Tag Archives: tax preparation

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 Preparation is Key in Claiming Your Adoption Credit; Thousands Have Yet to Receive Refund.

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Thousands of Americans are still waiting on large refunds from the IRS due to their adoption credit. This is partly due to the fact that this is the first year the credit is refundable. This means the money goes directly to the taxpayer, and not applied to future taxes owed. This would be especially helpful to families who incur high costs for adoption, if they ever receive their money.

By the end of April, 2011, the Treasury Inspector for Tax Administration found that the IRS had received returns for over 72,000 taxpayers claiming nearly $900 million in adoption credits. More than half of those returns have been sent for further review and will be audited to verify proper documentation and claims.

According to the IRS, the problem is that many taxpayers do not submit proper returns, lacking documentation.

Get your tax return prepared the right way. Don’t think your past returns were done correctly? Contact one of the licensed experts at Professional Tax Resolution today!

Sending your kids to a summer day camp? Some of the expenses may qualify for the Child and Dependent Care Credit.

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When trying to determine tax settlement strategies, the best is to not incur the balance to begin with! Here is one tip to help you lower your tax liability.

If you paid for someone to provide care for your child while you, your spouse, or both were either working or looking for work, you may qualify for the child and dependent care credit. Certain expenses and providers qualified for this credit, and summer day camps are one of those qualified expenses.

Depending on the parents’ income, the credit can be up to 35 percent of the qualifying expenses. For one qualifying child or dependent, parents may use up to $3,000 of the un-reimbursed expenses paid in one year, and up to $6,000 for two or more qualifying individuals.

If you have a tax settlement issue and believe this, or other tax credits were overlooked on your past tax returns, the licensed tax experts at Professional Tax Resolution may be able to help lower or even eliminate your tax debt liability. There are time limitations for your tax settlements, so don’t delay and call us for a free quote.

2010 Electric Car Credit and Other Tax Incentives

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There are a variety of reasons why taxpayers might find themselves with a significant amount of tax debt. Many individuals have outstanding tax liabilities because they have failed to file income tax returns or report portions of their income. In other situations, taxpayers have filed their returns but have done so incorrectly or relied upon the services of unqualified tax preparers who have made filing errors. At Professional Tax Resolution, our services go beyond those of a traditional tax settlement firm. Our goal is to stop collection activity, resolve any existing tax debt issues, and then work with the client to ensure that a problem situation does not repeat itself.

The government provides various types of tax credits to stimulate demand for certain products and industries. Most recently the IRS and various states have encouraged home sales and the purchase of energy efficient vehicles and appliances through the use of tax credits. While these incentives can provide taxpayers with substantial tax advantages, they can have devastating effects if they are filed incorrectly. It is not uncommon for our firm to meet with a new client who has been in tax compliance in the past but is now faced with a tax debt that is due to the incorrect filing of a tax return or an error in the reporting of a tax credit. If a tax credit is filed incorrectly, the IRS typically will not identify the error and disallow the credit until a year, or possibly two, after the filing of the original tax return. By this time, various types of filing, payment and accuracy related penalties and interest have often been applied to the outstanding tax debt. These assessments can add up to amounts that taxpayers simply are unable to pay.

Last year the IRS published numerous news articles about the fraud and improper filing of the $8,000 First-Time Homebuyer Credit. This year it is publishing similar articles about the misunderstanding and fraud related to the $7,500 electric drive motor vehicle credit. While taxpayers should certainly take advantage of these potentially lucrative tax incentives, they should also take care to make sure that they are in fact eligible for them and that they are properly filed.

Automobile companies are just beginning to mass market electric cars in response to increased consumer demand. This is at least partially a response to the lucrative tax incentives being offered by the Federal Government. President Obama is pushing to have a million electric cars on the road by 2015 and tax incentives are a large part of the strategy designed to make that number a reality. At present a $7,500 tax credit is available to any consumer purchasing an electric drive motor vehicle and additional credits are being offered to anyone who converts an existing gasoline powered automobile to plug-in.

Although the tax breaks may be serving their purpose in increasing demand for electric vehicles, a Treasury Department review revealed that thousands of taxpayers have claimed the credits for vehicles that don’t qualify. In fact, estimates indicate that over 20% of approximately $160 million in electric car tax credits claimed for the first half of 2010 were claimed in error. In response to the Treasury Department’s findings, the Inspector General has made numerous recommendations for recovering the wrongfully-claimed credits and for improving the reporting methods so as to avoid false claims in the future. The IRS has concurred, saying that it has taken “aggressive steps” to safeguard against improper payments as well as to “recapture the credits people erroneously claimed.”

At Professional Tax Resolution, we have the knowledge and experience to ensure that all of our clients’ tax filings are submitted accurately and according to established IRS guidelines. If a tax debt situation already exists, our experienced CPA’s will take the time to thoroughly analyze it in order to bring about resolution using the best tax settlement option available. The bottom line is not to try to handle a complex tax settlement case alone.

Visit www.professionaltaxresolution.com for more information about tax settlement options or contact us today at (949)-596-4143 to receive a free, no obligation consultation.