May 18, 2013

Posts Comments

Paying Estimated Taxes and the Benefits of Compliance

March 6, 2013 By

To enter into any tax payment agreement with the IRS, be it an Offer in Compromise or Installment Agreement plan, you first must be compliant. You have to be paying the current year’s taxes via either tax withholdings from you paycheck or the most accurate estimated tax payments.

If you are an employee, you don’t have to make estimated tax payments. However, so see to it that you completely cover your tax obligation; ensure that your Form W-4 withholdings are approriately structured. The same principe applies if your main income sources are unemployment, pensions, or payments from Social Security.

If you receive any taxable income, organize to have withholdings to be deducted. For Social Security, use the IRS Form -4v and Form W-4p for pension. If you are unemployed, contact your state’s unemployment department for the necessary documents.

If most of your income is from a profitable investment or business free from deductions for withholdings, be ready to make estimated tax payments if:

  • ·         You anticipate to owe the IRS $1,000 or more by April 15 after deducting your refundable credits and withholding.
  • ·         You suppose refundable credits as well withholdings to be lower than the smaller of:

-90% of the tax to be indicated on your tax return in 2012

-100% of the tax indicated on your tax return in 2011, which must cover the twelve months of the year. (If your 2012 AGI was more than $75,000 as single filer or $150,00 for married taxpayers filing jointly, replace 100% with 110%  )

You don’t have to worry about the estimated tax payments if your 2011 tax liability was less than $1,000.

When the Estimated Tax Payments Should be Made

Payment of taxes are due as follows (unless the tax due date is on a public holiday or weekend when it is moved to the following business day.)

  •     First quarter-April 15th
  •     Second quarter-June 15th
  •     Third quarter-September 15th
  •     Fourth quarter-January 15th

Farmers have two payment periods; they can either pay the whole amount on January 15, or March 15 when filing their tax returns.

Estimated Tax Payment Options

The Electronic Federal Tax Payment (EFTPS) is the easiest way to pay estimated taxes. This is a free and convenient payment solution, and since the money is directly paid  from your bank account; you retain the proof that indeed, the owed taxes have been paid in full. Just see to it that the payment is made to the right tax type or tax year. All payments made during the year can be downloaded and printed and attached to the tax return when filing. Paying estimated taxes will safeguard you from the many IRS penalties and interests.

Filed Under: Our Blogs Tagged With: , , , , , , , , , , , , ,

Useful Tips for Filing Amended Tax Returns

January 10, 2013 By

The decision whether to amend tax returns or not should be reached upon assessment of a number of factors aimed at evading more trouble with the IRS. If you have to amend more than one tax return, ensure that you amend each year independently using different Form 1040Xs. Each of the amended returns then, has to be mailed in separate envelopes to the IRS campuses in your respective area of residence.

There is a possibility that the amended return will be audited by the IRS. The number of audited returns is however, low unlike the assumption that all amended returns are examined. The possibilities are however, higher compared to the original returns. Another crucial fact is that the refunds can be applied to estimated taxes. The IRS will definitely scrutinize amended returns requesting for a reasonable amount of refunds. Try applying all or a fraction of your refund to the current year’s tax.

An understanding of the special statute of limitations and their rules is important. It usually takes the IRS three years to audit a tax return from the time of filing. This however, doesn’t mean that filing an amended tax return would restart that three-year statute of limitations. In case the amended return indicates a tax influx, and is submitted within 60 days prior to expiry of the three year statute, the IRS takes 60 days to assess the return from the day it is received. If the IRS fails to review the return within the 60 days, you can count your blessings.

Some individuals amend returns just before the expiration of the statute. Remember that an amended return that fails to report net increase in taxes is not eligible for any extension of the statute of limitations.

Taxpayers are always worried of the harsh IRS penalties and interests. It therefore, calls for caution because if the amended return shows that you owe more than what was owed originally and paid, you will have to deal with resulting interest and possible penalties. The IRS charges interest on all tax not paid by the due date of the original return, regardless of the extensions. If you fail to include the interest on the return, the IRS will do the math for you and send a bill your way or send a notice for any penalties which you can either pay or contest.

Dealing with amended tax returns can be hectic and tricky and should never be taken lightly. All in all, the accuracy of the original return is paramount.

Filed Under: Our Blogs Tagged With: , , , , , , , , , , , , , , , ,

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.

