Articles Posted in Tax Help

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

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If you disagree with how much the IRS says you owe as a result of an tax audit, there is a process to correct the problem. The procedure is known as an audit reconsideration and is allowed when:

  1. You or your representative did not appear at the audit to provide your information that would support the items on your income tax return. This could be the result of you moving, and you did not get notice that an income tax audit was occurring. This is also the case, if you simply decided that you would not attend the audit (for instance, you were scared or intimidated)
  2. You have additional documentation that was not available when the “original” audit was conducted. This often happens since gathering the items needed for an audit (bank records, receipts, etc), takes time to gather and organize, and perhaps that was not done in time for the audit meeting

With the recent Equifax Credit Bureau identity theft event, and many prior episodes of personal identifying information being stolen (Yahoo, etc) that appears to happening all the time now, I thought an article would be helpful on how your tax returns are affected by such events, and concrete steps you can take to protect yourself (and your parents if they are elderly).

From my experience as a CPA and Tax Attorney, if you think you are completely protected from identity theft issues by hiring a credit monitoring company, you are partially incorrect. The value of these companies is that they alert you if someone has stolen your identity and used (or try to use) this information to obtain credit. The problem is that often that the notification of this is after the crime has occurred, and you still have to deal with the clean-up. You may be better off pulling your own credit report every four months (from the three free ones you get every year) and doing this work along with a credit monitoring company just to make sure its done correctly. This is also a good way to make sure that your credit information is generally correct, and you can dispute any incorrect items through the credit companies.

Tax-HelpFrom a tax perspective, the “bad guys” are using your social security number and other identifying information  to get tax refunds. They do this by filing false income tax returns with your information, and typically having the refund directly deposited into a foreign bank account they control. When this happens (per the IRS 14,000 times it was done in 2016), you typically only find out when you file your legitimate income tax return, and are told by the IRS that a tax return has already been filed, and a refund already issued. The IRS will not go after you for the false refund, but this creates a huge mess that you will be dealing with for 1-2 years. Well, the question is, how do you avoid such a mess? The IRS has a program where you can request a PIN that they would send you, and you would use when you file your income tax returns. The “bad guys” would not have this PIN, so they would be blocked from filing a false tax return. As with most IRS related matters it is not easy to get a PIN (hopefully this will change someday). To obtain a PIN, you need to file Form 14039 (Identity theft Affidavit) with the IRS, and request one. When you file this form, the IRS will also mark your account as having a higher risk of fraud, and keep an eye on it for you. In addition, you should also obtain and examine your IRS tax account transcripts and review the activity for filed tax returns and refunds. I would take this step every six months. Therefore, with the PIN filing method, and reviewing your account at the IRS twice a year, you should feel confident that you have this issue under control with them.

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As residents throughout New York State prepare to gather with family and friends next week for the Thanksgiving holiday, Jan. 1 and 2016 are just around the corner. Also not far off, or far enough for most people’s liking, is the dreaded April 15 tax filing deadline. For small business owners, there are important steps that should be taken today regarding end-of-the-year tax planning that can make the upcoming tax season much less stressful.

For any business owner, having an organized and partially automated process for keeping track of financial records is a must. Today’s marketplace is flooded with accounting and tax-preparation online software programs that make it much easier to organize and keep track of a business-related expenses, income and deductions. For a small business owner, not only is it important to use one of these programs, but it’s also wise to input related financial data on a regular and consistent basis.

In addition to ensuring that one’s financial records are organized and up-to-date, business owners are also advised to, based on a business’ financial situation, plan and save for expected tax liabilities. Doing so will ensure that a business is able to meet its tax obligations and can prevent a business from incurring fines and penalties imposed by the Internal Revenue Service.

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While there’s no way for an individual to completely avoid paying taxes, there are ways to cut and reduce the amount of taxes an individual owes. By being proactive and engaging in tax planning, an individual can often reduce his or her tax liabilities substantially. It’s important to note, however, that there are creative strategies that can be employed to reduce the amount of taxes one pays and then there are those that are questionable or outright illegal.

Simply failing to file and/or pay one’s taxes is never a good idea. Not only is an individual likely to accrue costly fees and penalties, but he or she may also face criminal charges related to tax evasion. Additionally, it’s never a good idea to file or submit tax-related documents that contain false or doctored figures. Again, an individual who under- reports the amount of income or overestimates deductions will incur costly fines and penalties and may face charges of tax fraud.

In cases where an individual learns that he or she is being investigated or audited by the Internal Revenue Service, it’s wise to contact an attorney. It’s especially important to retain a strong legal advocate and representative if an individual is concerned that an IRS audit or investigation may result in the discovery of questionable or illegal tax-avoidance activities.

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For many who reside in the state of New York, one of their biggest fears is to be audited by the Internal Revenue Service. People who are concerned about this occurring probably believe that three years after a return is filed, they are in the clear. While it is true the statute of limitations for tax returns is generally three years, under certain circumstances it is possible that period could extend to six years. In some cases it could go even longer.

The audit period could extend from three to six years in situations where in completing the tax return, the tax player substantially understated his or her income. But just what does that mean? This situation arises when the taxpayer fails to account for more than a quarter of his or her income. The statute of limitations will start to run on either the date the filing is due or the date in which it is filed—whichever is later.

The IRS could also extend the audit period to six years in situations where the taxpayer has omitted more than $5,000 in foreign income. This might arise in situations where the taxpayer has accrued this income as a result of interest on an account that is overseas.

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