The IRS Innocent Spouse Rule

The Internal Revenue Service recognizes that sometimes, when a joint return is filed, both parties may not be responsible for a resulting tax liability. However, when a tax liability exist, either party can be held jointly and severally liable. This means that either spouse could be held responsible for entire tax liability. The Internal Revenue Service provides 3 types of relief Innocent spouse relief, separation of liability, and equitable relief. Often, innocent spouse relief is thought to be the same as injured spouse relief. Though similarities exist, injured spouse relief applies to actual or probable loss of overpayment (refund) due to one spouse having delinquent student loans, child support, federal or state tax liability, or other issues that causes a refund off-set (refund allocated to tax debt).

To qualify for innocent spouse relief the tax payer must have filed a joint return, show that when return was signed you didn’t know, and had no reason to know that the understated tax occurred, have an understated tax that’s due to inaccurate item (i.e. unreported income, misstated deduction, basis, or credit), and facts reveal unfairness to hold spouse responsible. “Innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme” (irs.gov pub. 971). Separation of liability allocates tax liability plus penalties and interest resulting from a filed joint return between each spouse.  Allocation is based on taxes, penalties, and interest each spouse would ordinarily be responsible for if taxes were filed separate from their spouse. Other requirements include tax payer seeking relief had a separate residence during the 12-month period ending on the date relief request is submitted, and you are no longer married or legally separated from the spouse you filed joint return with. If you do not qualify for innocent spouse relief, or separation of liability, you may still be able to obtain relief. The IRS could grant equitable relief under the following conditions. You don’t qualify for innocent spouse relief, or separation of liability, you file the proper form at the proper time, you filed a joint return for the year in question, no assets where fraudulently transferred to defraud the IRS, creditor, or business partner, and your spouse transferred no assets to you for tax avoidance purposes. Remember, in all instances the Internal Revenue Service will check to see if you are tax compliant in the year or years following the tax year or years relevant to your request for relief.

If you need assistance with applying for Innocent Spouse Relief, Separation of Liability, Equitable Relief, or Injured Spouse Relief. Call Advantage Tax Services now. You will be connected to a licensed tax professional with the experience to rendered the best resolution offered by the Internal Revenue Service. To contact Advantage Tax Service call or email us at 866-606-3570 or kpatton@thetaxadvantage2012.com.

IRS Tax Debt to be collected by Third Party Agencies

If you currently owe the IRS back taxes, now would be a good time to contact a tax professional to determine if you qualify for the IRS fresh start program. Recently, the IRS released information pertaining to their decision to enlist the assistance of four third party collection firms to assist in the recovery of approximately $138 billion dollars in tax debt. What this could mean for tax payers who owe is the beginning of multiple phone calls, harassing letters, and less time to financially prepare for repayment due to faster collection enforcement technique.

This is not the first time the IRS has implemented such a program. According to the New York Times, “Twice before, in 1996 and 2006, the I.R.S. has tried to farm out some of its collection duties. Both times, the programs were shut down and deemed failures”. However, not before causing significant stress to millions of tax payers. Most famous was the elderly couple that received over 150 calls in less than a month.

The IRS currently offers resolution programs that could assist tax payers resolve outstanding tax liability without exposure to harsh collection practices conducted by third party agencies. To ignore the opportunity to protect yourself and possibly resolve your tax issue for less than what is expected (Offer-In-Compromise), is the same as staying in a house that’s on fire. No one in their right mind would do that…right?

Don’t ignore the time given to secure your opportunity to resolve your tax debt issue without additional unwanted harassment. Contact your tax professional today. If you don’t have a tax professional you may contact Advantage Tax Services, Inc. at 866-606-3570.

Understanding the Audit Process

If you’ve received a notice of audit from the IRS, here’s a few things you should know to ensure that your experience is as painless as possible. The last thing you want to do is ignore the request for documentation. Even if you don’t have what’s being requested, you can avoid further problems and unnecessary expense by making contact with the examiner and requesting additional time to comply.

