There are common causes to tax problems that I see year after year. With the 2016 tax season and tax year upon us, it is a good time to identify and stop tax issues before they spiral out of control. Below are some of the common tax problems that I see that cause my clients to owe significant back taxes and can lead to a criminal tax investigation.
1) Hire a CPA: There is no such thing as a basic return. Even if you are not self-employed and don’t own a house, a return can be difficult. The tax laws and reporting requirements are complicated when it comes to claiming dependents, earned income tax credits, writing off medical expenditures, claiming charitable deductions, etc. So much can go wrong when preparing your taxes. Although the IRS budget is down, the government is adept at auditing questionable returns with computer algorithms. Generally speaking, the IRS has three years to conduct a tax audit. Typically, returns are picked up in the second and third tax year after filing. By that time, you have probably made the same mistake year after year and now owe several years of back taxes. Hiring a CPA will help avoid making errors on the tax return and curb future mistakes.
When hiring a tax preparer, you should ask about their credentials. Many of my clients think they are hiring a certified public accountant, but, in fact, are hiring someone with little or no experience and no license. My firm defends tax preparer investigations where the preparer does not have a good command of the tax law and makes costly mistakes in preparing their clients returns. At least, an active CPA license would display competence that the preparer has completed their continuing education requirements and is staying abreast of the constantly changing tax laws and reporting requirements.
For those of you who cannot afford a CPA, there are taxpayer clinics available that can be found on the IRS’s website:https://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers
If you needed to have a medical procedure, you would not handle the procedure on your own or ask a friend to help you; rather, you would go to the doctor. The same is true for preparing and filing your taxes. A botched tax return can cause harm to your financial health. Do not be a pennywise and a pound foolish.
2) Stay Compliant with your estimated tax payment requirements: The IRS will not negotiate a tax settlement, known as an offer in compromise or a payment plan if you have not paid the appropriate amount of taxes throughout the year. Additionally, if you are eligible to discharge your taxes in bankruptcy, yes this can be done, then when you get out of bankruptcy you are going to owe more back taxes if you are not timely paying your taxes. Generally speaking, the government requires you pay at least 90% of the taxes for the current year or 100% of the tax shown in the prior year. If you are self employed, then you should be completing a profit and loss statement at least quarterly to determine if you are on track. The failure to pay your estimated taxes can cause a large amount of back taxes being owed both to the IRS and state.
3) Ensure that you’re withholding enough from your paycheck: This is one problem that is easy to avoid. When you start your job, your employer provides you with a document called a Form W-4. Basically, the Form W-4 is an Employees Withholding Allowance Certificate that asks a series of questions to ascertain the total amount of exemptions. Many times, people do not complete the form properly. They take too many exemptions or experience lifestyle changes throughout their employment. If this is the case, then you must revise the Form W-4. If you owe money, basically more than $1,000, on your 2015 taxes, then you should tweak your withholding exemptions especially if you could not pay the prior years’ taxes. The failure to do so will result in owing back taxes.
4) If you won a lawsuit settlement, then seek a tax attorney: The tax laws are incredibly complex when analyzing legal settlements. Believe it or not most settlements are taxable. There is usually a boiler plate provision in most lawsuit settlements that states the “proceeds will be subject to Form 1099 reporting and to seek advice from a tax attorney.” Most of the time, my clients inform me that their attorney stated the settlement is not taxable. When filing their return, they do not report the proceeds. Because the proceeds were reported to the government by way of the Form 1099, the client receives an audit letter from the IRS. My advice is to hire an income tax attorney if you won a lawsuit settlement. If you cannot afford an attorney, then at the very least, check out IRS Publication 4345 (https://www.irs.gov/pub/irs-pdf/p4345.pdf) before filing your taxes.
