May 23, 2013

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What to Do When You Receive the Dreaded IRS Audit Notice

March 29, 2013 By

Receiving an IRS Audit Notice can make someone break out into a cold sweat, because no one looks forward to an IRS audit. However, the outcome of the impending audit will be determined by how you handle the notice. People often underestimate it and due to their lack of knowledge, end up in arms with the IRS, which can be avoided by taking the correct steps. Refer to the following when you receive the dreaded notice:

Read and Understand the Notice: You must read the IRS Audit Notice patiently and carefully. These notices carry lots of information like the year under audit, forms that will be examined, important dates, and all the contact related details. This will help you prepare for the impending audit.

Determine the Audit Location And Nature: Audits can either be correspondences requiring you to mail requested information to the audit office itself or a tax official might choose to visit your premises. In some cases, you may have to go to the audit office. In case the audits are correspondence-based, be careful enough lest you send original documents by mail; ensure that only photocopied or scanned documents are mailed. The audit officers may ask for a large number of documents and they take no responsibility if any of them are lost. You have to be very specific about what you send.

You also have the right to change the location of the audit if your tax professional lives in a different location. In fact, it is highly recommended that the audit is conducted as far away from your premises as possible.

Assess Yourself Well: Before heading out to the audit, properly assess yourself and determine whether you can handle it or not. If you are not confident enough, you will definitely need professional tax representation when dealing with the IRS. This should be determined beforehand. If you are using a tax pro, ensure that you understand him or her to avoid any form of confusion at the time of audit. The IRS may ask certain questions regarding your income as well as somewhat personal life. Your number one shield during a tax audit is your tax records and related documents, see to it that they are safely guarded because the IRS will definitely ask for proof.

The above steps are recommended will help you handle IRS tax Audit Notice effectively. However, if you are still unsure or confused about everything, understanding your rights can help you boost your confidence. Ignoring Audit notices or avoiding the IRS can be dangerous. Sometimes, proving to the IRS that you are committed to complying with their requirements may actually expedite the audit process.

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Responsible or Willful in Tax Withholding

March 26, 2013 By

Your business is struggling to remain profitable and to get it back to its feet you are tempted to divert worker’s withholdings to pay off business expenses. Avoid this at all costs unless you are ready for a tussle with the IRS. If for one reason or another the company eventually fails, you will end up with a payroll tax bill, money that the IRS will unquestionably want to collect. Uncle Sam will hold the “responsible person,” usually the signatory authority of the business, accountable.

In establishing the responsible person to account for an unpaid tax bill, the IRS considers several factors. If you end up in court, the following factors will be considered

·         The official duties and responsibilities of the individual

·         Does the individual sign checks?

·         What is the person’s identity?

·         Who hired or fired the employees?

·         Who manages the company’s financial affairs?

In establishing whether you are willful in such cases, the IRS considers two most important factors:

·         If you paid other creditors even in full knowledge of the unpaid IRS withholding taxes during this period.

·         You irresponsibly paid no attention to a known risk of unpaid taxes.

You will still be held liable if you recklessly took no notice of the facts and potential risks that payroll taxes hadn’t been paid, even if you were actually unaware of the unpaid taxes. You risk being considered willful if you failed to look into the matter even after receiving a notification that withholding taxes were not being paid as expected. This means that claiming negligence is a weak justification.

There was a case when the IRS went after two company officers over hundreds of thousands of dollars of unpaid payroll taxes. Though initially granted summary judgment, the decision was later reversed by the Sixth Circuit because the officers were evidently “responsible persons” but it could not be clearly established whether they were willful.

They were considered reckless by the district court, arguing that they knew or were supposed to know of impending risks due to unpaid taxes. It was a case that turned to some sort of blame game and finger-pointing, some form of she-said, he-said contest. To evade taking responsibility, the officers in question claimed that they had been advised by their accountants that the taxes were being remitted as expected, and even went as far as hiring employees to manage the payroll taxes.

Do you think the officers knew or should have known that the tax withholding was not being paid? Did they have control over the company’s finances? These murky areas, according to the District court, made the summary ruling improper. The officers might have evaded the IRS noose, but it pays to take withholding taxes seriously, because the IRS sure does.

 

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Keep Documentation of any Tax Issues that Arise

February 15, 2013 By

Every taxpayer is entitled to a copy of the tax return for personal record keeping purposes. The copy is either mailed or e-mailed to the taxpayer depending on the mode of filing; either on paper or electronically. Over 70% of taxpayers are helped by tax preparers when filing. As a result, they share IRS notices with their preparers as soon as they are received. Some tax pros promise the taxpayers that they will address any arising tax issues with the source (mostly the IRS). Unfortunately, taxpayers only realize that nothing was really done by their preparer months later upon receipt of another notice, on the same subject from the IRS.

