Tag Archives: unfiled returns

Back Taxes and Small Businesses -Tips to Avoid Tax Debt

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Back Tax Issues for Small Businesses

What back tax issues are commonly encountered by small businesses?

Due to the complexity of tax law, many small business owners do not know how to use available deductions to reduce their lax liability and therefore end up with tax balances that are more than the business can afford to pay.

With the current state of the economy, many small businesses have cash flow problems. When this is the case, they may use available cash to fund operations rather than making tax payments.

What types of tax payments are small businesses responsible for?

Small businesses are responsible for paying sales taxes (often to multiple states), payroll taxes and quarterly tax payments.

What are the consequences when small businesses do not make their tax payments on time?

The IRS has the power to impose harsh penalties when small businesses fail to meet their tax deadlines. The reason for the delinquency is usually not taken into consideration.

One of the harshest penalties is imposed when a small business fails to meet its payroll tax deadlines. The penalty is called the Trust Fund recovery Penalty and is equal to 100 percent of the payroll tax balance. This penalty does not take into account the reason for the delinquency and can assign blame to anyone who was, in any way, responsible for the payroll tax debt.

What solutions are available to small businesses with back tax issues?

The best way for a small business to deal with a back tax issue is to face it head on rather than to wait for the liability to increase due to the compounding of interest and penalties.

Many states offer voluntary reporting programs and, while no such program is currently offered by the IRS, they due offer numerous tax debt settlement options.

While small business owners may rationalize that they will clear up their tax debt issues down the road when business is more profitable, this is usually not a wise decision. The IRS is more likely to approve a settlement agreement when business income and profits are low, not to mention that he legal and financial consequences of not addressing a back tax issue can be severe.

Due to the complexity of tax law, especially as it applies to small businesses, the best approach to resolving back tax issues is often to enlist the help of a qualified tax professional.

If you are a small business with unresolved tax debt, our experiences professionals can help you resolve your back tax issues. For more information about our tax debt resolution services, call us by phone at (877) 889-6527 to receive a free, no obligation consultation.

Have IRS Tax Debt? Need a New Passport? The GAO wants to know.

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As of the end of fiscal 2010, the balance of reported unpaid federal taxes was about $330 billion according to the IRS. This is a huge amount and as we have written about in the past, the enforcement of the tax laws and the tax code is on Government Accountability Office’s list of high-risk areas.  The deficit being what it is it may come as no surprise that the GAO was asked to investigate, by cross referencing unpaid federal taxes and passport issuance, the magnitude of known unpaid federal taxes for individuals who were issued passports.  Selecting a past year, the GAO did a study for the fiscal year 2008 to identify examples of passport recipients who had known unpaid federal taxes.

They study discovered that individual states issued passports to about 16 million individuals during fiscal year 2008 and that of these, over 224,000 individuals (over 1 percent) owed more than $5.8 billion in unpaid federal taxes. That is JUST those individuals who got new passports in 2008 – not all passport holders.

Does that come as a surprise? Currently each state is not authorized to restrict the issuance of a passport to an individual because they owe federal taxes. In addition, federal law does not permit the IRS to disclose taxpayer information, including unpaid federal taxes to State officials unless the taxpayer consents. The reason this is at least somewhat surprising is that in contrast, federal law does permit certain other restrictions on the issuance of passports to individuals, such as for those individuals owing child support debts over $2,500.

Really, the problem is likely far greater than 1% of the newly issued passport holding population.  In addition to the obvious population balance of all valid passport holders for the studied year of 2008, the estimated amount of unpaid federal taxes was actually likely understated because it excluded individuals who had not yet filed tax returns or who had underreported income.

Making matters harder, individual States currently cannot compel a passport applicant to provide a Social Security Number (SSN). Because the IRS uses the SSN to identify each taxpayer, without an SSN you cannot match an individual back to their IRS data.

This study had produced such alarming results already and the GAO wanted to know a bit more. They took the 2008 study and dug deeper into the backgrounds of a very small group of just 25 passport recipients. Clearly this is a tiny study and cannot be reflective of the population as a whole. That said, some pretty interesting things were discovered.  When investigating for abuse related to the federal tax system or criminal activity, of these 25 cases, at least 10 passport recipients had been indicted or convicted of federal laws! In addition, the IRS had assessed trust fund recovery penalties on several passport recipients; a penalty which is applied when an individual does not remit payroll taxes to the federal government.  How does someone fall behind on Payroll taxes?  Instead of acting appropriately as the trustee of an individual employee’s withholding and forwarding it onto IRS, they divert the money for other purposes. Using payroll taxes is a big crime; in fact the willful failure to remit payroll taxes is a felony underU.S.law.

