Mistakenly, many believe that filing a tax extension is an extension of time to pay your taxes. While a tax extension provides an extension to file your tax return, it does not provide an extension of time to pay taxes owed.
The federal income tax is a pay-as-you-go tax system. If you’re an employee, then your employer will withhold income tax during each pay period in your name and social security number. If you are self-employed, then you would make estimated tax payments throughout the year based on earnings and, generally speaking, have to pay self-employment tax. If you are an employer, then you may have to make federal tax deposits for payroll taxes throughout the year as you are paying your employees.
While you should always aim at timely filing and timely paying your taxes, the good news is that interest rates, which are tied to federal short-term rates, are at historic lows. The IRS recently announced that the interest rates for the calendar quarter beginning Jan. 1, 2015, and ending March 31, 2015 are as follows:
- 3 percent for overpayments, in cases other than corporations
- 2 percent for overpayments in the case of a corporation (except 0.5 percent for the portion of a corporate overpayment exceeding $10,000)
- 3 percent for underpayments (including estimated tax underpayments)
- 5 percent for large corporate underpayments
To put the current interest rates in perspective, at the start of the financial crisis in 2007, rates on tax underpayments were as high as 7%.
Despite rates remaining unchanged since October 1, 2011, they won’t stay low forever. On December 17, 2014, the Federal Reserve indicated that it’s closer to an interest rate hike. Therefore, if you’re in an IRS installment agreement, it could make sense to make voluntary payments above your monthly payment to curb interest rate and future interest rate, hike risk.
Tax interest and penalties is the biggest complaint that I hear from clients. When you do not pay your taxes timely, the IRS, under IRC 6601(a), is required to charge interest on the unpaid taxes from the due date of the return until the date the tax debt is satisfied. To make matters worse, failing to pay your taxes timely will result in the IRS charging a penalty of .5% on the unpaid amount due per month up to 25% of the amount due. The .5% penalty will increase to 1% beginning 10 days after the IRS issues a Notice of Intent to Levy. On top of the tax penalties, IRC 6601(e) directs the IRS to impose interest on penalties. Therefore, owing a back tax can be a difficult debt to extinguish. You have to juggle interest on, not only the tax, but the penalties too.
While tax penalties are discretionary and thus can be negotiated by proving reasonable cause or your prior tax compliance history, interest is not discretionary. Accordingly, the IRS has limited authority to waive interest on a tax deficiency.
IRC 6404 discusses the limited circumstances in which the IRS is permitted to abate tax interest. The IRS may abate interest in the following circumstances:
- A determination is made that the unpaid cost of the tax assessment, including interest, does not warrant administrative and collection costs.
- The IRS made a math error on a return prepared by an IRS employee.
- The IRS provided erroneous written advice that caused interest accruals on a tax due,
- An IRS employee caused an unreasonable delay or error and the taxpayer did not in any way contribute to the delay or error
Because it is rare to abate interest, it is always in the taxpayer’s financial interest to reduce the amount of taxes owed as early and aggressively as possible if you cannot qualify for an offer in compromise or other tax resolution, i.e. Chapter 7 bankruptcy or doubt as to liability offer, that would settle your back taxes owed. In light of the 2015 IRS budget reduction, many of the IRS’s functions such as executing an installment agreement are taking months to complete. Often times, I tell my clients to make voluntary payments or work on current year compliance while waiting for the IRS. Both voluntary payments and current compliance have the effect of curbing IRS interest rate accruals.
Should you have any questions regarding IRS interest assessments, contact the Law Offices of Todd S. Unger, Esq. LLC. Todd S. Unger, Esq. LLC is a boutique tax controversy practice that handles tax collection, audits, tax whistleblower claims, tax preparer representation, and criminal tax investigations. To resolve your tax matter, call Todd S. Unger today (877) 544-4743.Continue Reading...
Owe New Jersey Back Taxes? The NJ Division of Taxation Offers a Way to Resolve Unpaid Tax Debt with No Penalties
The New Jersey Division of Taxation has offered businesses and individuals a way to resolve back taxes from 2005 through 2013 at a reduced cost. The details of the plan are as follows:
- Most of the penalties that were assessed to your account will be reduced to zero. The Amnesty Penalty (5%) imposed on taxes due on or after 1/1/2002 and before 2/1/2009 is still applicable.
- Interest will be calculated only on the tax and the reduced penalties.
- The 10% recovery fee which is imposed on each tax liability that is forwarded to NJ’s outsourced, collection unit, Pioneer, is waived.
- The 10% cost of collection fee charged for filing a Certificate of Debt (Judgment) may be eliminated.
On June 18, 2013, the IRS announced major changes to the voluntary offshore disclosure program (“OVDP”). OVDP had been criticized by the Taxpayer Advocate and tax attorneys as being too draconian on its participants who failed to disclose their foreign accounts, but were not willful evading their foreign tax obligations.
