Tag Archives: tax advice

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 Offer in Compromise – A Review of Eligibility Guidelines

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We get a number of calls inquiring about the IRS Offer in Compromise Program. While an IRS Offer in Compromise is a very effective tax settlement option for a very well defined group of taxpayers, it is definitely not the optimum solution for anyone with an unresolved tax debt. The acceptance criteria for an Offer in Compromise are very specific, the application process is lengthy and the rejection rate can be high. Amazingly the IRS can also take up to two years from the date it receives the initial application to accept or reject an Offer in Compromise. With this timeframe in mind, it is often advantageous to enlist professional help when considering this tax settlement option. An experienced tax settlement professional will be able to determine whether the taxpayer meets the strict IRS qualification criteria and, following that determination, will ensure that the Offer in Compromise application is submitted according to published IRS guidelines. Utilizing a qualified CPA or tax professional can drastically reduce the rejection rate because the preliminary work to qualify you as an applicant and to appropriately complete the forms is done for you.

Not sure if you qualify? The primary components necessary to obtain a successful Offer in Compromise tax settlement are outlined below:

  • The taxpayer must meet one of the three eligibility criteria specified by the IRS. Those three criteria are

1) doubt as to whether the taxpayer is liable for the tax debt

2) doubt as to whether the taxpayer has the means to pay the tax debt

3) a determination that settling the tax debt would promote effective tax resolution.

Since the Offer in Compromise allows a taxpayer to settle a tax debt for less than the full amount owed, the IRS only accepts applications that adhere strictly to theses acceptance criteria.

  • The taxpayer’s eligibility must be adequately documented. Sufficient documentation to support one of the three eligibility criteria is required. This documentation may include tax returns and other financial records, disability claims and records of medical treatment and hospitalization, among other things
  • The total amount of the tax debt must be accurate. This means that the taxpayer must be current in submitting tax returns. All previously submitted returns must be checked for accuracy and refiled when necessary.
  • The Offer in Compromise application must have been submitted according to specific IRS guidelines. All of the necessary forms included with the application must be complete and all required fees and supporting documentation must be included.

Once an Offer in Compromise application is submitted, the IRS will begin its review process. During this time additional information and supporting documentation will be requested when necessary. The review process usually takes anywhere from six to twelve months but can take a maximum of two years. If the application is not officially accepted or rejected within two years, the IRS is required to accept the offer.

If you have an unresolved tax debt, visit us today at www.professionaltaxresolution.com for more information about our customized tax settlement assistance. With over 16 years of experience working with the IRS, our experienced professionals will help you determine which available tax settlement option best meets your specific needs. Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to learn more about our services and to receive a free, no obligation consultation

 

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.

Tax Lien and Tax Levy Facts – The Expert Advice You Need

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What is a Tax Lien?
A tax lien is a claim against one or more of a taxpayer’s assets. It is issued by the IRS or State Tax Agency for the purpose of insuring payment of a tax debt. The tax lien gives the issuing tax agency priority over other potential creditors with respect to the assets identified by the lien. A tax lien is one of the more aggressive steps in the enforced collection process and is usually issued when all other previous attempts to collect a tax debt have been ignored.

How Does a Tax Lien Differ From a Tax Levy?
While the tax lien is a claim against a taxpayer’s property, a levy is the actual seizure of that property. The levy is one of the final steps in the enforced collection process and is used only when a taxpayer has made no attempt to resolve an existing tax liability. Once a Final Notice of Intent to Levy has been issued together with an official notice informing the taxpayer of their right to a formal hearing, the property identified by the levy can be confiscated without further notification.

Under What Conditions Can a Tax Lien Be Withdrawn?
A tax lien can be withdrawn if it was not filed according to established IRS policies and procedures or if it will delay the collection of the tax debt in question. It can also be withdrawn if the taxpayer enters into an installment agreement to repay the debt identified by the lien or if it can be established that withdrawing the lien is in the best interest of the taxpayer.

When is a Tax Lien Released?
A tax lien is released when the tax debt identified by the lien is paid in full. It will also be released if the taxpayer enters into a formal agreement with the issuing tax agency for partial payment of the existing liability. These resolution options include, but are not limited to, an Offer in Compromise or a Partial Payment Installment Agreement. Once the tax debt is paid in full or one of the partial payment settlement plans has been accepted, the taxpayer must submit a formal written request that the lien be removed. Within 30 days of receiving such a request, IRS will issue a Certificate of Release.

What are the Recent Changes to Tax Lien Guidelines?
• The threshold for issuing a tax lien has been raised from $5,000 to $10,000.
• A lien will now be released once a taxpayer has entered into a direct debit installment agreement but after a probationary period to insure that the direct debit agreement is in place and working as planned.
• The qualifying criteria for an Offer in Compromise have been revised to include a larger group of taxpayers. The tax debt ceiling has been raised from $25,000 to $50,000 and the maximum annual income allowed has been increased to $100,000.

If you are the subject of a tax lien or any other type of collection activity by the IRS or State Tax Agency, our experienced professionals can help you stop the action and resolve the tax debt issue that caused it. For more information about our tax debt resolution services, visit us today at www.professionaltaxresolution.com. Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation