Articles Posted in Tax Help

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If you owe the IRS back unpaid taxes, chances are that you are feeling scared and powerless. But the good news is that even if you are partially in the wrong, you still have rights thanks to The IRS Restructuring and Reform Bill of 1998 and the more recently adopted Taxpayer Bill of Rights.

Under these policies, the IRS has to fully communicate with taxpayers and afford them “due process” rights before pulling one of the many levers it has to make a taxpayer’s life miserable. Understanding your rights can make all of the difference when dealing with the IRS and back taxes.

Your right to be informed. The IRS has a duty to explain exactly what you need to do in order to comply with the tax laws. You also have a right to have all decisions made about your tax account explained to you in terms that you understand. However, you can’t just ignore the IRS’s attempts to inform you.

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One of the most common reasons why individuals fail to file Form 1040, the U.S. Individual Income Tax Return, that should be filed annually, is because they know they will owe the Internal Revenue Service, but are unable to pay the liability.

Filing returns that are past due are not any different than filing for the current tax year. If you choose to not file your past due returns or do not contact the IRS, the IRS will start to take action. Deliberate non-compliance can lead to additional tax penalties and potentially criminal prosecution.

Taxpayers should file every year, even if a full payment cannot be made. Taxpayers who are not able to pay the tax liability due on the bill are encouraged to pay as much as possible. This will help limit the amount of interest and penalties owed. Taxpayers should file all unfiled returns that are past due to avoid additional penalties and interest. The IRS can impose penalties for filing returns late, paying tax liabilities late, or both. The IRS will charge interest on any unpaid tax.

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Denial, avoidance and procrastination are all activities in which an individual may engage when faced with something that he or she would rather not deal with or do. However, such coping tactics are almost always sure to backfire and make an unpleasant or difficult situation even worse. This is especially true in cases where an individual receives communication from the Internal Revenue Service.

Anyone who opens their mailbox and sees a letter from the IRS is likely to panic. Whether an individual chooses to throw the sealed envelope away or simply disregard its message, ignoring the IRS can end up costing an individual hundreds to thousands of dollars in fines and, in some cases, a whole lot more.

Annually, the IRS claims to send “millions of notices and letters to taxpayers for a variety of reasons,” some of which may be minor or even positive in nature. Even in cases where an individual knows that he or she failed to file or pay taxes or expects bad news, it’s important toopen an IRS letter or notice as soon as possible and to contact the agency with any questions. This is especially true in cases where an individual believes that the IRS erred and an individual plans to dispute the issue in question.

It’s a somewhat painful road to take, but people manage to deal with their own taxes issues when they are under $10,000 and do not need a tax attorney to offer tax help services to them. And so can you. That’s what a person who called me and explained they owed about ~$8,700 in taxes. I gave them a frame work of how he could solve his problem without me  since the tax debt was small. He worked out an installment plan with the IRS and paid his debt off in about a year. The interest rate is compounded (interest on the accumulated unpaid interest and also on the original principal) that will add up, and tax penalties for not paying the taxes on time, so its advisable to pay off the debt quickly. The steps are:

a10-300x300a) Call IRS or state as soon as you realize you can’t repay your tax obligation.

If you filed your tax return, and determined a tax liability, deal with it immediately. Don’t wait. It’s going to make things worse if you don’t. Besides your original tax debt you may end up owning loads of back taxes, tax levies and penalties. Those add up pretty fast! Get ahead of the problem as quickly as possible. If you owe a lot, get tax help from a qualified professional.

Every month I am contacted by a new client who has a tax issue from the 1990’s. You may wonder if it is even possible to have a tax issue going back that far in time. The answer is yes, I hate to say since if you did not a tax return, the IRS will not start the statute of limitations on that year, and its still an “open year” where they can assess taxes against you. The other scenario of when old tax debts are still relevant is where the State, such as New York, has 20 years to collect the tax. Therefore, they are chasing people for tax debts for these years since the twenty years may not have expired yet (since there is almost always a delay after the end of a tax year and when the tax return is audited) so this tax debt is still on the books.

Therefore, it is important to maintain good records, and to maintain them forever. This may seem harsh and a painful experience, but its better to keep good tax records than to pay a tax bill that is inflated greatly with interest if you made a mistake and did not file a tax return when you thought it was filed (which is easy to happen with e-filed tax returns) and need your tax records to file a new tax return.

a9-300x150The Lucky number is twenty three years. This is the number of years you should keep your tax records, since you are covered in case of some mistake, and need to prove what happened. This is not as bad as it seems since other permanent records (deeds, Wills) need to be kept forever. Often, it is less paperwork than you think if you get rid of the extra paperwork and envelopes that come along with the tax records. I am sure your still in shock. 26 years is not a short period of time, but it worth it when needed to prove that you paid the correct taxes.

As you may have noticed, almost everything is being done online now.  From shopping to researching, communicating to anyone in the world – everything is going through the world wide web.  Now, even filing your taxes can also be done online through the E-file system!