Many taxpayers have found themselves in trouble with the IRS because of cases they entrusted their tax preparers to take care of. Following up with your tax prep on the progress of their communication with the IRS is a good habit, especially when potentially facing harsh IRS consequences. You can ask for proof of all correspondence between your tax preparer and the state authorities or the IRS.

There is nothing embarrassing about requesting for copies of any correspondences done by the tax preparer. You must never forget that the IRS will hold you responsible and you may have to pay penalties or/and interests you could have evaded.

If you are an employer and someone else handles your payroll, request for a report that what was done is exactly what you expect them to do. You don’t have to be reminded by an IRS notice or phone call to realize that all is not well with your payroll taxes. Get copies of every deposit, issued checks, 941s and 940s-print copies of all online transactions. The same applies if you are using a payroll service, make certain that indeed deposits are being made on schedule.

Taxes are important; state and federal authorities expect nothing short of perfection in filing and payment. Some due diligence with those who manage your taxes will go a long way in safeguarding you from a lot of tax-related challenges with the authorities.

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The Dangers of Not Filing Taxes

January 30, 2013 By


There is absolutely no justification to tax non-compliance, at least in the views of the IRS. However, the IRS estimates that the annual federal net tax gap is more than 385 billion dollars, which represent 15-16% of non-compliance. The main triggers of tax non-compliance, according to the IRS include factors like income under-reporting (80%), tax underpayment, non-payment and non-filing of returns (10% each).

The IRS has established a number of measures to net defaulters and narrow the tax gap. Unlike late-filers who miss the tax filing deadline but still go ahead and file, even the following year, non-filers don’t file at all. Of course there are some serious risks involved; likelihood of attracting an IRS audit, penalties, interests, and sometimes, you may even face criminal charges. There are three main categories that typical non-filers fall into; the procrastinators, the tax protestors, and the uncooperative non-filers.

Using millions of the delinquent tax returns, the IRS, before finally contacting non-filers on the state of their tax return statuses, normally gathers significant information about them. These include; their occupation, income sources, bank and savings accounts locations, addresses, age, AGI-Adjusted Gross Income of the last filed returns and paid taxes, years of delinquency, standards of living, amongst others. They use public records to find evidence on any unreported income, assets, professional association membership records, business licensing bureaus, amongst others. The IRS is usually thorough in its research and you have to be really good to hide for long.

The IRS also tries to establish the reasons why you haven’t been filing your tax returns as required by law. When eventually, you are contacted by an IRS examiner, you are required to furnish the taxman with some information for defaulting; is it due to lack of education, inability to pay or lack of records? If you are cooperative, you will be offered required information and guidance on how to go about filing your tax return. However, third party contacts may have to be made if you don’t cooperate with the IRS to establish your income. If any subsequent cases of tax evasion, incorrect statements or refusal to avail crucial records are detected, the IRS may resort to criminal investigation.

The IRS always tries to contact taxpayers concerning every move it makes. If you fail to respond to their inquiries, then it can go ahead and work out a tax return based on assessments stipulated in the Internal Revenue Code 6020(b). You can avoid criminal tax investigation by timely and voluntarily disclosing any considerable unreported tax liability and cooperating with the IRS.

In any case, the right thing to do to avoid all these inconveniences is to come out clean, comply and remain compliant.

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How to Effectively Respond to IRS Letters after Filing your Return

January 29, 2013 By


The IRS constantly communicates with taxpayers via mail for various reasons. Unfortunately, most of these letters are perceived to carry unpleasant tax information that trigger a sudden increase in your heart rate. Some individuals panic and fail to even open them, not knowing that most of the IRS communications can easily be resolved by promptly responding and providing the requested information or documents. Failing to answer IRS letters might result in various terrible consequences like having your bank accounts completely swept out, wage levied, even end up in jail; Uncle Sam means business when it comes to his money.

Understanding what the IRS is capable of doing alone can keep you up at night, but still, you don’t have to panic. Just open any letter you receive from any tax agency and stay in touch. Sometimes, timely correspondence may be the only thing you have to do to steer clear of IRS troubles. If you are always travelling, have someone regularly check your mail box with instructions to open and share the details with you, especially if they are from the IRS.

There are times when you cannot understand the content of IRS letters, share with someone else and ensure that you comprehend every word written. It is even easier if you have contracted the services of a tax pro-just fax or send them a scanned copy as soon as possible for more accurate interpretation. Alternatively, visit the IRS website and use the codes in your letter to search for instructions and information. If searching the web is not your thing, simply call the IRS for personalized assistance. Please note that you may be asked to provide some personal information like your SSN, date of birth, names, amongst other details.

