The Senate recently approved nearly $80 billion in IRS funding, with $45.6 billion specifically for enforcement. This new funding is expected to result in more tax audits. There is no sure way to avoid an IRS audit. However, there are some things that the IRS has generally viewed as “red flags.” These could increase the chances of an audit for taxpayers. Here are our top five tips to avoid an IRS audit.
File Your Tax Return
Currently, you must file a tax return if your gross income meets certain thresholds based on your age and filing status. If you meet the minimum income requirement and you do not file a federal income tax return, or file late. In 2024, you can be penalized 5% of your unpaid tax liability for each month your return is late. However, the penalty will not exceed 25% for your total tax balance. Additionally, you will incur a 0.5% per month for failure to pay penalty, up to 25%.
While both penalties have a cap, interest will continue to accrue until the balance is paid off. It is compounded daily at the federal short-term rate, plus an additional 3% for individuals. In 2024, the underpayment penalty is 8% for individual taxpayers. In addition, the IRS may prepare a substitute for return (SFR) on your behalf. They do this by using your W2 and 1099 forms for that tax year and even your bank account records. The SFR will likely result in a larger tax bill, since tax credits and deductions will not be claimed. In short, choosing to not file a return each year will not excuse you from paying taxes.
Report All Income
Underreporting income is one of the most common reasons taxpayers get audited. Remember, the IRS receives copies of all your W-2 and 1099 forms for the year. If incomes do not match up, they will investigate your tax situation. The IRS could then give you the IRS negligence penalty. This can cost you an additional 20% of the underpaid amount in penalties. That said, it’s always best to report all earnings the first time around.
Use Common Sense with Business Expenses
The IRS reminds taxpayers that business expenses should be “ordinary and necessary” to produce income for your specific trade or business. In other words, items like office equipment and advertising costs are fine, but you should not try to deduct your daily lunch expenses. You should always avoid comingling personal and business expenses.
Keep Good Records
Keeping good records that support your reported income is critical. This can include invoices, canceled checks, mileage logs, and other documents. The IRS recommends keeping records for three years after filing. Bookkeeping can be a tedious process, so it may be best to hire a professional if you are not up to the task.
Know How to Report Losses
The IRS will likely audit individuals and businesses that report multiple or consecutive losses. If your business claims a loss for several years, the IRS may classify it as a hobby instead of a for-profit business. Once this happens, you will not be allowed to claim a loss related to the business and you will have to prove that your “business” has an acceptable motive to earn a profit.
Tax Relief for Taxpayers
Odds of an audit increase when the IRS notices any red flags. The audit process can be tedious and taxing. Failing an audit can result in a huge, unforeseen tax bill. It’s best to seek assistance from experts who can help you avoid an IRS audit. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Tax settlements are a crucial aspect of managing one’s financial responsibilities. They provide a mechanism for individuals and businesses to resolve outstanding tax issues with the IRS. This article aims to shed light on the tax settlement process, including its various options, implications, and considerations.
Understanding Tax Settlements
Tax settlements, also known as tax resolutions, refer to the process of reaching an agreement with the IRS to resolve outstanding tax liabilities. This can involve negotiating the total amount owed, the payment timeline, or even the reduction of penalties and interest. There are several types of tax settlements.
Offer in Compromise (OIC)
An Offer in Compromise (OIC) is a program provided by the IRS. It allows taxpayers to settle their tax liability for less than the full amount owed. It’s like making a deal with the government to pay a reduced sum to satisfy your tax liability. It’s quite rare for a taxpayer to receive an OIC because of the strict eligibility requirements.
You must show that paying the full amount of your tax liability would cause you significant financial hardship. This could be because of job loss, medical expenses, or other challenging circumstances. To obtain an OIC, you’d apply to the IRS explaining your financial situation and why you think you should pay less. It’s a bit like making your case. In your application, you propose an amount that you can realistically pay. This is the reduced sum you’re offering to settle your tax liability. If your offer is accepted, you agree with the IRS to pay the reduced amount. Once you fulfill the terms of the agreement, your tax debt is considered settled.
Installment Agreements
Installment Agreements are arrangements that allow taxpayers to pay their tax balance over time through a series of scheduled payments. It’s like setting up a monthly payment plan with the tax authorities, such as the IRS.
First, you figure out how much you owe in taxes, including any penalties and interest. If you can’t pay the full amount upfront, you can request an Installment Agreement. This is like asking the IRS if you can pay in smaller, more manageable amounts over time. The IRS reviews your request and may negotiate the terms of the agreement. This includes determining the amount of each monthly payment and the duration of the agreement. Once the terms are agreed upon, you make regular monthly payments until the total tax balance is paid off.
Currently Not Collectible (CNC)
Currently Not Collectible (CNC) is a status that the IRS grants to taxpayers who are facing significant financial hardship and are unable to pay their tax liability at the current time. In simpler terms, it’s a temporary pause on the collection of tax payments. To qualify for CNC status, you need to demonstrate that paying your tax debt would cause you substantial financial hardship. This could be due to factors like unemployment, serious illness, or other challenging circumstances.
