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IRS Tax Code and Money Earned Abroad – Could it Change?

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Money earned abroad by American corporations is free from U.S. taxes until it is returned to the United States. However, once these foreign earnings are repatriated, they are taxed at a rate of 35%. The current tax code allows multinational companies to avoid this tax, but only if they invest in certain domestic assets such as bank deposits, stocks and bonds. If the foreign earnings are reinvested into the companies themselves, they are taxed at the corporate tax rate of 35%. Currently, a group of multinational companies who have joined together to form what is called the Win America Coalition, is lobbying Congress to reduce the tax rate on earnings they bring home from overseas. This group of companies, which consists mainly of the Silicon Valley technology giants together with some pharmaceutical companies, is asking for the tax rate on repatriated foreign earnings to be reduced from 35% to just over 5%. They claim that a reduction in the tax rate would increase hiring and stimulate job growth by allowing companies to invest in themselves. While some members of both major political parties are in favor of such a tax cut, others are against it. The pros and cons are outlined below.

Reasons for favoring a tax cut on repatriated foreign earnings:

• Due to a flawed U.S. tax code, profits of U.S. companies continue to be invested around the world instead of at home.

• Even though companies are allowed to keep funds earned abroad in U.S. banks, they are not able to put the funds to work in the U.S. economy without being subjected to a 35% tax rate.

• Reducing the tax rate for repatriated funds earned abroad would inject billions of dollars into the U.S economy, thus creating jobs.

Reasons for opposing a tax cut on repatriated foreign earnings:

• Domestic companies that do not have overseas operations say it is unfair to give multinational companies a lower tax rate.

• Some analysts say that job growth created by a tax cut would be lower than some estimates predict because foreign earnings are already invested in U.S. stocks and bonds and deposited in U.S. banks.

• Independent tax analysts have said that when a similar tax cut was initiated in 2004, most of the repatriated funds were spent on shareholder dividends, stock buybacks and executive pay rather than on any type of expansion that would have created jobs.

According to recent report by the Senate’s Permanent Subcommittee on Investigations, large multinational companies are already investing nearly $250 billion in United States financial institutions in order to avoid paying the 35% tax rate on repatriated foreign earnings. The question is whether a reduction in the current rate would promote changes in the distribution of these funds that would be beneficial to the economy.

Do you have a tax planning or preparation question?  Are you thinking about your 2011 taxes and want to avoid owing the IRS a tax debt?  Call for a free, no obligation tax consultation with our CPA’s today (877) 889-6527 or email us at info@protaxres.com

Start of 2012 with clear and accurate tax advice – contact us today!

 

IRS Tax Debt – Don’t Just Ignore It – Resolve Tax Debt Before the IRS Collects

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Most people who have IRS debt do not find themselves in that situation due to an unwillingness to pay their fair share of taxes. It is much more common that taxpayers find themselves owing the IRS either due to a mistake on a previously filed income tax return or some unavoidable circumstance such as a lost job, a decrease in earned income or an illness. While the initial IRS debt may have been the result of an unfortunate turn of events or a simple mistake or unreported item, it has often been compounded over time by the addition further taxes, penalties and interest. It is not uncommon for penalties and interest, which are often applied retroactively when the IRS or state tax agency makes an adjustment to a return from a prior year, to account for as much as 50% of an outstanding IRS debt balance. 

 

Resolving an IRS Debt

The first and most important thing that a taxpayer should do to resolve an IRS debt is to stop avoiding the issue. Taxpayers often think they can simply ignore their IRS debt because collection efforts begin mildly with letters simply stating the outstanding balance. Generally, the IRS has 10 years from the date a tax return is filed to collect an IRS debt. While collection efforts begin with passive techniques such as sending an IRS letter or IRS notice, as the 10 year collection period progresses, the methods get more aggressive. Collection attempts eventually lead to the possibility of filing a lax levy on bank accounts, wage garnishments or the filing of a tax lien. Any of these actions can have a drastic effect on a taxpayer’s credit rating and financial wellbeing. When faced with an IRS debt, a taxpayer may be best served by contacting a tax settlement professional to help resolve the issue.

 

How a Tax Debt Settlement Firm Can Help

The most obvious way to avoid an escalating IRS debt is to not incur the debt in the first place. While this may seem obvious, it is easier said than done. Mistakes are made and life events occur that are sometimes unavoidable. However once an IRS debt is incurred, it may be a good investment to enlist the help of a qualified professional to resolve the issue. Without professional help, individuals often find themselves overwhelmed by the barrage of letters from the IRS and confusion over how to proceed.

 

Why Professional Tax Resolution is a Good Choice

There are many different types of tax settlement firms and some, unfortunately, make promises they can’t keep and resort to unethical practices. For this reason, it important to research a potential tax resolution firm in order to select one that is reputable and has had a history of success settling IRS debt issues. To insure that a firm meets these qualifications, it is a good idea to verify their current licensure with the state certification agency and the Better Business Bureau. It is also advisable to review references if any are available. At Professional Tax Resolution, we encourage you to check our licenses, memberships and reviews. Our licensed CPAs and Enrolled Agents represent our clients before the IRS and state agencies from start to finish. We work with our clients to prepare all un-filed tax returns, confirm and correct balances as reported by the IRS and provide our clients with the best tax settlement option available. Call (877) 889-6527 for a free, no obligation consultation today.