Be mindful that just because you’ve been selected for an audit does not automatically mean you’ve done something wrong. Tax returns are selected a number of ways to include random computer selection, document matching, or related examinations. The IRS protects taxpayers by providing certain rights, as it relates to audits. The first being, “the right to professional and courteous treatment by IRS employees, a right to privacy and confidentiality about tax matters, a right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided, a right to representation, by oneself or an authorized representative, a right to appeal disagreements, both within the IRS and before the courts” (Irs.gov/pub 1). If you experience an issue regarding your rights as a taxpayer you may contact the taxpayer advocacy for assistance.

The possibility of being audited is one reason why it is important to retain records in support of your credits and deductions for three years from the date of your return(s). One of the most difficult aspects of going through an audit is having to gather required documents to substantiate your position. Remember, audits are conducted to document what’s on your return with proof. Not having needed records could result in adverse or otherwise unwarranted outcomes that could cost you money.

Generally, audits are conducted by phone or in person at your local IRS office, your home or office, or your tax professional’s office depending on your situation.  The IRS will send audit notification by phone or mail, providing ample time for you to prepare. If your audit results in changes made to your return, said changes will be thoroughly explained and you will be provided instructions should you choose to appeal IRS findings. If you agree with IRS audit findings you will be asked to sign the examination report, or similar form.

If you find yourself with a tax liability after being audited and cannot make full payment, the IRS offers several payment options designed to assist tax payers with financial hardships. Please refer to Publication 594 at irs.gov for more information on the collection process. Remember, don’t fear the IRS respect them. In most cases, negative outcomes derive from ignoring notices and/or failing to ask for help when you need it.

If you find yourself in need of audit representation, or facing any other tax issue please call Advantage Tax Services, Inc. at 866-606-3570, or visit our website at www.advantagetaxrelief.com.

The Difference Between 1099-C Cancelled Debt Exclusions and Exceptions

Whether you received a 1099-C or not outstanding debt that’s been cancelled has to be reported as income. The good news is you may qualify for special exceptions, and/or exclusions that could eliminate negative tax consequence. Not understanding what’s available to you, as it relates to tax treatment of cancelled debt, could expose you to unwanted tax liability, interest and penalties.

The Internal Revenue Code (IRC) provides many exceptions to the rule that cancelled debt be included in income. In determining the amount of liability considered non-taxable you must first apply exceptions before exclusions. One of the reasons for this is that exclusions may require you to reduce your tax attributes and exceptions don’t.  A tax attribute is one of a range of specific measures in the federal income tax calculation process that benefits the taxpayer. It’s relevant in cases when a taxpayer is insolvent or bankrupt. Generally, you will not have income from debt cancelled from gifts, devises, bequest, or inheritance. Also, according to IRC, “Student Loans Certain student loans provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers. If your student loan is canceled as the result of this type of provision, the cancellation of this debt isn’t included in your gross income” (pup 4681, irs.gov). Certain criteria must be meant to qualify. Another exception is deductible debt If you use the cash method of accounting, you don’t realize income from the cancellation of debt if the payment of the debt would have been a deductible expense. Another exception is the “Price Reduced After Purchase” exception. If debt you owe the seller for the purchase of property is reduced by the seller at a time when you aren’t insolvent and the reduction doesn’t occur in a title 11 bankruptcy case, the reduction doesn’t result in cancellation of debt income. However, you must reduce your basis in the property by the amount of the reduction of your debt to the seller (pup 4681, irs.gov). In addition, though some debt cancellation resulting from home loan modification may result in the cancelled amount being included in income, you may be able to spread the amount cancelled over a three-year period. For more information, see www.irs.gov/ uac/Principal­Reduction­Alternative­Under­theHome­Affordable­Modification­Program and Revenue Procedure 2013-16.

 

Exclusions include, but are not limited to bankruptcy, farm indebtness, qualified real property business indebtness, and qualified principle residence indebtness. Each of the aforementioned may have special rules that may limit the amount of debt excluded. Remember, determine exceptions first before applying any applicable exclusions. This will assist you in maximizing tax benefit, and provide the best opportunity to minimize any potential tax liability as a result of cancelled debt.

