IRS TAX PROBLEMS – IRS Collection Process

IRS Tax Problems – The IRS Collection Process

If you do not pay in full when you file your tax return, you will receive written Notice of the amount you owe, a Bill from the IRS. This Bill starts the IRS Collection Process, which continues until your account is satisfied or until the IRS may no longer legally collect the tax; for example, when the time period for collection has expired.

The First Notice you receive from the IRS will be a Letter that explains the balance due and demands payment in full. It will include the amount of the tax, plus any penalties and interest added to your unpaid balance from the date the tax was due.

If you are unable to immediately pay your balance in full, the IRS, upon request, may be able to offer you a monthly Installment Payment Agreement. If you cannot full pay under an Installment Payment Agreement, you may propose an Offer in Compromise (OIC). An OIC is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax liability by payment of an agreed upon reduced amount.

If you are unable to pay anything because of a current financial hardship, the IRS may temporarily suspend certain collection actions, such as issuing a levy, until your financial condition improves. The IRS may, however, file a Notice of Federal Tax Lien while your account is suspended. Interest and late payment penalties will continue to accrue while collection is suspended. If you are a member of the Armed Forces, you may be able to defer payment.

It is important to contact the IRS and make arrangements to pay the tax due voluntarily. If you do not contact the IRS, the IRS may take action to collect the liability. Some of the actions the IRS may take to collect taxes include:

  1. Filing a Notice of Federal Tax Lien
  2. Serving a Notice of Levy, or
  3. Offsetting a Refund to which you are entitled

The Federal Tax Lien is a legal claim to your property, including property that you acquire after the Lien arises. The Federal Tax Lien arises automatically when you fail to pay in full the taxes you owe within ten (10) days after the IRS sends its First Notice of taxes owed and demand for payment, and the IRS makes an Assessment of the tax. The IRS also may file a Notice of Federal Tax Lien in the public records. The Notice of Federal Tax Lien publicly notifies your creditors that the IRS has a claim against all your property, including property acquired by you after the Notice of Federal Tax Lien is filed. The filing of a Notice of Federal Tax Lien may appear on your credit report and may harm your credit rating. Once a Lien arises, the IRS generally cannot release the Lien until the taxes, penalties, interest, and recording fees are paid in full or until the IRS may no longer legally collect the tax.

The IRS will withdraw a Notice of Federal Tax Lien if the Notice was filed while a bankruptcy automatic stay was in effect. The IRS may withdraw a Notice of Federal Tax Lien if the IRS determines that (1) the Notice was filed too soon or not according to IRS procedures; (2) you enter into an Installment Payment Agreement to satisfy the liability unless the Installment Payment Agreement provides otherwise; (3) withdrawal will allow you to pay your taxes more quickly; or (4) withdrawal is in your best interest, as determined by the National Taxpayer Advocate, and the best interest of the IRS.

The IRS also may use a Levy to collect taxes. The IRS may Levy assets such as wages, bank accounts, Social Security benefits, and retirement income. The IRS also may seize your property for the purpose of selling the property to satisfy a tax debt including your car, boat, or real estate. In addition, any future federal tax refunds or state income tax refunds that you are owed, may be applied to your federal tax liability.

IRS TAX PROBLEMS – What is “Bartering” Income?

IRS TAX PROBLEMS – What is Bartering Income?

Bartering is the trading of one product or service for another. Often there is no exchange of cash. Some businesses barter to get products or services they need. For example, a gardener might trade landscape work with a plumber for plumbing work.

If you barter, you should know that the value of products or services from bartering is taxable income. This is true even if you are not in business.

Here are a few facts about bartering:

  • Bartering income.  Both parties must report the fair market value of the product or service they get as income on their tax return.
  • Barter exchanges.  A barter exchange is an organized marketplace where members barter products or services. Some operate out of an office and others over the Internet. All barter exchanges are required to issue IRS Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions”. Exchanges must give a copy of the form to its members who barter each year. They must also file a copy with the IRS.
  • Trade Dollars.  Exchanges trade barter or trade dollars as their unit of exchange in most cases. Barter and trade dollars are the same as U.S. currency for tax purposes.  If you earn trade and barter dollars, you must report the amount you earn on your tax return.
  • Tax implications.  Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
  • Reporting rules.  How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on IRS Form 1040, Schedule “C”, “Profit or Loss from Business”.