The 2012 OVDP Terms
Simply stated, the 2012 OVDP deal offered no criminal exposure if you got to the government before it found out about you in exchange for the following:
- You paid a 27.5 percent penalty on the undisclosed offshore accounts with the highest aggregate account balance on the period covered by OVDP (8 years);
- You filed all delinquent FBAR(s) for the period covered by OVDP (8 years); and
- You filed all original and amended tax returns for the period covered by OVDP (8 years)
- You paid all back taxes, interest, and a 20% penalty on the taxes owed (the accuracy related penalty)
The 2012 OVDP offered reduced penalty calculations of 12.5% and 5% of the highest aggregate balance, but these reduced OVDP penalties were based on precise requirements. If you did not satisfy the requirements, OVDP tax agents did not have the discretion to negotiate. If you did not like the program, you could opt out of OVDP.Continue Reading...
Congress may authorize the hiring of private collection agencies to collect back taxes. Congress added a proposal in the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act of 2014 which would authorize the IRS to contract with private collection agencies to recover back taxes. Congress believes that it can recover $2.4 billion in unpaid federal tax debt over the next 10 years through the use of private collection agencies. Currently, the NJ Division of Taxation utilizes a private collection agency.
This is not the first time that Congress outsourced private tax collectors. The IRS utilized private tax collectors in 1996 and 2004. Both times the IRS stopped using private tax collectors because they were deemed inefficient in the collection of back taxes. The IRS Oversight Board (Oversight Board), a nine-member independent body charged to oversee the IRS operations, agrees. The Oversight Board believes private collection firms are not as effective as IRS personnel in charge of collection (Revenue Officers and the Automated Collections Unit).
The IRS is missing out on billions of dollars by not collecting taxes within the time frame permitted by Congress. Generally speaking, the IRS has 10 years to collect a back tax or reduce the tax debt to a judgment. Currently, many cases are sitting in the queue waiting to be assigned. If the cases are not assigned, within the 10 year statute, then the tax debt is forgiven. I have witnessed the IRS missing out on hundreds of thousands of dollars in back taxes. For example, last week, I noticed that the IRS missed assessing a trust fund recovery penalty. If the taxpayer’s business does not pay the FICA portion of payroll taxes, then the IRS can pierce through the business and assess the payroll tax owed against an individual.Continue Reading...
NJ Sales and Use Tax Relief for Tattooing and Cosmetic Makeup Services in Reconstructive Breast Surgery
The New Jersey Assembly Budget Committee approved a bill, A-4526, that provides a sales tax exemption for permanent cosmetic make-up services provided in conjunction with reconstructive breast surgery. The new law, known as “Jen’s Law” became effective on January 17, 2014. The law was named after Jennifer Dubrow Weiss of Vorhees, NJ who had a double mastectomy upon discovery of genes that lead to a high risk of cancer.
Under the old New Jersey tax law, procedures for permanent cosmetic make-up to create the appearance of a pre-mastectomy breast were subject to sales tax. Many insurance companies had excluded sales tax from coverage for cosmetic services which caused large out of pocket costs for the insured.
Assembly woman Caroline Casagrande, who sponsored the bill, expressed the following in a press release:
“Women who are at a high risk for getting breast cancer often take preventative measures to reduce that risk. A mastectomy is an extremely traumatic event for a woman,” “In addition to the physical pain, the psychological effects are often devastating. Reconstructive surgery is often an important step in the healing process. Requiring women to pay out of pocket sales tax for ensuing cosmetic services is an additional burden they should not have to bear.” She further stated that “During the final stages of breast reconstruction surgery, women often decide to use tattoos to create the appearance of a pre-mastectomy breast.”
On March 21, 2014, the NJ Division of Taxation issued a reminder that sellers of tattooing, permanent body art, or permanent cosmetic make-up application services should not charge a sales tax in connection with reconstructive breast surgery if the customer provides a doctor’s prescription to the seller.
If you have been assessed with a sales tax on or after January 17, 2014, you should apply for a tax refund from either the service provider or the Division of Taxation. New Jersey tax law requires that you file your claim for a refund on the Form A-3730 within four years from the date the sales tax was paid.Continue Reading...
The hotly contested severance compensation, tax dispute has been resolved and it’s a victory for the government. The nations’ highest court has spoken: Severance pay is subject to FICA tax.Continue Reading...
On February 12, 2014, the United States District Court granted the United States’ motion for summary judgment which entitled the US to foreclose upon a taxpayer’s properties for back payroll and income taxes.
In US v. DeSerio, a couple owned two properties in Cornville, Arizona. The couple owed outstanding federal employment, unemployment, and income tax liabilities covering multiple tax years from the early 1990s through 2007. In the aggregate the couple owed the IRS over 1 million in back taxes. The IRS utilized the powers authorized in IRC §6321 and §6322 and filed a notice of federal tax lien in favor of the United States. The notice of federal tax lien attached to all of the taxpayers property rights including two Arizona properties owned solely by the taxpayer.Continue Reading...
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.Continue Reading...
Be Careful in the 2013 Tax Season…
A 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.Continue Reading...
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.Continue Reading...