It really doesn’t matter what the content of the letter is, but don’t transfer your agitation to innocent IRS officers when you call them. Instead, be polite and show your willingness to resolve the issue at hand. Sometimes, you may end up talking to a rather rude or hostile agent; just request to speak to the person in charge or the supervisor. Always ensure that you have captured the names and employee numbers of the IRS agents you speak to. If you believe you were not treated right, feel free to file a complaint with the Treasury Inspector General for Tax Administration-TIGTA.

Promptly responding to issues raised by the IRS in their letters is the best way to solve any tax issues. Sometimes, it might just be a notification that doesn’t compel you to respond, just weigh the need and choose whether to respond or not.

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Enrolled Agents: the Tax Experts You Should Never Rule Out

January 18, 2013 By

No one understands the vast amount of various tax secrets better than Enrolled Agents. They always come in handy in helping many taxpayers steer clear of potential IRS tax troubles. A profession with a rich history dating back to 1884, Enrolled Agents are federally-authorized tax experts with technical know-how of U.S. taxes. In fact, they are products of Congress, which was propelled to regulate individuals representing citizens when dealing with the Treasury Department. This action was prompted after dubious claims were presented for Civil War Losses.

Enrolled Agents are empowered by the United States Department of Treasury to represent taxpayers before all administrative levels of the IRS including audits, collections, and appeals. They are referred to as “Enrolled” because they hold practicing licenses from the federal government. Taxes are very sensitive and the IRS only deals with Enrolled Agents, attorneys, or CPAs.

EAs are trustworthy and uphold confidentiality strictly. To ensure that taxpayers are protected against fraudulent agents, the IRS has put strict measures in place. To become an Enrolled Agent, one has to undertake wide-ranging exams that cover all areas of the tax code or you must have worked for the IRS for more than five years, holding a position that involves regular application and interpretation of the tax code and the accompanying regulations. The examination is made up of three distinct parts, each containing about 100 multiple choice questions.

One may pass the exam, but that alone doesn’t mean that he or she automatically becomes an Enrolled Agent. The IRS undertakes a rigorous background check on all potential agents before qualifying them as being suitable to represent taxpayers. Currently, the number of practicing EAs in the U.S. stands at about 46,000.

To ensure that the Enrolled Agents are not left behind with the regular tax code and related changes, they are expected to take and complete 72hrs of continuing qualified learning after every three years to keep their licenses. Many taxpayers, when looking for tax professionals, limit their search to CPAs, but not all CPAs possess the necessary tax code knowledge and regulation expertise. They may be less known that other tax representative titles, but EAs are capable of advising, representing, and preparing tax returns for individual taxpayers, corporations, partnerships, and other entities just like the rest of them, if not better.

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The Challenges with Tax Refunds

January 11, 2013 By

Every year, taxpayers are treated to different depressing tax stories. In 2011, the processing of returns belonging to individuals paying their first-time homebuyer tax credit was immensely delayed. Occasional hold-ups are becoming part of the filing of the tax filing process and the IRS has tried to streamline the payback process and made changes to the 1040. You can now directly enter the payback amount on the return and you don’t need any attachment.

Name Changes
In its effort to stamp out tax identity theft and related frauds, the IRS introduced a new computer protocol that really slowed down the whole process. It was more intense earlier in the year when almost everyone was dashing for tax refunds. With many fraudsters masquerading all over and ready to snatch refunds, the IRS pays close attention at the names used on tax returns. Most taxpayers who change their filing statuses, say they get married and choose to file jointly, miss crucial factors. If you adopt the name of your spouse, you must ensure that all records are changed accordingly. Change of name is simple, write to the Social Security Administration about the name change to avoid any suspicion from the IRS.

Bank Account Details
With most Americans owning bank accounts, and some fraudsters targeting them as well, banks and other financial institutions have also tightened their rules. Direct deposits are common and fast, but you may no longer have to use the routing numbers when depositing funds directly. However, Form 1040 clearly indicate that you have to ask for the right routing number from the financial institution whenever the number on deposit slip differs from the one on checks, or the deposit is to a savings accounts that bars you from writing checks, or if the checks point out that they are payable via a financial institution that differs from the one you have a checking account.

Wrong Refunds
It is very possible that the amount of refund you expect is not likely to be the one you eventually receive from the IRS. You can receive more or less than you apply if your math was incorrect and the IRS corrected it, incorrectly claimed deductions or credits, improper crediting of the tax payments, or you owe the government some debt like student loans.