 

 

IRS Tax Tips for the Unemployed – What to Know When Money is Tight

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If you are unemployed you are probably worried about many other things but there are some tax consequences and conversely some tax breaks that result from being unemployed.

Here are some facts that unemployed taxpayers will need to know when filing a 2011 tax return on April 15 2012.

1. Severance packages, Accumulated sick leave, Vacation, and Holiday pay are all taxable income. It is another terrible reality of being terminated. These amounts will have taxes deducted and be declared on your W2 as income.

2. Unemployment benefits are also considered taxable income. At tax time you will have to pay taxes on this income even though it was not deducted at the time the checks were issued to you.

3. You can be proactive and ask the government to withhold 10% of the unemployment payments you receive weekly in order to prepay the resulting tax liability.

To do so, complete IRS Form W-4V and submit it to your state unemployment department. The state unemployment department will provide form 1099-G to the IRS by Jan. 31 to show how much you received in benefits. The IRS will be looking for this number on your tax return.

4. Withdrawals from retirement plans and IRAs are generally taxable. The news is worse if you are under 59 ½ or younger. In that case you may be subject to a 10% early-withdrawal penalty on top of which your state may assess a penalty as well.
Ask your Tax professional, but there are some exceptions to this penalty. For a self help tutorial on the subject check out Publication 575 at www.irs.gov.

5. There is one way to use retirement funds – although only temporarily – without penalty. To do so, roll over your retirement fund or pull money out for 60 days or less and then re-deposit the entire amount into a qualified retirement plan. Using your funds only temporarily like this does allow you to escape the hefty penalties.

6. Loans and gifts from family and friends are not taxable income. This is one bright spot for the many cash strapped taxpayers out there. In addition, Bank loans or credit card cash advances are also not subject to tax.

7. Money received from a credit card company or an insurance carrier to cover your monthly payments while unemployed is not taxable income.

8. Public assistance, welfare and food stamps, are not taxable income either.

9. Having any Debt written off or forgiven may result in that amount being subject to income tax. The unemployed often find themselves with debt being forgiven and an unfortunate tax consequence as a result. While not working, you have no income and likely do not have the ability to repay existing debt. If a creditor writes off a balance you owe or reduces your balance by forgiving some of the debt, you will be liable for income taxes on the amount forgiven. Be on the look out, you will receive a Form 1099 by Jan. 31 indicating the debt forgiven amount that is taxable.

10. If you file bankruptcy none of the forgiven debt is taxable income.

11. If you are insolvent, you may escape a tax liability to the extent of insolvency.

To determine this, add up the value of all of your assets on the eve of the debt forgiveness. Then add up the value of all of your debt. Subtract the debt from the assets. If the result is a negative number, then you are insolvent to that extent.

Here is an example: You have assets of $100,000 and a debt of $120,000 with a resulting insolvency of $20,000. A credit card company forgives a balance of $30,000. In this case you would have to pay taxes on $10,000 which is the difference between your insolvency and the balance forgiven.

Tax Benefits. Now to the Few Potential Positives To Being Unemployed.

1. Your decrease in income will likely throw you into a lower tax bracket and you may enjoy a refund from amounts paid in before your unemployment.

2. If your earned income is low enough, you may qualify for the Earned Income Tax Credit (EITC) as well as the additional Child Tax Credit, which will result in an even bigger refund of the amounts you paid into the system before unemployment.

3. Job search expenses are deductible.

4. If you go back to school, you may qualify for the American Opportunity Credit or an education deduction for college tuition, books, fees, and computer equipment.

5. If you get a new job and the job requires a move; you may be able to deduct moving expenses. For more information, read the self help guide – “IRS Publication 521” to determine if you meet the time and distance requirements. This guide can also help you to determine which expenses are deductible.

6. If you have a tax debt from prior years and are already on an installment plan, you will likely be able to put off repayment because you are unemployed. Call the IRS and let them know your situation. As a temporary status, they can reclassify you as “temporarily uncollectible”. Typically this gives you a year of delayed repayments before they begin collection efforts again. If another year passes and you are still unemployed, the IRS will renew the “uncollectible” status. Of course those hefty penalties and interest will continue to accrue, but you will be temporarily relieved of the burden of the IRS debt.

 

At Professional Tax Resolution we provide all of the services necessary to help you plan your finances or resolve a tax debt issue that already exists. Our professionals will get a comprehensive understanding of your situation, stop any immediate collection actions, and help you handle the pressure you might be feeling.

Call (949) 596-4143 or click “Learn More” for a free consultation with our CPA.

 

If You Have Unreported Income You May Get a Letter from the IRS

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Understanding The IRS “Soft Notice” Pilot Program to Encourage Income Reporting Compliance

In 2007, the IRS launched a pilot program designed to decrease the tax gap by identifying unreported income. Under this pilot program, which is still in effect, IRS notices are issued to taxpayers when there is a discrepancy between the income reported on their tax returns and the income reported directly to the IRS by various financial institutions and employers. These “soft notices” do not identify specific discrepancies or calculate amounts due. They simply ask taxpayers to review their returns and to file amended returns if errors are found. 

