece of equipment or new truck) could enable you to benefit from the new depreciation rules and eventually reduce your tax liability. According to the tax law, any qualified property bought between September 27, 2017, and December 31, 2022, can be fully depreciated of the property cost. Just ensure you place in service the purchased asset within that time frame to take the first-year deduction on the purchased asset immediately. If things remain as they are today, then the depreciation bonus goes down by an extra 205 annually, starting in 2023 (so, 80% depreciation in 2023, 60% in 2024, and so on). Your taxable income will drop considering that the cost of the depreciated asset will be recognized as an expense. 

Important notice: Making big purchases should NOT be your first course of action to help get a deduction, especially if you are planning on buying assets that won’t bring you additional income. Also, remember that the higher the deduction today, the lower the deduction in the future (most likely). If your business slips into a higher tax bracket, this could be a problem. So, only make big purchases if you really need the asset to be bought. 

 

  1. Keep a Per Diem Calendar

The IRS allows truck drivers to prove necessary and ordinary business expenses incurred when traveling away from the home base. This deduction is called Per Diem and involves incidental costs and your meals for the days you were on the road. This applies to travels that require you to rest or sleep away from home to deliver on your job duties. Although this particular deduction is no longer an option for company drivers (employees), the TCJA (Tax Cuts and Jobs Act) left it open for owner-operators (aka self-employed individuals). 

The Per Diem rate is set at $66 for every day you are away from home for business and $49.50 per partial day (effective since October 2020). Take note, though, that the IRS only enables you to deduct 80% of the Per Diem rate. This means that you get a deduction of $39.60 for a partial day and $52.80 for a full day. 

So, to claim your Per Diem deduction, you must know how many days you have spent on the road. This is why it is critical that you keep track of these days (i.e., you can keep a calendar and mark “/” for partial days and “X” for full days). 

Important: Ensure you provide DOT ELD logs with locations, dates, and times to substantiate your per diem. 

 

  1. Set up your business as an LLC

Being an LLC and getting taxed as an S-corporation by filing form 2553 is something worth considering, provided you net more than $70,000 annually. You see, for a sole proprietorship, all income is subject to self-employment tax (approx. 15% of all earnings), both distributed and undistributed. This is not the case with an S-Corporation, where you can withdraw additional funds as distributions and pay yourself a reasonable salary to minimize your self-employment tax. The key term here, though, is reasonable. In any other case (you give yourself a huge salary), you may send the IRS a red flag and trigger an audit.

Here is an example to make this a bit clearer for you: 

Let’s assume that your annual net income is $55,000 and pay yourself a salary of $35,000. The self-employment tax rate is 15%. So, 15% of $35,000 is $5,250. This means that instead of $8,250 self-employment tax (15% of $55,000), you are now paying $5,250.

 

  1. Catch up with your tax payments

If you have fallen behind your quarterly estimated tax payments, it is a good idea to try to catch up before the end of the year. A great way to do that is by making a larger than normal quarter tax payment to help pay any due tax liability when you file your tax return. Remember that not paying enough taxes throughout the year will get you penalized. In general, taxpayers owing no more than $1,000 avoid a penalty for underpayment of the annual tax. The same applies to those that have paid more than 90% of the tax due for the current year. Nevertheless, we can’t stress enough the significance of paying your taxes every single quarter to skip additional penalties that could be quite high. 

Tip: You could consider setting aside 25% of your net income (the weekly) for your quarterly estimated tax payments. 

 

Key Steps to File Taxes Successfully and Save on Taxes

Staying organized is crucial if you want to give yourself a considerable payoff in your taxes. In doing so, make sure you keep a careful record of any job-related expenses you have because the money you spend while on the road for work can increase the sum you can get back from your taxes. That aside, here are three important steps every truck driver should take to get taxes done.

Step #1: Select the (Right) Form You Need to File

Company drivers must have already received a W-2 form, which reports their annual wages and income. The majority of truckers will need to use the details from the W-2 form to fill out either a 1040A or 1040 form for taxes. 