You can spend or save wrong refunds that are less than you expected and pursue the rest. However, hold onto more-than-expected refunds until it is clarified, who knows, it might be your lucky day, but never rule out a miscalculation from the IRS’s end; Uncle Sam will come for his money, so don’t squander it, not just yet!

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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.

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Lessons from Top 3 Tax Mistakes when Filing Taxes

December 31, 2012 By

“Everybody makes mistakes” is a common saying that many individuals, who end up in a mess they create, normally turn to for solace. Unfortunately, when it comes to taxes, it is acceptable but comes with serious consequences, some that might leave you with a few extra dollars on your tax bill. We can however, learn from every mistake we make in life. Below are some common tax mistakes that tend to haunt taxpayers. If you haven’t committed any of them, ensure that you don’t; they are serious blunders..

1. Errors Related to the First-time Homebuyer Credit
Taxpayers love credits, but the IRS has perfected the art of tightening the rules around every credit they introduce; and first time home buyer credit was not an exception. First, the qualifying home must have been your primary personal residence for not less than 36 months at the time of claiming, (and not 35, 30 or 22). Many rushed to sell their home without understanding the restrictions, only to count their losses thereafter.

Taxpayers who were savvy enough to ask for professional help were guided, some choosing to stay a little longer to qualify as opposed to joining in the excitement only to be hit by reality later. To avoid the repayment, one has to repay the credit up to the value of the profit. If you sell at a loss or even get evicted, it might lead to no repayment or having to repay smaller amounts. Be warned that if the loan you took exceeded the price of the house, it is very possible that you owe more of the credit than you might have projected. Alternatively, rent out some rooms if you cannot afford the house, it allowed.

2. 401 (k) or Retirement Plans Withdrawals
You can withdraw money from your IRA account to cover medical insurance or for a house down payment. As much as you can avoid early withdrawal penalties by doing this, due taxes remain intact. Furthermore, the waiver on penalties is only applicable to IRAs and not job-related plans like 401 (k) or 457. If however you need money badly, you can borrow up to 50% of the account balance ($50,000) tax-free, and pay back yourself over the years. Alternatively, move the funds into your IRAs first from the retirement plans and then withdraw. Finally, get a credit card loan, which has lower rates than federal and state tax penalties.

3. Spouse’s Retirement Funds in Divorce
The Tax Code contain a special provision that allows waiving of penalties and taxes whenever the court orders a distribution from one spouse’s retirement plan that should be paid to the former spouse, a Qualified Domestic Relations Order (QPR). You can evade the 10% early withdrawal penalty by taking the money and cashing it all or cashing it all into the bank account, but you will have to pay taxes on cash you don’t necessarily need currently. The best way out is to split distribution into two funds; withdraw the much you need currently and stash the rest in an IRA.

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Five Tips for Amending and Filing Tax Returns

December 21, 2012 By

There are different circumstances when you may be forced to amend your tax returns, like when you forget to report some income on the IRS Form 1040 or receive an amended Form 1099 or K-1. Whatever the case may be, bear in mind the following and crucial tax tips:

1. You are Not Obliged to File Amended Returns: As surprising as this might be, it is not mandatory that you file amended returns. The moment the IRS systems matches the amended Form 1099 or K-1 against your Form 1040, it can send a bill based on the details captured. It is always recommended that you find out from the IRS if the originally filed return was accurate at the time of filing. If it was, then you actually don’t have to file the amended return. If however, there were some discrepancies at the time of filing, you should make the corrections and file the amended return as soon as possible before the IRS spots the flaw and comes after you.

2. Not All Errors Must be Amended: There are some errors, like wrong calculations that can be corrected by the IRS and therefore, you don’t have to amend the return. You will also not find it necessary to amend the return on realization that Form W-2 was omitted or you forgot to attach schedules and related mistakes. This is because the return can still be processed without them. Some parts of the original return cannot be changed by the amended return like filing status from married filing jointly to married but separate filing.

3. No Cherry-Picking: As much as filing amended returns is not mandatory, you have to correct everything the moment you choose to. It is not possible to alter areas that increase your refunds and ignore those that increase your tax obligations.

4. Proper Timing is Crucial: Form 1040X- Amended U.S. Individual Income Tax Return must be filed in not more than three years from the time the original returns were filed or two years from the tax payment date; whichever is later. It is however, recommended that you file amended returns as soon as possible. If you want to claim more refunds, be patient until the original refunds have been paid, then go ahead and file 1040X.

5. Strictly Paper Filing Required: Amended returns are strictly filed on paper (Form 1040X) even in situations when the original return was electronically filed.

Conclusion:  Are you considering filing amended returns? Ensure that you understand the listed factors and make the right decision.

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