In spite of the fact that these “soft notices” do not require any specific response or action on the part of the taxpayers who receive them, they should be taken seriously. The IRS designed these letters to encourage compliance through self-correction and should be considered as advanced notification that IRS software has picked up a disparity in reported income.

Although the “soft notice” pilot program collected more than one million dollars in its first year and it can be expected to continue for many more to come, the IRS has not collected enough data to determine its long term benefits.

If you received a letter from the IRS or an IRS Notice and are seeking guidance, call us toll free at (877) 889- 6527 for a free, no obligation consultation with a CPA.  Professional Tax Resolution Inc., is an honest firm with strong values. We want our clients to understand all of the options they have and never promise that we can do something we can’t.

Tax Settlement can be achieved though many methods but often the most effective way is by reducing how the liabilities were incurred at the time and avoiding them in the future.

IRS Tax Debt – Avoid a Tax Liability When Helping Friends or Relatives

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With credit so tight and banks unwilling to loan to small businesses and individuals, more and more family members are faced with the difficult decision of how or when to help out. Once you decide to lend a hand, you have to consider the potential tax implications. You ask yourself would it be better to make an outright gift or to make a loan with the expectation of repayment?

Let’s consider the scenario of a gift.

Many people are aware that small cash gifts generally don’t have to be reported to IRS. However, you should also keep in mind that if you give more than $13,000 in a single year to an individual it still needs to be reported on a gift tax return, and this could have an effect on your general estate situation.

But, wait are there not new estate tax rules that would protect you from a tax standpoint? The answer is Yes and No. The 2010 Tax Act provides everyone a $5 million lifetime exemption for estate and gift transfers. However, it does not exclude you from having to report a gift to an individual when it exceeds $13,000 in one year.

Why you might ask? The generous $5 million lifetime exemption is only on the books until Dec. 31, 2012 and many tax professionals dread the potential for a “claw back” which may in fact happen after the 2012 cut off considering the sorry state of our economy. What a ‘claw back” could mean is that all of the reportable gifts you made during your lifetime could be considered having actually occurred in your estate after 2012 – regardless of how much exemption Congress will allow after next year. The bottom line is you can’t assume that the IRS will not monitor your gift transfers in the months ahead even though you don’t have any tax liability right now.

So, now let’s consider a Loan.

Is it advantageous to treat your monetary support as a loan rather than an outright gift? A properly documented loan will show the IRS that you did not intend to make a reportable gift and will also clarify the repayment expectations with whomever you are helping. But perhaps most importantly for you, certain tax reporting issues can be easily eliminated with the documentation of this support having been a loan.

Of course this does not come without caution. The IRS is leery about the legitimacy of loans especially when they’re between family members. So whatever you prepare as loan documentation you must make it clear that it is what is considered an arm’s-length loan and that you expect to be repaid. While you don’t need an attorney to draft up a formal document, it does always help to spell out the payment terms and any interest that you may charge. Even better, you can try to secure collateral to legitimize your loan agreement.

Gosh, how can you even think about charging interest when the person you are helping is faced with a dire financial situation? It is true; most will just try to keep things simple by making an interest-free loan, especially when it involves family. But here is why this is not a great idea for you from a tax standpoint. The IRS really considers that true bona fide loans have a reasonable interest rate charged and paid by the borrower. In fact here is the real rub, if you make an “interest-free” loan over $10,000 to anyone, the IRS will “impute” interest for you, based on rates set by the Treasury. What does that mean? You could wind up paying tax on fictitious interest that you never received! To protect yourself, charge a minimal interest rate for any loan you make.

Ok so now what happens when that Loan fails to be repaid?

Yikes. Well, if you loaned $20,000 or $30,000 to a friend or a relative, you now have a true loss or debt and you might be wishing you some records of that fact. Why you ask? You may now be eligible for an attractive (bad-debt) tax deduction in the year of worthlessness.

But how formal a set of documentation do you need to be able to document this bad-debt deduction? Obviously the more the better, but if you have some written documentation and the transfer of funds was clearly labeled you may be ok. A landmark tax court decision observed that a valid debt may exist without all the legal formalities even when between related parties. In this case, the taxpayer prevailed over the IRS because his intentions were proved with business-like actions and by making informal notations – such as marking “loan” on checks and deposit slips, etc. In this particular case the key was that that taxpayer and the recipient of the loan were recognized as creditable witnesses with a prior debtor-creditor relationship. The bottom line is, do what you can to document and legitimize the loan and consider it and insurance policy for yourself in the future.

This is just one example of the tax advice and guidance we provide each and every day. If you have a loan that has failed to be repaid, a tax debt, unfiled tax returns, or any other tax related problem give us a call for a free, no obligation consultation (877) 889-6527. Talk directly with a CPA and understand what we can do to resolve your tax problem once and for all. Look us up – we are proud A rated members of the BBB.