We all know that the main idea behind doing things online or electronically is the accessibility and the convenience it brings to us. However, it also brings security risks if not done properly. If we are to apply this thought with filing income taxes, it means critical information is being made potentially public so we need to take steps to make sure the process is secure.  E-file systems brings convenience as the entire process is faster than paper filing which means you will save precious time. When E-file returns are processed with secure services (like tax professional use), it can also provide that security you need.  It saves you time with the entire process including obtaining the refund (if applicable) faster compared to manually paper filing.  Since you will be entering the information online, it means less errors since the e-file system checks your information with its database.  In terms of security, although some might feel that doing processes online is unsecure, for tax filing it is the other way around if done correctly.  More risk in terms of security is involved with the manual process as the papers or documents you mail the IRS can get lost in the mail and your personal information can be seen by anyone.

a9-300x300Another benefit of E-file is that you get to know if IRS the has received the income tax return as you will get a confirmation of both receipt of filing and the start of processing.  If IRS has not accepted the return you filed, then you will be notified within 24 hours with instructions on how to correct the return  so you can redo and refile your return. Last but not the least benefit to E-file is that it is environmentally-friendly – since it avoids all the paper involved with a paper filed return.

From my experience, the IRS does make a strong effort to notify taxpayers when issues exist with their tax account. Most of the IRS notices are standardized forms that can range from you having unreported income to having a refund on your tax return that is different than what your tax return states. The IRS is very good about using the mail to notify taxpayers, so do not be fooled if a person calls you on the phone and acts like they are from the IRS. This is likley a person just trying to impersonate the IRS to steal your money. However, if you receive such a call, remain polite but do not give out any personal information. Since the IRS uses mail and a primary method to reach taxpayers, it is important to keep your address with them current.

a1-300x300Your response to the IRS issue contained in the notice needs to be tailored to the issues involved. Often, I find that you have to clear and concise when responding to IRS notices to make any progress in resolving the issue. If the notice relates to an unfiled tax return, the IRS notice will ask for a copy of the tax return filed, or why it was not filed (this could be because you had to  little income to cause a filing requirement). If you have many years of unfiled tax returns, its a good idea to hire a tax attorney to help file the tax returns and reduce the tax penalties.

If you ignore this request related to unfiled tax returns, the IRS will prepare a substitute tax return, using information that they receive from third parties (banks, employer W2 forms, etc.) to prepare the tax return for you. In some ways that may seem ideal, but this return the IRS will not allow a married filing jointly form of filing, or take into account any itemized deductions. Therefore, your tax bill will be higher than if you prepared and filed your own tax return.

If a taxpayer does not file an income tax return (IRS calls them non-filers), and the IRS deems that a tax return is due to be filed, the IRS will use the information it receives from third parties (employers, brokerage firms, mortgage lenders) and filed W/2 forms, Form 1099, Form 1098, and other similar income reporting forms, to prepare the missing tax return. The tax return is prepared by the substitute return group at the IRS, which is connected to the audit group. The tax return is called by the IRS a Substitute For Return (SFR).

tax-planning-300x263When the IRS prepares your tax return, they use the highest tax rate and do not include any tax credits you are entitled to. Therefore, the tax computed is higher than what it would have been if you prepared the tax return in most cases. They also treat married people as married filing separately, which also causes the tax rates to increase. They also exclude dependents, which causes a higher tax bill. 

When you don’t file an income tax return, there is no statute of limitations of when you or the IRS can file a tax return, or audit you. The typical rule is that the IRS can audit you for the last three years once you file a tax return, unless they find your income was materially under reported on a filed tax return and they can go back for the last six years. The IRS however, under the Internal Revenue Manual sections 412.1.3, says in general they will only prepare substitute income tax returns for the last six years. The six-year rule also agrees with the IRS policy for non-criminal cases of only looking for taxpayers to file for the last six years if they did not file for a longer period of time.

As we discussed last in the last post, it is important to determine whether you are non-resident alien or resident alien. One major tax issue we discussed is about the substantial test. This test is used to determine whether you are resident or non-resident alien. Along with the basics, today we discuss situations that some individuals can exempt the days they are actually present in the United States.

In general, there are several categories of individuals who can exempt the days of presence in the United States. For example, days in transit, or days related to regular commuting to work from Canada or Mexico are not counted as presence for tax purposes. Individuals also don’t count days as crew members of a foreign vessel. In addition, students, trainees, foreign government related individuals, and professional athletes, are exempt within certain parameters. a7-300x300

The Form 8843 is designed to serve this purpose of determining if a person is exempt.  If you are an alien individual (other than a foreign government-related individual), you need to file Form 8843 to explain the rationale of your claim that you can exclude days of US presence in the United States as exempt individuals. In addition, this form can be used for people who are unable to leave the United States because of a medical condition or medical problem. This form is required to be attached to your Form 1040NR or Form 1040NR-EZ (note these are the non-resident income tax forms).

The United States is known as an inclusive country. People from all over the world study, work and live in this country. As an international student or foreign worker, you may ask the question, what is my US tax status when I have income. Below I will give you a starting point when you ask this question or struggle with this issue.

The first step in resolving this tax problem is to understand if you are a resident alien or a non-resident alien. As for tax purposes, an alien refers to an individual who is not a U.S. citizen. Alien has two subcategories, resident alien and non-resident alien. In most cases, resident aliens are taxed on all their income, regardless where the income comes from. Nonresident aliens are taxed only on income sources from within the United States, and on most income which is from a trade or business in the United States. Often, foreign people may also subject to certain tax treaties as well that can override the regular tax rules.

a6-300x300Normally, you are nonresident alien unless you pass either green card test or substantial presence test for the calendar year. The green card test means you meet the test as a lawful permanent resident of the United States. You are regarded as a lawful resident if you are given privilege to reside in the United States permanently as an immigrant. Often, governmental agency (i.e. USCIS) will issue you a registration card when you have this status. This status continues unless the resident status is taken away from you (administratively or judicially).  A green card holder pays taxes, and is subject to the same tax rules, as a US citizen