 

IRS REMINDER – Employers Who Use A “Payroll Service”

IRS REMINDER – Tips For Employers Who Use A Payroll Service

 

IRS focuses on businesses that have employees and use a payroll service. Payroll services help employers meet their payroll tax responsibilities.

 

But it’s important for employers to remember: You can outsource your payroll tax duties but not your payroll tax responsibilities. At the end of the day, you’re responsible for meeting your payroll tax responsibilities and could be financially liable for responsibilities not met.

 

To protect yourself, you should know your payroll tax responsibilities even if you use a payroll service.

IRS TAX PROBLEMS – You Can View Your IRS Tax Account Online

IRS TAX PROBLEMS – View Your Tax Account Online

 

As part of the IRS commitment to improve and expand taxpayer services, a new online tool allows you to view your federal tax account balance online. This new tool is available to individual taxpayers and is rolling out in phases. The first phase, available now, allows you to view your balance, select IRS Direct Pay, debit or credit card, or apply for an installment agreement. It’s safe, secure and available on the IRS.gov “payments page”.

 

Launching in phases gives the IRS an opportunity to gather and evaluate feedback and to improve the customer experience. A key part of the IRS Future State initiative is for taxpayers to have a more complete online experience. Future features will allow a taxpayer to see 18 months of payment history and get tax account transcripts in a single online session.

 

Before accessing the new online tool, you must authenticate your identity through the Secure Access process. This is a two-step authentication process, which means that if you are a returning user, you must use your credentials (username and password) and request a new security code (sent via text) each time you log in.

 

If you already have a user name and password from Secure Access for Get Transcript Online or IP PIN, you may use the same username and password. To register for the first time, you must have an email address, a text-enabled mobile phone in your name and specific financial information such as a credit card number or specific loan numbers. You may review the “Secure Access” process prior to starting registration.

 

 

IRS TAX PROBLEMS – Payment Options – Taxpayers Who Owe Taxes

IRS TAX PROBLEMS – Taxpayers Who Owe Taxes

The IRS offers a variety of payment options where taxpayers can pay immediately or arrange to pay in installments. Those who receive a bill from the IRS should not ignore it. A delay may cost more in the end. As more time passes, the more interest and penalties accumulate.

Here are some ways to make payments using IRS electronic payment options:

  • Direct Pay. Pay tax bills directly from a checking or savings account free with IRS “Direst Pay”. Taxpayers receive instant confirmation once they’ve made a payment. With Direct Pay, taxpayers can schedule payments up to 30 days in advance. Change or cancel a payment two business days before the scheduled payment date.
  • Credit or Debit Cards. Taxpayers can also pay their taxes by Debit or Credit Card online, by phone or with a mobile device. A payment processor will process payments.  The IRS does not charge a fee but convenience fees apply and vary by processor.

    Those wishing to use a mobile devise can access the “IRS2Go” app to pay with either Direct Pay or debit or credit card. IRS2Go is the official mobile app of the IRS. Download IRS2Go from Google Play, the Apple App Store or the Amazon App Store.

  • Installment Agreement. Taxpayers, who are unable to pay their tax debt immediately, may be able to make monthly payments. Before applying for any payment agreement, taxpayers must file all required tax returns. Apply for an installment agreement with the “Online Payment Agreement” tool.

    Who’s eligible to apply for a monthly installment agreement online?

    • Individuals who owe $50,000 or less in combined  tax, penalties and interest and have filed all required returns
    • Businesses that owe $25,000 or less in combined tax, penalties and interest for the current year or last year’s liabilities and have filed all required returns

Those who owe taxes are reminded to pay as much as they can as soon as possible to minimize interest and penalties. Visit IRS.gov/payments for all payment options.

 

IRS REMINDER – Small Business “Research Credits” Eligibility

IRS REMINDER – Eligible Small Business Startups Can Choose New Option for Claiming “Research Credit”

Eligible small business startups can now choose to apply part or all of their research credit against their payroll tax liability, instead of their income tax liability, according to the Internal Revenue Service (IRS).

This new option will be available for the first time to any eligible small business when filing its 2016 federal income tax return. Before 2016, the research credit, like most tax credits, could only be taken against income tax liability. The option to elect the new payroll tax credit may especially benefit any eligible startup that has little or no income tax liability.