Should you need assistance with this or any other tax issue please call Advantage Tax Services, Inc. at 866-606-3570, or visit our website www.advantagetaxrelief.com.

Understanding Your Tax Filing Requirements

Often, tax payer run into tax debt issues because they don’t understand filing requirements or how a lack of compliance could prove to be costly due to penalties and interest added to existing liabilities. The worst thing a tax payer can do is ignore the obligation to file. The IRS has ways of finding out exactly what you earned during a tax year. In addition, without giving consideration to possible credits and deductions you may qualify for; the IRS has authorization to file substitute returns on your behalf and pursue any outstanding tax liability resulting from the filing process.

Taxpayers who earn an income that equals or exceeds pre-determined threshold amount(s) are required to file a tax return. The threshold amounts are adjusted annually for inflation. For the year ending December 31, 2016, based on filing status, every taxpayer who earned amounts exceeding the following must file a tax return.

  1. Head-of-Household – $13,250 (if 65 or older or blind – $14,500)
  2. Single – $9,275 (if blind or 65 or older – $10,825)
  3. Married filing separate – if neither spouse itemizes, a return must be filed if gross income equals or exceeds $4,050, regardless of age.
  4. Married filing jointly – $18,500 (if one spouse is blind or 65 or older-$19,750; if both spouses are blind or 65 or older – $22,250
  5. Surviving spouse – $18,550 (if 65 or older or blind – $19,800)
  6. Dependents – every individual who may be claimed as a dependent of another must file a return for 2016 if he has either (x) unearned income in excess of $1,050 (plus any additional standard deduction if the individual is blind or 65 or older) or (y) total gross income that exceeds the sum of any additional standard deduction if the individual is blind or 65 or older plus the greater of (a) $1,050 or (b) the lesser of (i) $350 plus earned income, or (ii) $6,300 (IRS Secs. 6012(a), 63(c), 151;IR-2015-119).

Tax payers who qualify for additional deduction for blindness may be required to submit additional documentation to substantiate their entitlement to the additional standard deduction. Also, a tax payer with self-employment income must file a return if net self-employment income is $400.00 dollars or more.  Anyone who worked and was subject to wage withholdings, but did not meet the above thresholds may choose to file a return if by doing so entitles them to a refund or other tax benefit. Please be mindful of the fact that even though you may not be required to file you would be required to file all back returns if you incur a tax debt that requires assistance (e.g. installment agreement, offer-in-compromise, etc.). So, it may be in your best interest to file every year that you have income or qualify for certain tax credits.

If you need assistance with the above or any other tax issue, please contact Advantage Tax Services, Inc. at 866-606-3570 or visit our website @ www.advantagetaxrelief.com. You will be connected with a licensed tax professional with the skill set to assist you with the best tax resolution option offered by the IRS for your situation. For speaking engagements or media please contact Charles Scott at  470-268-8912.

The Difference Between Payroll Tax and Estimated Taxes

Often tax payers find themselves owing the IRS even after they’ve paid taxes throughout the year. This has proven to be very confusing, as well as frustrating for many who already feel they pay way too much in taxes. In order to gain control over this tax issue, you first must understand what these taxes constitute and how they are calculated. Only then will you be able to instruct your tax payments in a way that produces your desired tax outcome.

If you work as a W-2 employee, then generally you are required to remit payroll taxes. These are taxes that are withheld from your check every pay day. Payroll taxes by definition are taxes both employer and employee are required to, and are calculated as a percentage of income paid by your employer. This tax is paid two different ways. The first way is taxes that employers are required to withhold from your paycheck. The money withheld is used to cover social security, Medicare, income tax, and different insurances (unemployment, and disability).  Payroll tax deductions include the following:

  • Social Security Tax Withholding (6.2% until annual maximum is reached)
  • Medicare Tax (1.45%)
  • Federal Income Tax (Based on withholding tables see pub. 15, irs.gov.)
  • Additional Medicare Tax (0.9% for income over $200k)

The second way payroll tax is paid comes directly from the employer. Employers are required to pay an amount fixed or proportional to an employee’s pay. These amounts are also paid to help fund social security, as well as other insurance programs and include the same aggregate percentages that’s paid by employees. This is how Federal Insurance Contribution Act (FICA) taxes are paid. FICA is made up of social security and Medicare. The employee pays half and the employer pays half to reach 15.3% of wages tax obligation.