In this smaller study of the 2008, of those 25 new passport holders, some had accumulated substantial wealth and assets, including million-dollar houses and luxury vehicles, all while failing to pay their federal taxes. In fact, of the 25, at least 16 passport recipients traveled outside the country all while owing federal taxes and another 4 passport recipients actually resided in another country at the time! Worse yet, two individuals used the identities of deceased people to fraudulently obtain passports in the first place and then used the passports to travel toMexico,France, and Africa. Ironically in one case, the unpaid tax debt belonged to a deceased individual and in the other; the debt was actually incurred by the imposter.

If this small study is any indication, there appears to be a big opportunity to crack down on passport issuance for those who owe federal tax debt. Although nothing official has been implemented to date, Congress could pursue policy to link federal tax debt collection and passport issuance by enabling States to screen and prevent individuals who owe federal taxes from receiving passports.  This would require transparency and more communication between the IRS and the individual States, but it seems that the opportunity to collect unpaid tax debt would be greatly improved as a result.

 

If you have an unresolved tax debt, visit us today at www.professionaltaxresolution.com for more information about our customized tax settlement assistance. The CPAs and tax professionals at Professional Tax Resolution use their extensive knowledge of the tax code to provide taxpayers with the best settlement option available. 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 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.

 

He Owed the IRS $80,000 in Back Taxes. We Reduced His Tax Debt to Zero!

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Steve H. came to Professional Tax Resolution after receiving notice of a wage garnishment from his largest customer.  Steve, a technology consultant, had failed to file tax returns for six years and, according to IRS calculations, owed over $80,000 in back taxes, penalties and interest.  Tax settlement plans for taxpayers with numerous un-filed tax returns always begin with gathering the records necessary to prepare the un-filed tax returns. In this case, the taxpayer was able to gather some information from banking records and some from customers for which he had provided services. Fortunately for this taxpayer, his wife had worked for several years and had had federal and state taxes deducted from her paycheck. We were able to obtain and verify additional tax information by obtaining IRS wage and income transcripts.

After gathering all possible relevant information, we were able to prepare all of the outstanding tax returns.  While balances were due in some years, refunds were owed in others. We were able to request that the IRS apply refunds owed to years where balances were due such that the net result was an outstanding tax liability of zero. It is never advisable to wait for a wage garnishment, tax lien or tax levy to resolve an outstanding tax issue. However, even when a tax issue seems practically unsolvable, there are tax resolution options available.  Professional Tax Resolution always looks at all available tax settlement options and provides a tax debt resolution plan for even the most complicated cases.

IRS Tax Penalties Increased for Failure to File W-2s and 1099s. Yikes!

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When meeting with a new client regarding an outstanding tax debt we generally ask if all required W-2’s and 1099’s and have been filed.  It is not uncommon for the client to casually respond that they need file those also.  They are often surprised to hear of the substantial penalties that apply for the failure to file these information returns.  Since the IRS assesses these penalties on a per return basis the resulting penalties can be very significant when there are numerous documents that have not been submitted.

Under the Small Business Jobs Act, the IRS has implemented higher penalties for failure to file information returns such as a W-2’s or 1099’s. The new penalty structure is designed to encourage businesses to file these returns as soon as possible. The quicker the delinquent returns are filed, the smaller the penalty.

  • First tier penalties have been doubled from the previous amount to $30 per return. These penalties apply to any information return that is submitted after the filing deadline but within 30 days. The maximum penalty for a calendar year has been increased from $75,000 to $250,000 (from $25,000 to $75,000 for small filers).
  • Second tier penalties have been doubled from the previous amount to $60 per return. These penalties apply to any information return that is submitted more than 30 days after the filing deadline but before August 1st. The maximum penalty for a calendar year has been increased from $150,000 to $500,000 (from $50,000 to $200,000 for small filers).
  • Third tier penalties have been doubled from the previous amount to $100 per return. These penalties apply to any information return that is submitted after August 1st. The maximum penalty for a calendar year has been increased from $250,000 to $1.5 million (from $100,000 to $500,000 for small filers).
  • The penalty for intentional failure to file has been increased from $100 to $250 per return.

The new penalty structure applies to information returns that were required to be filed on or after January 1, 2011.