Filed Under: Our Blogs Tagged With: , , , , , , , , ,

Penalty on Estimated Taxes

September 20, 2012 By

There are times when you might receive payments or income without Federal Income Taxes being withheld. To avoid any penalties in such cases, it is recommended that you make estimated payments all through the year. This is not only applicable to the self-employed individuals or occasional freelancers but also other taxpayers who might be getting some income from other sources that are not subject to withholding-usually landlords, partners in partnerships, and S corporations taxpayers, who have invested significantly in various entities.

Individual taxpayers need to make estimated tax payments if they expect to owe $1,000 or more on their Form 1040, line 76 while filing the Federal Income Tax return. You might also be required to make estimated taxes payments if you owed taxes the previous year and still expect to owe the current year. There are special rules and exemptions that apply, so refer to Federal Form 1040-ES for additional information.

Before making estimated payments, you have to establish your estimated tax. This can be done with the aid of the worksheet on Form 1040-ES. A year is divided into four quarters, each with a particular payment due date as established by the IRS (normally the 15th of April, June, September and January). Please note that failing to pay in time might trigger a penalty.

You may not be able to make enough in estimated payment in one particular year. If the total of your withholding and timely approximated payments fails to meet at least the following, you might still owe a penalty; 90% of your current year’s tax or 100% of the previous year’s tax. If your income does not change from one year to another, you are much safer if you pay the amount you owed the previous year. However, if the Adjusted Gross Income (AGI) for the previous year exceeded $150,000 ($75,000 if your current year’s filing status changed to married but filing separately), then you have to pay at least 110% of the previous year’s tax for the amount.

In case you failed to make enough estimated tax payments all through the year and as a result, you are subject to a penalty, use Federal Form 2210 to calculate the penalty amount that should then be entered on line 77 of your return. Include the penalty to the cumulative tax due and enter the value on line 76. Some taxpayers resort to getting paid at the end of each of the four periods, making it easy to estimate the tax payment. You can only file Form 2210 alongside your return if the instructions on the form indicate that you have to. There are some tax prep software that can help. Alternatively, the IRS will estimate the penalty for you if opt to leave line 77 blank.

Just like other IRS payments, you must observe deadlines lest you accumulate penalties. In the event that you miss the deadline, you shouldn’t ignore but go ahead and pay to evade more penalties.

Filed Under: Our Blogs Tagged With: , , , , , , , ,

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.

Filed Under: Our Blogs Tagged With: , , , , , , , ,

IRS Help Regarding Your Foreign Account

August 4, 2011 By

The IRS has over the recent past, cracked down on taxpayers who have been defaulting on payment of taxes against foreign incomes. Unremitting taxes from foreign incomes is one of the leading contributors to the tax gap and the IRS has earmarked this tax source as an area of focus, especially in the wake of the tremendous government deficit. Taxpayers with foreign accounts and those that make foreign incomes can no longer take payment of taxes for granted. The IRS has made major headway through partnerships with other governments, seeking disclosure from foreign banks to get to taxpayers who have defaulted in paying their taxes on foreign incomes. They have also come up with various initiatives and procedures that are targeted at getting more taxpayers to pay taxes against these incomes. Some of these recent moves by the IRS on tracking down foreign income earners are:

Form 1040 Disclosure

In the 2010 tax return form 1040 at Section B, the IRS included a question that required the taxpayer to reveal whether he or she had a foreign account. Many taxpayers ignored this yes/no question while others checked the “No” option, though they did indeed had foreign accounts. However, answering this question falsely or ignoring it means that you willfully withheld or misrepresented the truth and therefore, exposes you to further liabilities. Even taxpayers that checked the “Yes” option are still required to pay taxes on foreign incomes earned and file the treasury disclosure form (if their accounts meet the minimum disclosure threshold).

IRS 2011 Offshore Voluntary Disclosure Initiative (OVDI)

In 2011, the IRS also provided an amnesty program to foreign account holders who had not complied to the legal disclosure requirement to do so with reduced consequences and no criminal recourse. The amnesty program provided an opportunity for the taxpayer to come clean by paying due taxes and interests accrued and paying a final penalty of a percentage of the highest account balance since 2001. This amnesty lapses on August 31st, 2011, except for those that applied and qualified for an extension to November 30th, 2011. The IRS says that this is a last amnesty opportunity for any defaulter to come clean without facing the full legal consequences.