To qualify for the new option for the current tax year, a small business must have gross receipts of less than $5 million and could not have had gross receipts prior to 2012. A small business meeting this standard with qualifying research expenses can then choose to apply up to $250,000 of its research credit against its payroll tax liability.

To choose this option, fill out IRS Form 6765, “Credit for Increasing Research Activities”, and attach it to a timely-filed business income tax return. Because many business taxpayers request a tax-filing extension, they still have time to make the choice on a timely-filed return. A number of special rules and computations apply to this credit. See the instructions to IRS Form 6765 for details.

For eligible small businesses that already filed and failed to choose this option, there is still time to make the choice. Under a special rule for tax-year 2016, they can still do so by filing an amended return. This return must be filed by Dec. 31, 2017.

Amended return forms vary depending upon the type of business. Sole proprietors file IRS Form 1040X. Regular corporations file IRS Form 1120X. S corporations file IRS Form 1120S, identifying it as a corrected return (line H(4). For information on amending a partnership return, see the instructions to IRS Form 1065.

After choosing this option, either on an original or amended return, a small business claims the payroll tax credit by filling out IRS Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities”. This form must be attached to its payroll tax return, usually IRS Form 941, “Employer’s Quarterly Federal Tax Return”.

Further details on how and when to claim the credit are in IRS notice 2017-23, available on IRS.gov. The notice also provides interim guidance on other technical issues, such as controlled groups and the definition of gross receipts.

 

IRS REMINDER – “Work Opportunity Tax Credit” Can Help Employers Hire New Employees

IRS REMINDER: “Work Opportunity Tax Credit” can Help Employers Hiring New Workers

The Internal Revenue Service (IRS) is reminding employers planning to hire new workers that there’s a valuable tax credit available to those who hire long-term unemployment recipients and others certified by their state workforce agency.

The “Work Opportunity Tax Credit” (“WOTC”) is a long-standing income tax benefit that encourages employers to hire designated categories of workers who face significant barriers to employment. The credit, usually claimed on IRS Form 5884, is generally based on wages paid to eligible workers during the first two years of employment.

To qualify for the credit, an employer must first request certification by filing IRS Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. Other requirements and further details can be found in the Instructions to Form 8850.

There are now 10 categories of WOTC-eligible workers. The newest category, added effective Jan. 1, 2016, is for long-term unemployment recipients who had been unemployed for a period of at least 27 weeks and received state or federal unemployment benefits during part or all of that time. The other categories include certain veterans and recipients of various kinds of public assistance, among others.

The Ten (10) categories are:

  • Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
  • Unemployed veterans, including disabled veterans
  • Ex-felons
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • Vocational rehabilitation referrals
  • Summer youth employees living in Empowerment Zones
  • Food stamp (SNAP) recipients
  • Supplemental Security Income (SSI) recipients
  • Long-term family assistance recipients
  • Qualified long-term unemployment recipients.

Eligible businesses claim the WOTC on their income tax return. The credit is first figured on Form 5884 and then becomes a part of the general business credit claimed on IRS Form 3800.

Though the credit is not available to tax-exempt organizations for most categories of new hires, a special rule allows them to get the WOTC for hiring qualified veterans. These organizations claim the credit on IRS Form 5884-C. Visit the “WOTC” page on IRS.gov for more information.

IRS TAX PROBLEMS – Hobby or Business Determination

IRS TAX PROBLEMS – Hobby or Business?

Millions of people enjoy hobbies that are also a source of income. From catering to cupcake baking, crafting homemade jewelry to glass blowing — no matter what a person’s passion, the Internal Revenue Service (IRS) offers some tips on hobbies.

Taxpayers must report on their tax return the income earned from hobbies. The rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Here are some tax tips to consider:

  1. Is it a Business or a Hobby?  A key feature of a business is that people do it to make a profit. People engage in a hobby for sport or recreation, not to make a profit. Consider Nine (9) Factors when determining whether an activity is a hobby.

In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. No one factor alone is decisive. You must generally consider these factors to establish that an activity is a business engaged in making a profit:

  • Whether you carry on the activity in a businesslike manner.
  • Whether the time and effort you put into the activity indicate you intend to make it profitable.
  • Whether you depend on income from the activity for your livelihood.
  • Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
  • Whether you change your methods of operation in an attempt to improve profitability.
  • Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
  • Whether you were successful in making a profit in similar activities in the past.
  • Whether the activity makes a profit in some years and how much profit it makes.
  • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

You may find more information on this topic in Section 1.183-2(b) of the Federal Tax Regulations.

