May 19, 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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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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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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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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Snail-Mailing your Tax Returns? Be Sure to Send them Correctly!

December 6, 2012 By

As much as the number of taxpayers filing their returns electronically has been increasing in the recent years, there are many other taxpayers who still file paper returns for one reason or another. Mailing of these returns must be done with caution, as traffic in automated fatalities has been reported to spike on the Tax Day. It is recommended that you use the United States’ online post office locator to find a government postal office near you, find out their working hours, and see/obtain a map.

One main disadvantage of postal tax return mailing is the delay in delivery. However, this doesn’t mean that you will be penalized for filing late if the mail is delivered past the deadline, so long as it is posted on time. This is because the IRS recognizes the official postmark and treats it as proof that indeed, the tax return was filed and mailed before the deadline. There are three main options offered by the postal office that you can use:

i. First Class Mail: Mail is delivered in between two and three days on average
ii. Priority Mail: This method delivers the mail within the same time frame as first class mail service
iii. Express Mail: This is the fastest as the mail is delivered the following day. Online tracking and signature at delivery are included.

The postal services have other options like proof of delivery through return receipts and certified mail. Sometimes, you may have to drop the return in a postal office collection chute or curbside mailbox. This is fine, so long as the pick-up time is before the deadline. Ensure that you apply enough stamps on the return package if you choose to do it on your own. This should depend on the weight of the envelope; if you can, weigh it just to be accurate, as returns with insufficient stamps are usually returned, and you risk paying late-filing penalties and interests if this happens.

Other important considerations to bear in mind when mailing your returns are:

• Ensure that your return address is indicated on the envelope for easy return of undelivered returns.
• See to it that the return is mailed to the right IRS tax return processing center
• Check and use the mailing address that is listed on your tax return form or use the IRS interactive map to locate the appropriate IRS office to mail your 1040 to.

Finally, note that postal mailing takes time depending on the option you use. Please be patient and wait for the confirmation from the IRS about the receipt of your return and status.

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Alarming Tax Day Accidents and What to Do to Stay Safe

December 5, 2012 By

The blood pressures of many taxpayers shoot to extreme limits on and around the Tax Day. This is equally a risky period to use the road, according to a research report published in the Journal for the American Medial Association in April 2012. According to the researchers Christopher J. Yarnell, AB and Donald A. Redelmeier, MD, FRCPC, MS (HSR), road accidents in 2012 increased at around this time, resulting in about 13 more fatalities than the usual average on Tax Day, which was a 6% increase.

Road risks differed based on a number of factors like region, sex of the road users, hour of day, or locations. Ironically, the young adult man driving in rural areas is more vulnerable to accidents around this period. This means that western parts of the country recorded higher cases as per the collected statistical data. Unlike the young, seniors over 65 years worry less about their taxes and as a result, had decreased risks of being caught up in any accident. According to the researchers, the likelihood of being involved in an accident on Tax Day is equivalent to those of Super Bowl Sunday.

The increase in accidents and casualties, according to the researchers is attributed to equally increased levels of stress. In 2011, April 18th (2010 tax filing and payment deadline) was found to be second most stressful day of the year, just after April 27th when tornadoes claimed more than 300 people in the south. Another cause could be alcohol, but the researchers failed to come up with any supporting data on this. Restaurants offer specials during this time to help calm the nerves of taxpayers.

It is also possible that drivers could be using unfamiliar routes either to the post office or to their tax preparers at this time and may not be accustomed to the geography of the roads. What of sleep and irritability? How easy is it to sleep in peace if you couldn’t file or pay in time anyway?

Do you really have to suffer from anxiety on the Tax Day? Of course not! As much as tax payment and filing is very important, and the IRS sometimes appears insensitive to your situation, it is definitely not worth dying for. Talk to a professional tax preparer and let him or her worry about your returns and sleep in peace. Don’t forget to wear a safety belt at all times on the road; you may adhere to the road rules but someone else might be having a nightmarish day. Just be cautious and drive safe.

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