If you’re a small business owner or work as an independent contractor, then you may be required to pay your Medicare and Social Security (Self-employment) tax obligation by making estimated tax payments throughout the year. The IRS states, “Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return” (irs.gov., pub. 505, tax withholding and estimated taxes).

Should you need assistance figuring how much estimated tax to pay, or if you have tax debt as a result of under payment of tax, please call Advantage Tax Services, Inc. 866-606-3570, or visit us @www.advantagetaxrelief.com. You will be connected to licensed professional with the experience and skill set to provide you the best solution offered by the IRS.

 

Kenyatta Patton, EA, MAMF

What to Do When You Owe the IRS

If you receive a tax bill this summer for outstanding taxes, you are expected to pay that bill in full including any penalties and interest. If you can’t pay the outstanding balance, it is sometimes prudent to get a loan to pay the bill in full rather than to make installment payments to the IRS. This is because acceptable Installment Agreements (IA’s) require approval by the IRS. Often, what the IRS approves could be beyond your capacity to pay. Any amount sent will be deducted from your balance, however you still could be vulnerable to collection enforcement action.

The Internal Revenue Service (IRS) is the world’s most powerful collection agency. Often, tax payers that owe taxes find themselves in difficult situations due to the harsh tactics used to collect. The IRS can levy your bank account, wages, investment(s), place liens on your property, and even destroy your credit.

The good news is the IRS also offers many different resolution options designed to assist tax payers who may not be able to pay their tax liability. The bad news is a very large percentage of tax payers that owe make the biggest mistake of all. They fail to respect the IRS instead of fearing them.

As such, the first thing to do is don’t ignore any notices you receive. Most notices provide amble opportunity for you to respond, or obtain additional time to respond if needed. Next, schedule a consultation with a licensed tax professional. Licensed tax pros have demonstrated proficiency at understanding how to apply the rules that govern various tax scenarios and compliance issues.  

Another important step is to review the tax return(s) from which your tax liability derived. Simple mistakes, like claiming income or deductions twice could cause you to miss eligible deductions or increase your tax liability. This could be easily corrected by filing an amendment.

If your liability has been caused due to underpayment and you’re a W-2 employee, make changes to your withholding amount to ensure that you don’t create another tax bill moving forward. If you are an independent contractor who receives 1099’s, ensure that you make estimated tax payments moving forward. This will go a long to show that not only have you corrected the problem, but you plan to be compliant moving forward.  

In addition, inquire as to how to minimize penalties and interest. Owing a tax liability can be challenging enough without added assessments that could increase your tax bill significantly. You may qualify for exceptions to underpayment of tax penalties, or penalty abatement.  

Finally, don’t panic. If you respond reasonably to notices and are honest with the IRS, they are not bad creditors to deal with. If all else fails and you can’t afford professional assistance, contact your local tax payer’s advocacy. You may qualify for free assistance.   

Should you need assistance with an outstanding tax debt, contact Advantage Tax Services, Inc. at 866-606-3570 or visit our website www.advantagetaxrelief.com. You will be connected to a licensed tax professional with the skills needed to provide you the best resolution option offered by the IRS.

 

Kenyatta Patton, EA, MAMF

How to Determine Your Tax Liability

Every year many tax payers have no idea whether they will owe taxes or not. Often, some tax payers feel that they may owe, but have no idea how much or why? Understanding how to determine your tax liability will not only help you make better decisions about the way you treat income, but it will go a long way to ease the stress that is often experienced when it’s time to file your tax return.

