The 2014 Tax Season is Here

The 2014 filing season has officially begun.  If you have not filed in years or are looking for a tax preparer, then you must read this blog.

I have not filed a tax return in years!

If you have not filed in years, do not put off another year of filing.  The failure to file a tax return is costly and exposes you criminally.

First, you may be owed a tax refund from the government.  The IRS has a statute of limitations period which is the later of three years from the due date plus extensions or two years from when the tax was paid.  Therefore, you can lose your tax refund by not filing timely.  

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Tax Evasion Penalty for Founder of Beanie Babies

Sizzle the BearMatters that touch on failure to pay income taxes have received a lot attention with tax authorities stepping up efforts to net those who conceal their financials. According to the Chicago Tribune, Beanie Babies, the founder of Try Warner was sent for a two-year probation term with 500 hours of hard work after pleading guilty of hiding a colossal amount of untaxed money in a Swiss bank.

While the U.S. District Judge lauded Warner for his benevolence and charity work, he was alive to the fact that bypassing the federal tax law was a serious matter that cannot be condoned. Warner could be seen taking notes as the judge read the ruling and only stood to apologize for his conduct that denied the nation millions in tax revenue. The philanthropist said it was regrettable of the mistake that would later cost him his respect and was sorry for his actions or inaction.

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IRS Audits Are Declining for Most Individuals

aAccording to the IRS, the overall revenue collected from tax audits increased year in FY 2013. The 2013 increase in revenue is in spite of the fact that tax examinations decreased.

The IRS budget has been on the decline since 2010. The decreased budget has been the catalyst for the IRS to focus on high income taxpayers. The IRS believes it can get more bang for the buck by going after high net worth taxpayers.

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Question: Should I file my taxes if I can’t pay?

Answer: Yes!  This is a question that that I’m always asked around tax season and the tax extension deadlines.

Putting aside that it is a misdemeanor to fail to file a tax return and a felony for the willful failure to file a tax return, it can be financially devastating to not file on time.

One of the biggest IRS penalties is the failure to file a tax return by its due date plus extensions.  The failure to file penalty runs at 5% per month up to maximum of 25% of the total tax due.  For example, if the tax return is reporting a balance $100,000.00 and its five months late, the IRS will assess an additional $25,000.00 in tax penalties.  Therefore, by filing the return timely, you would avoid criminal exposure and the costly failure to file penalty.

In addition to the failure to file penalty, the IRS would assess the failure to pay penalty on the amount owed plus statutory interest.  The failure to pay penalty is assessed at .5% per month up to a maximum of 25% for the late payment of tax.  The failure to file penalty is reduced by the failure to pay penalty when both penalties run concurrently.  If the government issues a notice of intent to levy and you do not pay within 10 days from the notice, then the penalty increases to 1% per month.  Therefore, if you have any money available, even if the amount is less than what is reported, then submit the funds with your tax return.  That way, you reduce the exposure to the failure to pay penalty which is based on the amount of back taxes owed.

In addition to the tax penalties and the taxes owed, the IRS assesses statutory interest on both the tax reported and the tax penalties assessed.  In the aggregate, penalties and interest could inflate your back taxes by 55%-75%.  Therefore, by timely filing and paying what you can, you can significantly reduce the amount of back taxes owed.

The disadvantage of filing a tax return without payment is that the IRS collection cycle will begin.  However, if you are proactive, you can negotiate for additional time to pay taxes, request an IRS payment plan, place your account in forbearance (i.e. currently not collectible, CNC, or Status 53), apply to settle your tax debt for less than what is owed (i.e. offer in compromise or OIC), or propose to the IRS another alternative that would resolve your back taxes.

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Tax Preparer Convicted of IRS Fraud

Be Careful in the 2013 Tax Season…

dA recent criminal conviction serves as a reminder that you must be careful when hiring a tax return preparer to prepare your 2013 tax return.

Verlean Hollins, a Chicago tax preparer plead guilty to aiding and assisting in the preparation of 3,200 false federal income tax returns.  Hollins admitted that during the 2009 through 2011 tax season, she filed 3,193 income tax returns in which she falsely claimed the eligibility of higher education tax credits for her clients.

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Can the IRS hold me personally liable for Payroll Taxes?

Yes.  Although it’s the business entity that accrued and is liable for payroll taxes, interest, and tax penalties, the government can hold an individual personally liable for back payroll taxes by assessing the Trust Fund Recovery Penalty.

Employers are statutorily required to deduct and withhold an employee’s federal income, Social Security, and Medicare taxes.  See IRC 3102(a) and 3402(a).  Additionally, employers are required to match the employee’s share of social security and Medicare taxes.  The withheld income tax and the employee’s share of social security taxes are referred to as the trust fund taxes. The employer’s share of social security taxes and Medicare taxes are excluded from the trust fund tax definition.  

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Can the IRS Take my Home?

houseYes, but §6334 requires the IRS to obtain a U.S. District Court judge’s approval in writing before the seizure of a “principal residence.”

The definition of “principal residence,” as defined by IRC 121 and the regulations thereunder, is the critical inquiry in determining whether or not judicial approval is necessary in seizing a taxpayer’s home. IRC 1.121-1(b) provides a facts-and-circumstances analysis for determining whether the taxpayer’s property is considered their principal residence. The regulations state that a houseboat, a house trailer, or the house or apartment that the taxpayer is entitled to occupy as a tenant-stockholder in a cooperative housing corporation may be a principal residence. Personal property that is not considered a fixture under local law is not the taxpayer’s “principal residence.” 

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Manny Pacquiao vs. the IRS

pac

While Manny Pacquiao has won the boxing world championship in eight distinct classes, his fight with the Philippine and United States tax men is sure to be his most challenging yet. The Philippine Bureau of Internal Revenue (BIR) has slapped Pacquiao with a $50 million tax bill; at the same time, the IRS claims that Pacquiao owes $18 million in back taxes and placed a lien on his U.S.-based assets.

Filing a Notice of Federal Tax Lien is the IRS’s protocol when a taxpayer owes the IRS more than $10,000.00 (raised from $5,000.00 as part of the IRS Fresh Start Initiative). An IRS tax lien is a claim against a taxpayer’s property for the payment of back taxes including any interest, penalties, and costs thereon. The purpose of filing a lien is to protect the Government’s interest in a taxpayer’s property against the claims of other creditors. Therefore, despite his wealth and boxing prowess, I would not lend Pac-Man any money at this time.

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Last Minute Moves for 2013 that May Help if you have Under-Withheld Your Taxes

It is not too late to reduce your tax bill on April 15, 2014. As long as the below adjustments occur before December 31, 2013, you may be able to avoid or reduce a back tax liability if you have under-withheld. Before relying on any of the below information, you must contact a tax attorney or CPA to discuss your individual tax situation.

Under-Withholding Taxes
A refund indicates that you are paying too much tax and a tax debt means that you are paying too little. Most wage earners with a tax problem with whom I consult have had insufficient taxes taken out of their paycheck. The goal of withholding is to be as close to breaking even as possible.

If you are withholding too much, then you are providing the government with an interest free loan. If you have under-withheld, then you must contact your HR department immediately before accruing a significant back tax liability. You must adjust your W-4 to reflect the proper amount to be withheld from each paycheck. The failure to properly withhold can result in the IRS garnishing wages, levying bank accounts, or seizing assets. Additionally, the IRS can assess with tax penalties such as the failure to pay or an estimated tax penalty. Furthermore, if you have negotiated an IRS installment agreement or the IRS has accepted an offer in compromise (tax settlement), then the failure to properly withhold may result in a breach of your agreement.

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