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Estimated Taxes, the Penalties and How to Avoid them

December 19, 2012 By

It is more often than not, painful to write the IRS a tax check annually, but worse when you have to pay penalties on top of the taxes, some that you could have evaded in the first place. However, many taxpayers forget to review their financial statuses or withholdings within the year, ending up with underpaid taxes. To ensure that taxes are taken seriously, the IRS has perfected its list of penalties, and you have to take your taxes seriously if you are to avoid paying them.

To help avoid the IRS penalties as a result of underpaying, you have to consider two basic rules: first, keep your tax dues under $1,000 by the tax day by paying them all throughout the year. Second, use payroll withholdings or pay taxes quarterly. These two rules might appear simple and easy to follow but many taxpayers still find it hard to adhere to, and end up paying fewer taxes than they should, eventually attracting penalties.

Take a look at the IRS Form 1040, line 61 or 35 of Form 1040A, and see to it that the listed amount is paid up. If you believe your income is on a steady rise, paying at least 110% is safer. Taxpayers who pay through payroll withholdings are at an advantage, as the IRS treats the payment as being paid evenly all through the year even if it is paid in one go in December. Use the previous year’s tax liability to work out an estimated amount for the current year to avoid underpayment. Use the year-to-date withholding column on your to do this.

Employed taxpayers can approach this issue by evenly spreading the extra costs through the rest of the checks. Raise the withholdings on the last four paychecks and pay by the end of the year. Taxpayers, who own corporations can choose to write themselves a massive paycheck, then subtract the state and federal income taxes for the whole year all at once. You may end up with a net paycheck of $5 for a gross paycheck of $150,000. The IRS doesn’t like this strategy, but it is legal and acceptable.

You can save a reasonable amount of money in IRS and state underpayment penalties by using all the cash all year and pay federal and state taxes in January the following year. The unemployed on the other hand, have to pay their quarterly estimated taxes on time to evade penalties. This can easily be done using the EFTPS system where you pay electronically without paying any fees.

The IRS has a special form that is designed to help eliminate penalties for six months, which only works if you can fully pay by October 15th and you meet all the other requirements.

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Major Tax Breaks for Bloggers and Other Online Businesses

October 11, 2012 By

Many bloggers and online entrepreneurs usually pay little attention to how federal taxes affect their operations. However, there is little difference between setting up an online business and conventional ventures, as the processes are relatively the same. One major limitation to smooth operation of any business is the high operation costs. To help entrepreneurs smoothly run their businesses, there are a few tax deductions that can be claimed.
• Domain registration and web hosting fees
• Internet access fees
• Website design and development costs, including logos like specialty logos for a post or your online products.
• Professional consultant fees paid to experts like web designers, search engines optimization experts, bloggers, copywriters, web content managers, among others.
• Software purchases, e.g. design programs like Photoshop, audio and video applications for podcasts, animation features, etc.
• Telephone related charges like placing long distance official calls to enable the running of the blog or website.
• Computers and hardware like mice, printers, monitors, and keyboards
• Travel expenses and costs to attend official business-related conferences.

To remain profitable online, entrepreneurs have to work not only harder, but smarter. Everyone works hard enough, but the extra acute ones use little effort to realize tremendous results. According to the IRS’s Schedule C filed alongside Federal Form 1040, qualified sole proprietors can make some reasonable deductions on their returns in various categories. Also available from Uncle Sam are a number of small business tax calendar as well as other important tools that business owners can take advantage of when filing their tax returns.
Every entrepreneur aims at maximizing profits while keeping expenses low. IRS tax breaks are ideal for the struggling online entrepreneurs to recover some of the basic expenditures that any eligible self-employed individual should claim. It is however, important to ensure that any official transactions and business related costs are well documented. It is recommended that you save the receipts along with tax related documents in hardcopy and digital formats securely.
It has been noted that many individuals prefer running their own business, as it is much easier to evade some taxes. For this reason, any suspicion by the IRS that you are involved in any form of tax evasion might result into a tax audit of your tax returns. This is usually messy when the IRS officials demand for paperwork which you have either lost or did not even bother to keep. Lack of documented proof will not only result into rejection of refund claims, but will also trigger the IRS to dig deeper into your business.

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Substitute Returns and Back Taxes

July 2, 2012 By

The Internal Revenue Authority may make estimates on how much a tax payer should remit. These estimates are referred to as proposed assessments. Usually, the IRS will send you a letter to the tax payer, referenced “Notice of Proposed Assessment”, which may be deemed as a personal invitation to file your back taxes.

Because people are free to arrange their financial affairs in such a way to take advantage of any tax benefits, the IRS may not know every tax deduction and credit you might qualify for. The only way for the IRS to really know how much you owe is for you to tell the IRS what your tax liability is. And the only way to do that is to file a tax return.

The IRS may be unaware of which tax deductions and credits you may qualify for owing to the fact that people are open to planning and arranging their financial activities and affairs in the most tax- economic way. The only way to inform the IRS about what tax credits you qualify for

Educated Guesses

If a tax return isn’t filed, the IRS may sometimes estimate your tax liability, in order to figure out what you might owe, if you indeed owe. The proposed assessment may be seen as an educated guess, and may be avoided if you file a return, as it is the only way the IRS will be furnished with information on your actual tax situation.

Substitute Tax Returns

Failure to respond to this notice may lead to the IRS filing a tax return on your behalf. This is called a Substitute for Return (SFR), and is an official way for the IRS to make an estimate on how big your tax bill might be. The purpose of an SFR is to arrive at a definite dollar amount, before the initiation of collection efforts. Upon issue of a Proposed Assessment, and subsequent failure to respond, the assessment becomes final. This means that the IRS can now legally collect on the tax for ten years.

To avoid an IRS assessment, the fastest and most convenient way would be to file a tax return. The IRS is legally obligated to accept your tax return, as opposed to its own computation. This is because your self-filed tax return has your own signature on it, meaning you have accepted that you have a defined tax liability. More so, it would save loads of time and money that would be spent trying to correct erroneous SFRs.

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