Obviously, the first variable in the tax formula is gross income. This is the aggregate of all  earned and unearned income from various sources throughout the year.  Income is either earned or unearned. Earned income is cash or in-kind benefits people receive in exchange for work or service, including employment and self-employment. Unearned income is cash or in-kind benefits that people receive without being required to perform work or service. Depending on the type of income you receive, as well as other variables your tax outcome could vary.

Next, certain deductions are subtracted from gross income. These deductions are referred to as above the line deductions, and are used to arrive at adjusted gross income or AGI. The name comes from their paperwork placement. They are found on page one of Form 1040, just above the line where adjusted gross income is tabulated. They include contributions to traditional IRA, alimony, moving expenses, and many others. For a complete list of “above the line” deductions please see irs.gov/pub. 17.

After you arrive at AGI, there’s another round of deductions known as personal and dependency exemptions. The personal exemption amount in 2016 is $4,050.00 dollars. The IRS allows every resident tax payer to deduct this amount from personal income. Dependency exemptions are personal exemptions allowed for tax payers who have qualified dependents. For example, if a tax payer filed married filing jointly, and they have 2 children; the number of personal exemptions would be 4. Please see IRC section 152 for additional information.

There two types of additional deductions.  One is called standard deduction, or tax payers may itemize deductions. Generally, a comparison is done to derive at which deduction type is most advantageous.  The standard deduction is a pre-determined amount based on filing status. The standard deductions for year ending December 31, 2016 is the following:

Single – $6,300.00

Married Filing Jointly – $12,600.00

 Married Filing Separate – $6,300.00

Head of Household – $9,300.00

Qualifying Surviving Spouse – $12,600.00

At this point, both personal exemptions and either standard or itemized deductions are subtracted from AGI to arrive at taxable income. To determine your tax rate, examine applicable tax tables at irs.gov.

Please be mindful of additional deductions (credits, prepayments toward tax, overpayments or credits from previous years, and tax withheld by an employer or previously made estimated tax payments) that are subtracted from your tax liability to determine net tax payable.

Should you need assistance determining your tax liability or with any other tax issue, please contact Advantage Tax Services, Inc. at 866-606-3570. You will be connected to a licensed tax professional who can assist you in finding the best resolution option offered by the IRS.

 

Kenyatta Patton

10 Things New Business Owners Must Know

Starting a business can be expensive and complex depending on what kind of business you start. A strategic business plan helps you address questions like, what are my capital resources, how will my product or service reach the market place, or how will I manage my day-to-day operations. These are very important issues for any start-up, and must be addressed, however there are other “must knows” that are just as critical to new business success.

The first, which is the proper business form to choose could have a significant impact on your bottom line. This is because different business forms are taxed differently. The various forms of business structures include sole proprietor, LLC, Partnership, S-Corporation, or C-Corporation. Each with their own set of rules, as it relates to how you pay taxes. The next consideration, whether you should get an Employer Identification Number (EIN) has been a popular topic among start-ups. Generally, regardless of your business form, applying and obtaining an EIN is a must. This is because during the course of conducting business you will most likely make certain payments that require information return(s). The forms used to report these payments must include the payee’s identification number.

Another important consideration is deciding on your tax year. A tax year usually consists of twelve months. The IRS allows two kinds of tax years. The first is Calendar Year, which starts January 1 and ends December 31 of every year. The second is Fiscal Year. “A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month” (irs pub 538). Though most start-ups choose the calendar year, it is good to understand the difference between the two. Once your business grows it may become prudent to switch to Fiscal Year due to many potential tax advantages they may avail themselves as a result.

The next three considerations include businesses owners knowing what type of federal and state tax they will be responsible to pay, which tax forms are you required to file, and how to properly account for employees, as it relates to taxes. The IRS requires different business forms to file different tax returns (Schedule C, 1120, 1102s, 1065) at different times during the filing period. In addition, depending on whether you have W-2 employees or independent contractor’s different type information return requirements will apply. You may also be faced with state and local sales tax payment and reporting requirements. It is also important because it has been argued to be one of the most troublesome areas for small business start-ups.