You apply to the IRS, providing detailed information about your financial situation. This includes income, expenses, assets, and liabilities. The IRS reviews your application and assesses whether your financial situation qualifies for Currently Not Collectible status. They may consider factors such as your income, necessary living expenses, and the value of your assets. If approved, the IRS temporarily halts its collection efforts. This means they won’t take certain actions, such as levying your bank account or garnishing your wages, for a specified period. However, the IRS may periodically reassess your financial situation. If your circumstances improve, they may lift the CNC status and resume collection efforts.
Penalty Abatement
IRS penalty abatement allows taxpayers to request the removal or reduction of certain penalties imposed by the IRS for failing to meet tax obligations. In simpler terms, it’s like asking the IRS for forgiveness on specific penalties associated with your tax liability. The IRS usually forgives first-time offenders. If you’re requesting another abatement, you need to provide valid reasons for not meeting your tax obligations on time. These can include circumstances beyond your control, such as illness, natural disasters, or other factors that prevented you from fulfilling your tax responsibilities.
In your request, you explain the reasons for your failure to comply with tax deadlines and provide supporting documentation. The IRS reviews your application and assesses whether your reasons for requesting penalty abatement are valid. They consider factors like the nature of your circumstances, the impact on your ability to meet tax obligations, and the documentation you provide. If the IRS approves your request, they may either remove the penalties entirely or reduce the amount owed. This can result in a significant reduction in the overall tax balance.
Benefits of a Tax Settlement
A tax settlement can offer several benefits for taxpayers facing financial difficulties. One of the primary benefits is the potential to settle your tax liability for less than the full amount owed. By successfully negotiating a tax settlement, you may avoid more severe collection actions by the IRS, such as levies, seizures, or wage garnishments. This can help protect your assets and income. A successful IRS tax settlement can be a fresh start for taxpayers who have struggled with tax liability. It provides an opportunity to resolve past issues and move forward with a clean slate.
Tax Help for Those Seeking a Tax Settlement
Navigating tax settlements requires a strategic approach, open communication, and a clear understanding of available options. Whether opting for an Offer in Compromise, Installment Agreement, or another settlement option, seeking professional advice and adhering to the established process is key to successfully resolving tax liabilities. Professionals can provide guidance, negotiate on your behalf, and ensure compliance with tax laws. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
In a significant development, the IRS has announced the resumption of collections in 2024. This marks a crucial phase in the aftermath of the global economic challenges posed by the COVID-19 pandemic. This decision has implications for taxpayers across the United States, as the IRS seeks to address the mounting financial pressures faced by the government. However, the IRS is providing penalty relief to nearly 5 million taxpayers. In this article, we’ll discuss the details of IRS collections in 2024 and tax relief options available for those with tough tax situations.
Background
The temporary halt on IRS collections was initiated in February 2022 as a response to the economic downturn caused by the pandemic. It provided relief to countless individuals and businesses struggling to meet their tax obligations. The suspension aimed to alleviate immediate financial burdens and stimulate economic recovery. Although taxpayers should note that the failure-to-pay penalty continues to accrue during nonpayment. However, as the nation slowly recovers, the IRS has deemed it necessary to reinstate collections to ensure the sustained functioning of essential government services.
Key Changes in IRS Collections
The IRS will send out collection notices again beginning in January 2024. The IRS is focusing on taxpayers with taxes bills for tax years before 2022. They will also send notices to businesses, tax-exempt organizations, trusts, and estates with tax bills from before 2023. The specific IRS notice being sent out will be IRS LT38, which is a notice of resumption. Taxpayers who receive this letter should contact the IRS about payments or other options available to them. If action is not taken, the next notice they receive will involve more serious action leading to IRS collections.
As collections resume, the IRS will also ramp up its enforcement efforts to address outstanding tax debts. This may involve increased audits, investigations, and legal actions against non-compliant taxpayers. It is crucial for individuals and businesses to ensure compliance with tax obligations to avoid potential legal consequences.
IRS Penalty Relief
To ease the new collections process, the IRS is offering penalty relief to nearly 5 million taxpayers, including businesses and tax-exempt organizations. The IRS did not send these taxpayers automated notices during the pandemic. The relief will come in the form of waivers for failure-to-pay penalties, adding up to $1 billion. Eligible taxpayers will automatically receive penalty abatement in their online accounts with no further action needed. If the taxpayer already paid their penalties for tax years 2020 and 2021, they would receive a refund. Alternatively, the IRS may credit the payment towards another tax bill. Refunds and credits will be sent out beginning in January 2024. More information can be found in IRS Notice 2024-7 on their website.
To be eligible for penalty relief, taxpayers must have a tax balance of less than $100,000 for each return and each entity. They also must have received an initial balance due notice between February 5, 2022, and December 7, 2023. The IRS will resume the failure-to-pay penalty for eligible taxpayers on April 1, 2024.
Preparing for IRS Collections Resumption
As the IRS gears up to resume collections, taxpayers are encouraged to take proactive steps to manage their tax liabilities effectively:
Review Financial Situation: Assess your current financial situation and evaluate your ability to meet tax obligations. Understanding your financial standing will help you make informed decisions and explore available options.