Opting Out

The IRS has also provided an opportunity for taxpayers who have already signed into the 2011 OVDI to opt out of the initiative and face the regular consequences of their non disclosure. This option has been provided to enable taxpayers who may be at a disadvantage through the initiate to opt in for paying penalties under the regular requirements. However, since those opting out will have already joined the initiative and provided the IRS with information about their foreign accounts, they will be obviously more vulnerable to an IRS audit and back-tax bills.

Treasury Disclosure Form TD F 90-22.1 Update

Taxpayers who have foreign accounts (including bank accounts, stockbroker accounts, annuity accounts, and other fund and investment accounts) are expected to file Form TD F 90-22.1 “Report of Foreign Bank and Financial Accounts” (FBAR) form by June 30th of every year for the previous financial year. In 2011, this form was adjusted to allow for more disclosure as the IRS seeks more information to seal any possible tax loopholes.

Quiet Disclosure

Some taxpayers are opting to start filing FBAR forms to fully disclose and pay past foreign income taxes without alerting the IRS of their former non-disclosure and default; they are also not taking up the OVDI amnesty program. They are doing so in the hope that the IRS will not catch up with them within the 3 year statutes of limitations and therefore, forgo any penalty payments or other legal recourse. This is being referred to as a “quiet disclosure.” The IRS has warned against quiet disclosures and has stated that any taxpayer who opts for quiet disclosure is in essence, willfully violating the law.

www.limonwhitaker.com

Filed Under: Our Blogs Tagged With: , , , , , , , , ,

IRS Help: Update on OVDI and FBAR

June 22, 2011 By

The IRS is experiencing increasing pressure to collect as much taxes as possible in light of a looming government deficit. One of the areas believed to contribute the most to the tax gap is the taxation of foreign incomes. Therefore, in the recent past, the IRS has increased its efforts to collect taxes from foreign incomes. The IRS is aggressively seeking disclosure of information from U.S citizens’ accounts in foreign financial institutions. The IRS has also made changes to the Foreign Bank Account Report (FBAR) disclosure and has also increased awareness for qualifying taxpayers to comply with the requirements of the FBAR.

Offshore Voluntary Disclosure Initiative (OVDI)

In 2009, the IRS introduced an amnesty program to enable taxpayers who had not made disclosures on the FBAR form in past years to come forward and comply with the rules of regulations. The Offshore Voluntary Disclosure Initiative (OVDI) of 2009 provided less penalties for individuals who had violated the rules of the foreign income disclosure and foreign income taxation. In 2011, the IRS had introduced yet another OVDI program in what they call “a last and final amnesty.” The FBAR form is a treasury form that is to be filed by every U.S. citizen, resident, or entity that owns or controls a foreign financial account that has had a balance equivalent to or over $10,000.00 at any point throughout the tax year. However, for those who missed out on filing the form in past financial years and who do not wish to be audited and face both civil and criminal charges, the IRS has set up the OVDI to compel such parties to come forward and report their foreign accounts with the incentive of facing far less punitive consequences. In this initiative, any taxpayer who has had a balance of over $75,000.000 or equivalent in their foreign account at any point since 2003 (to date) and has not complied with the FBAR can get back into the state of compliance by paying a penalty of 25% of the highest balance in which the account had within the same period. Those with foreign accounts whose balance remained below $75,000.00 or equivalent throughout the same period of 2003 to 2010, may pay a penalty of 12.5% of the highest balance in the account in the same period under the OVDI. For inheritance accounts and other qualifying accounts, the penalty for compiance under the OVDI is 5%. This may be a tax relief for many.

90 Day Extension

The deadline for the 2011 OVDI program was set to lapse on August 31, 2011. However, as a show of good faith and to ensure every taxpayer gets an opportunity to comply, the IRS has further extended the deadline of the OVDI by 90 days to November 30, 2011. However, one needs to apply for the extension and show cause for the need of this extension. The taxpayer will need to demonstrate that they indeed, attempted to meet the August deadline but may require the additional time to assess the taxes due and to ensure full compliance of the guidelines to the OVDI. The request must indicate the items that are still not disclosed and why they are not yet disclosed. The IRS has also placed further instructions on how to handle the extension in their website’s Frequently Asked Questions section.