Finally, understanding the proper accounting method (cash vs. accrual), what business expenses are deductible, and which records to keep and for how long are the last three “must knows”. Depending on what accounting method you choose, you could be paying more in taxes than you should. Making this determination requires a good understanding of the accounting methods available and how those methods affect your specific situation. Understanding what expenses are deductible will assist you with proper record keeping, as well as help your tax professional maximize your credits and deductions. Remember, a tax pro generally is limited to information you provide. Tax professionals may understand the implications of certain deductions, but not know without your input that said deduction(s) apply.

 

Kenyatta Patton, EA, MAMF

Top 3 Tax Issues for Truckers

Every tax season thousands of truck drivers leave hundreds of thousands of dollars in tax deductions on the table. This is due in large part to inadequate planning and poor bookkeeping.  In addition, many tax professionals do a poor job at properly informing truckers of the many different tax breaks available to them. Truck drivers have access to many different tax deductions and credit, however the three main areas that cause tax liabilities to occur include depreciation, per diem, and cash vs. accrual basis accounting.

Depreciation

Generally, it requires a tremendous upfront investment to purchase or lease tractors and trailers. Often, owner/operator start-ups find solace in financing due to up to five-year lease terms which really helps control overhead and cash flow. The problem is that according to Internal Revenue Code (IRC) regarding depreciation, you only have three years on tractors and trailers. In other words, you can only claim depreciation for three years on tractors and five years for trailers. As a result, many owner operators end up paying on equipment long after tax deductions for depreciation is exhausted. Another challenge is how the Internal Revenue Service (IRS) figures depreciation. For example, if you buy a $50,000 tractor it is possible to write off $16,665 the first year, $22,225 the second year, $7,405 the third year, and only $3,705 the last year.  This means your overall tax liability will increase significantly the third year you own the equipment. Often, tax professionals fail to inform owner/operators that their potential tax liability will increase dramatically in the third year. This leaves many with huge tax liabilities that they didn’t plan for and can’t afford to pay.

Cash vs. Accrual Basis

Did you know the IRS has special rules that allow trucking companies to be on a cash basis when other businesses would be required to be accrual? The difference between cash and accrual basis is cash basis requires taxes to be prepared based on monies received and spent during a given tax year. Accrual basis requires your taxes to be filed based on monies earned (whether you receive it or not) and expenses they incurred (whether or not you actually paid them). It’s advantageous to say the least, for trucking companies to be on a cash basis because most of a trucking company’s receivables outweigh their liabilities. Let’s look at a scenario. Generally, customers pay trucking companies thirty or more days out, but if you have employees you most likely pay them weekly. So in effect, you are paying expenses faster than you get paid yourself. If you are on an accrual basis, you are not taking advantage of the above mentioned special rules available.

 

Per Diem

Most of you already know that you work away from home you may be eligible for deductions related to meals and entertainment expenses. Generally, deductions are taking in one of two ways. One way is to keep up with all your receipts for meals and entertainment expenditures incurred during the year. The other way is to use the per diem method. Per Diem rates are set by fiscal year, effective October 1 each year. These rates vary depending on zip code ($89.00 dollars was standard for 2015-16) The IRS allows a certain amount per day to be deducted without you having to keep up with receipts. However, it would be prudent to keep your receipts anyway just in case you have to prove you were actually on the road during the time period being examined. Most tax payers can only deduct 50% of these expenses, whereas truck drivers subject to DOT Hour of Service Rules could deduct 80%. Please be mindful that situations vary. For example, if your company pays drivers a per diem then the driver can’t deduct the per diem too. Only the company would be eligible for the deduction in this case.  In addition, as a result of the per diem deduction, your itemized deductions could be limited. The per diem deduction is most favorable when used by owner operators who can deduct these expenses on schedule C against their income.

Should you need assistance with this or any other tax issue please contact Advantage Tax Services, Inc. You will be connected to a license professional with the skills needed to help provide you the best resolution option available.

Office: 866-606-3570