You could also consider form 1040EZ, which is a simplified version of the 1040 form, provided you meet certain conditions. For example, you need to choose NOT to itemize deductions and make no more than $100,000 annually. Also, you must have a tax status of married filing jointly or single. Before opting for the 1040EZ solution, though, take into account the trucking deductions that could help you save money. 

Owner-operators, on the other hand, may find it easier to report their income via a 1099 form that reports miscellaneous earned income. The 1099 form enables you to itemize work-related expenses and deduct them from your taxes. 

Step #2: Claim Work-Associated Tax Deductions

Truck driver tax deductions can save you some serious money (you pay less in taxes) as they allow you to reduce your adjusted gross income. We have already provided you with a long list of truck driver deductions you could be eligible for. You only need to calculate your adjusted gross income  and report it on your tax forms, which will be the only type of income that will be taxed. The lower your adjusted gross income, the less in taxes you pay. 

Step #3: File Your Taxes on Time 

That would be not after April 15. You can file your taxes either by traditional mail or electronically. So, by now, you must have finished all the required paperwork (more or less), added costs, and know whether you will be getting a refund or you need to send a check. Just make sure all this is done before the deadline. 

Extra Tips for Filing Taxes for Truck Drivers:

  • Mileage cannot be claimed at standard rates, though you can claim it as a deduction. 
  • Any expenses your employer reimburses are NOT considered tax deductions you could claim. 
  • Make sure you keep a properly updated record of your actual expenses. 
  • Know all the regulations related to filing taxes. Also, what deductions you can take. There are certain rules that apply to truck drivers who wish to claim deductions. 
  • Never over-claim deductions. 
  • Using tax software can help you file your taxes in a decent way. However, it can never match the job done by a tax professional.
  • Have a tax professional review your accounts to stay on the safe side and avoid penalties, especially if your income tax bracket has gone up recently. 

 

Understanding the IRS Statute of Limitations

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

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

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

 

What Is A Statute of Limitations?

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

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

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

 

How Long Is the IRS Statute of Limitations?

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

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

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

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

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

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

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

 

When Does the IRS Statute of Limitations Begin and End?

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

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

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

 

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

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

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

Examples of tolling events are:

Filing for Bankruptcy

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

Requesting an Offer in Compromise

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

Lack of Legal Capacity

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

Unconditional Promise to Pay

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

Cause of Action Has Been Concealed (Fraudulently)

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

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

 

How to Use the Statute of Limitations To Your Advantage

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

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

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

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

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

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

 

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

IRS Revenue Officer on the way to visit a business

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

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

 

What Does an IRS Revenue Officer Do?

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

The general powers of an IRS Revenue Officer include:

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

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

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

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

(3) Your tax debt exceeds $100,000. 

 

Things to Know:

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

 

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

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

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

How Things Work – The Drill

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

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

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

 

What To Do If an IRS Revenue Officer Contacts You

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

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

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

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

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

Tips:

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

 

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

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

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

Note:

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

 

The Best Course of Action to Take with a Revenue Officer

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

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

 

Finally, remember that…

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

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

 

Understanding Tax Returns

tax return

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

 

What Is a Tax Return?

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

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

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

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

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

 

What Types of Tax Returns Are There? 

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

Form 1040 (for Individuals) 

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

You should file Form 1040 if:

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

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

Form 1040X (for Individuals)

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

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

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

Form 1040EZ (for Individuals)

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

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

Form 1120 (for C-Corporations)

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

To file Form 1120, you need to enter:

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

Form 1120-S (for S-Corporations)

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

Form 1065 (for Partnerships) 

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

 

What is a 1040 Schedule A?

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

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

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

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

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

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

 

What is a Schedule C? 

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

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

 

What is a Schedule E? 

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

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

 

How Long Should You Keep Your Tax Returns? 

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

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