Make sure to base the determination on all the facts and circumstances. For more about ‘not-for-profit’ rules, see IRS Publication 535, “Business Expenses”.

  1. Allowable Hobby Deductions.  Within certain limits, taxpayers can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
  2. Limits on Hobby Expenses.  Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
  3. How to Deduct Hobby Expenses.  Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See IRS publication 535 for the rules about how to claim them on Schedule “A”, Itemized Deductions.

 

IRS TAX PROBLEMS – Employee or Independent Contractor Classification Rules

IRS TAX PROBLEMS – Employee or Independent Contractor?

The IRS encourages all businesses and business owners to know the rules when it comes to classifying a worker as an employee or an independent contractor.

An employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Employers normally do not have to withhold or pay any taxes on payments to independent contractors.

Here are two key points for small business owners to keep in mind when it comes to classifying workers:

  1. Control. The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a worker’s job, it exercises financial control. This includes:
    • The extent of the worker’s investment in the facilities or tools used in performing services
    • The extent to which the worker makes his or her services available to the relevant market
    • How the business pays the worker, and
    • The extent to which the worker can realize a profit or incur a loss

 

  1. Relationship. How the employer and worker perceive their relationship is also important for determining worker status. Key topics to think about include:
    • Written contracts describing the relationship the parties intended to create
    • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay
    • The permanency of the relationship, and
    • The extent to which services performed by the worker are a key aspect of the regular business of the company
    • The extent to which the worker has unreimbursed business expenses

 

The IRS can help employers determine the status of their workers by using form IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding”. IRS Publication 15-A, “Employer’s Supplemental Tax Guide”, is also an excellent resource.

 

IRS TAX PROBLEMS – Penalties for Filing Late & Paying Late

IRS TAX PROBLEMS – Facts about Filing Late and Paying Penalties

April 18, 2017 was this year’s deadline for most people to file their 2016 federal tax return and pay any tax they owe. If taxpayers are due a refund, there is no penalty if they file a late tax return.

Taxpayers who owe tax, and failed to file and pay on time, will most likely owe interest and penalties on the tax they pay late. To keep interest and penalties to a minimum, taxpayers should file their tax return and pay any tax owed as soon as possible.

Here are some facts that you should know:

  1. Two penalties may apply. One penalty is for filing late and one is for paying late. They can add up fast. Interest accrues on top of penalties.
  2. Penalty for late filing. If taxpayers file their 2016 tax return more than 60 days after the due date or extended due date, the minimum penalty is $205 or, if they owe less than $205, 100 percent (100%) of the unpaid tax. Otherwise, the penalty can be as much as 5 percent (5%) of their unpaid taxes each month up to a maximum of 25 percent (25%).
  3. Penalty for late payment. The penalty is generally 0.5 percent (0.5%) of taxpayers’ unpaid taxes per month. It can build up to as much as 25 percent (25%) of their unpaid taxes.
  4. Combined penalty per month. If both the late filing and late payment penalties apply, the maximum amount charged for the two penalties is 5 percent (5%) per month.
  5. Taxpayers should file even if they can’t pay. Filing and paying as soon as possible will keep interest and penalties to a minimum. IRS e-file and Free File programs are available for returns filed after the deadline. If a taxpayer can’t pay in full, getting a loan or paying by debit or credit card may be less expensive than owing the IRS.
  6. Payment options. Taxpayers should explore their payment options at “IRS.gov/payments”. For individuals, “IRS Direct Pay” is a fast and free way to pay directly from a checking or savings account. The IRS will work with taxpayers to help them resolve their tax debt. Most people can set up a payment plan using the “IRS Online Payment Agreement tool” on “IRS.gov”.
  7. Late payment penalty may not apply. If taxpayers requested an extension of time to file their income tax return by the tax due date and paid at least 90 percent (90%) of the taxes they owe, they may not face a failure-to-pay penalty. However, they must pay the remaining balance by the extended due date. Taxpayers will owe interest on any taxes they pay after the April 18th due date.
  8. No penalty if reasonable cause.  Taxpayers will not have to pay a failure-to-file or failure-to-pay penalty if they can show “reasonable cause” for not filing or paying on time.