Opting Out

The IRS has also provided an opportunity for taxpayers who signed in under the OVDI of both 2009 and 2011 to opt out of the initiative. The FAQ section of the IRS has also been updated to include details about how one can opt out of the programs and reasons why someone may opt out. Ideally, taxpayers can opt out of the program if the penalties to be paid through the OVDI are more than what they will owe if they are audited and will have to pay the due taxes, interest, and penalties. One of the examples given for someone seeking to opt out is, if the taxpayer qualified for foreign income credits that cover the taxes that were due over the years and so, they owe no taxes and will only owe penalties for not filing the FBAR form (which may be significantly less than the OVDI penalties). However, the IRS warns that if one opts out of the OVDI, they may face criminal charges, especially if not filing the FBAR form in past tax years is proven to be frivolous or to avoid taxes.

www.limonwhitaker.com

Filed Under: Our Blogs Tagged With: , , , , , ,

Is It Time to Hire a Tax Lawyer?

April 19, 2011 By

If you are in trouble with the IRS, there are several important factors to consider before choosing representation. Consider the level of involvement of the IRS in your issue thus far.

If the IRS is going to audit you because they believe your taxes were fraudulently filed, a tax lawyer will be able to advise you on what to do to avoid severe penalties of up to 75% of taxes you owe. If you owe taxes and paying them will create severe hardship for you, you may be able to enter into an Offer in Compromise agreement with the IRS which will allow you to pay less than your full debt. Although you can get an Offer in Compromise without representation, a tax attorney will be able to increase your offer’s chance for acceptance. In the event that your offer is not accepted, your attorney can advise you on your other options.

You may have a lien placed on your assets or your wages may be garnished because of failure to pay your taxes. With a lien or wage garnishment, the IRS attempts to gain back the value of the taxes you have yet to pay. A tax attorney can help you by getting the lien or wage garnishment removed. If the IRS has already audited your tax returns and determined they were fraudulently filed, a tax attorney can help you get the resulting penalties removed.

To find the best tax lawyer for your needs, do your research. Many attorneys offer free consultations, which is a great opportunity to assess whether you are compatible with that tax lawyer. It may also help to ask others who have had tax problems, and it is essential to make sure they have experience, the proper education, and are a member of the state bar.

www.limonwhitaker.com

Filed Under: Our Blogs Tagged With: , , , , , , , , , , , , , , , , , , , , , , , ,

IRS Trouble for Nicolas Cage

April 14, 2011 By

No matter how much you think you would love to have Nicolas Cage’s paycheck, you don’t want to have the associated tax bill. Apparently, he didn’t either, and thought he could get away with simply not paying. Nick has gotten himself into serious IRS tax problems which could harm him financially in more ways than a hefty check to the government. He currently owes the IRS $14 million in back taxes, and contrary to popular belief, celebs don’t get the star treatment from the IRS.

This is not Cage’s only tax blunder. A few years ago, his lawyer negotiated a payment of only one-third of his $1.8 million tax bill. At the time, he and his lawyers must have cheered. However, the IRS didn’t stop there with Nicolas Cage. The IRS knows old habits die hard and kept an eye on his paychecks.

And paychecks he got. How did he get such a high tax bill? Well, he makes a lot of money per film and then does not seem to consider it income for tax purposes. For example, in 2007 he got $24 million for two movies, income on which he decided not to pay taxes.

Unfortunately, the actor is not a good candidate for an offer in compromise, a status a person with tax debt can negotiate with the IRS in order to pay back their taxes piece by piece, and often for a lower total. Offers in compromise exists for people who really cannot pay back their tax debt, but who still have to pay something in order for the government to get what is due. However, since Cage is worth around $38 million, well, he can afford it.

Nicolas Cage may make a perfect example for the IRS to show taxpayers that shirking their taxpaying duties is not a good idea. The IRS estimates that it is missing about $345 billion in unpaid taxes. This amount comes from underreported income and over-reported expenses. The IRS knows that people owe them this money and will use its powerful resources to get it.

Knowing how to navigate the Internal Revenue Code and then dealing with the IRS if you do it the wrong way is not something you would have learned in school… unless you’re a tax professional. However, if you do find yourself in a jam, know that you may have options like an offer in compromise, and can settle for an amount that seems fair with the IRS.

www.limonwhitaker.com

Filed Under: Our Blogs Tagged With: , , , , , , , ,
« Older Posts