5) Use a Payroll Company: I think individuals and businesses do not understand the risk they face both to the survival of their business and freedom. When you have a payroll tax problem, the IRS can pierce through your corporation and assess the payroll taxes to you individually. To demonstrate the seriousness of a payroll tax problem, the civil statute (IRC 6672) and criminal statute (IRC 7202) for the failure to pay payroll taxes is virtually identical. That is very scary. A payroll tax company is inexpensive and can help you with adequately depositing and filing your payroll tax returns. Filing and taking care of your own payroll is cavalier.
6) File your tax returns timely to avoid onerous penalties and criminal exposure: While it is true the IRS will take a longer time to catch up with the non-filer, you are losing refunds and costing yourself so much money by not filing. Generally speaking, you have three years from the due date of a tax return plus extensions to claim a refund. Many of my clients have forfeited their refund to the federal government by failing to file a tax return timely.
If you owe money when filing your taxes, then you will be assessed with an estimated tax penalty, failure to pay penalty, failure to file penalty, and statutory interest. When you tack on all of the penalties and interest, the amount can run as high as 50% of the taxes owed; however, if you file timely, you can shave off about 25% of the penalties. Generally speaking, the failure to file penalty runs at .5% per month the return is late up to 25%. By filing timely you can avoid this penalty plus the interest.
7) Do not liquidate your qualified retirement plan: This one is a killer especially if you are under the age of 59 ½. The great thing about a qualified retirement plan such as a 401k, 403b, 457(b), traditional IRA, SEP, etc. is the deferral of taxes on income. When many of my clients face a financial hardship, they tap into their retirements without withholding for taxes. To make matters worse, my clients that are under 59 ½ get hit with a 10% early withdrawal penalty on top of the income tax owed. The best move is to borrow against the plan, if possible. There are some exceptions to the 10% tax depending on the type of plan and the usage of funds. Before tapping into a retirement plan, you should speak with a tax attorney.
8) Because your money is offshore you think that you don’t have to pay taxes: All US Citizens are taxed on worldwide income. The definition of a US Citizen is broad and captures individuals with green cards and people living in the US illegally. A US Citizen is taxed on all worldwide income. Additionally, you may need to file annual reports to report foreign assets such as FinCen Form 114 (known as an FBAR), Form 8938, Form 5471, Form, 5472, Form 3520-A, etc. If you have an obligation, but fail to file the aforementioned forms, you can be assessed penalties ranging from $10,000 per each violation to criminal prosecution. If you own foreign assets, you should hire a competent preparer or tax attorney with international experience.
9) Don’t fight the IRS alone. If you are getting audited, owe back taxes, are under criminal investigation, have unreported offshore accounts, then you should hire a tax attorney. Yes, I am biased here, but here is why you should hire a tax attorney. The IRS and your interests are adverse. Therefore, the IRS is not looking out for your best interests.
The IRS is not in a position to offer legal advice and many times is incorrect. Accordingly, if a tax motivated bankruptcy is an option, then the IRS cannot offer you legal advice to file bankruptcy. Often times, the IRS does not know the law and misstates information. I do not believe the misinformation is intentional. Contrary to what you hear in the news, most people that work at the IRS are patriots; however, the laws are voluminous and complex.
Many letters that the IRS disseminates have procedural rights associated with them. By ignoring letters or not responding adequately, you could be missing out on opportunities to challenge your tax dispute. Having a tax attorney copied in on all correspondence can ensure that you adequately exercise your procedural rights.
Finally, you do not want to speak with the IRS especially if you are being audited, have failed to file a return, neglected to pay your payroll taxes, have not reported offshore accounts, owe significant back taxes, failed to report income, or have overstated your deductions. The IRS is adept at getting taxpayers to talk. Remember, the IRS is not your friend and, at the end of the day, they are doing one job: to enforce the laws of the tax code which you may not have followed properly.
You should discuss with a tax attorney whether or not you are on pace with your compliance requirements or are making any of the above mistakes while the 2016 is young. The Law Offices of Todd S. Unger, Esq. LLC resolves tax matters exclusively. Tax Attorney, Todd Unger resolves simple to the most complex tax disputes with the IRS and state. Call a tax lawyer today (877) 544-4743.