Explore Payment Plans: Investigate installment plans and other payment options offered by the IRS. Engage with the agency to negotiate a plan that aligns with your financial capacity.
Seek Professional Guidance: Consult with tax professionals or financial advisors to navigate the complexities of tax obligations. They can provide valuable insights into available options and help you make informed decisions.
Stay Informed: Stay updated on IRS communications and guidelines regarding the resumption of collections. The IRS website and official announcements will be valuable sources of information during this period.
More Relief Options for Taxpayers Who Owe
The IRS resuming collections in 2024 marks a pivotal moment for taxpayers in the United States. While it signifies a return to normalcy for government revenue collection, the penalty relief demonstrates a commitment to supporting individuals and businesses still recovering from the economic impact of the pandemic. By staying informed and proactively managing their tax obligations, taxpayers can navigate the challenges posed by the resumption of collections and work towards financial stability. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses IRS online accounts, including why it’s beneficial for taxpayers to have them.
Having an IRS online account can offer several benefits to individuals and businesses. Here are some of the advantages of creating and using an IRS online account:
Convenience: Online accounts provide easy and convenient access to a wide range of IRS services, including filing tax returns, checking the status of tax refunds, making payments, and managing your tax information. You can access these services from the comfort of your own home or office, eliminating the need to call the IRS.
24/7 Accessibility: You can access your IRS online account at any time, day or night. This is particularly useful for people with busy schedules, those who prefer to handle their taxes outside of regular business hours, or individuals in different time zones.
Electronic Payment Options: You can make tax payments, such as estimated tax payments, electronically through your online account, including the option to pay by credit or debit card.
Online Account Management: Your online account allows you to update your personal information, such as your address or direct deposit details. It also provides access to your tax transcripts and IRS notices.
Tax Alerts and Notifications: The IRS can send important notifications and alerts through your online account, helping you stay informed about tax deadlines, changes in your tax status, or issues that require your attention.
Creating an IRS online account can help make your experience with taxes and the IRS much easier.
Tune in next Friday for another episode of “Ask Phil.” Next week’s topic: gift taxes!
Life can be challenging when facing both financial difficulties and health issues. Many taxpayers ask themselves, “Can I get disability if I owe back taxes?” For individuals experiencing a debilitating condition while also owing back taxes, the situation can seem overwhelming. However, it’s essential to know that there are options available to help ease the burden. In this article, we will explore the process of obtaining disability benefits while managing tax debt, providing a comprehensive guide to assist those in need.
Understanding Disability Benefits
Disability benefits are designed to provide financial support to individuals who are unable to work due to a severe medical condition. These benefits can be crucial for maintaining a basic standard of living and accessing medical care. Two primary types of disability benefits are commonly available: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI).
Social Security Disability Insurance (SSDI)
SSDI is a federally funded program that provides financial assistance to individuals who have worked and contributed to Social Security but can no longer maintain gainful employment due to a disability. To qualify for SSDI, an applicant must meet specific criteria set by the Social Security Administration (SSA):
You are under 66 years old
You are receiving treatment for medical condition
You cannot work because of your medical condition
You are not currently working, or you work part-time with a low pay rate
You are not expected to recover or work within one year
You worked and paid taxes for several years before your medical condition
Supplemental Security Income (SSI)
SSI is another federal program that provides assistance to disabled individuals with limited income and resources, regardless of their work history. Eligibility for SSI depends on the applicant’s financial need, age, disability status, and citizenship or residency status. To qualify, you must:
Be under 66 years old
Be receiving treatment for medical condition
Not be able to work because of your medical condition
Not be currently working, or you work part-time with a low pay rate
Not be expected to recover or work within one year
Have less than $2,000 in assets (single filers) or less than $3,000 (married couples), and you or your spouse must not have any other significant income
Applying for Disability Benefits with Tax Debt
While owing back taxes can complicate your financial situation, it generally does not disqualify you from receiving disability benefits. However, it’s essential to understand the potential impact on your benefits.
SSDI and Tax Debt
If you have unpaid tax debt that includes Social Security taxes, you may not be eligible for SSDI. This is because in order to qualify for SSDI, you need to have paid Social Security taxes for at least five of the last ten years. If you haven’t paid enough tax, you may not qualify for these benefits, even if your medical condition is serious. If you already receive SSDI, the IRS can garnish your pay, including up to 15% of your SSDI benefits, to pay off your tax debt.
SSI and Tax Debt
You can still apply for SSI benefits even if you owe back taxes. As of October 2015, the IRS no longer levies SSI benefits.
Tax Help for Social Security Recipients
Navigating disability benefits while owing back taxes can be a complex journey. However, it’s crucial to understand that these challenges are not insurmountable. By staying informed about your rights, seeking professional advice, and addressing tax debt proactively, you can improve your financial situation and focus on your health and well-being. Remember, help is available, and with the right approach, you can overcome these obstacles and find stability in challenging times. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
