They say that death and taxes are the only two certainties in life. However, taxes are only collectible for so long. The IRS Collection Statute of Limitations is a critical aspect of tax law that often confuses taxpayers and professionals alike. This statute dictates the timeframe within which the IRS can collect unpaid taxes. While it offers protection to taxpayers, navigating its complexities requires a nuanced understanding. Let’s delve into what the IRS Collection Statute of Limitations entails and its implications for taxpayers.
What is the IRS Collection Statute of Limitations?
The IRS Collection Statute of Limitations is outlined in Section 6502 of the Internal Revenue Code. It establishes the timeframe during which the IRS can pursue the collection of unpaid taxes. Generally, the statute allows the IRS ten years from the date of assessment to collect the owed taxes.
How Long is the IRS Collection Statute of Limitations?
The IRS has a 10-year statute of limitations for tax collections, beginning when the IRS first assesses your tax liabilities. In other words, the IRS cannot collect tax debt that is older than 10 years. You should keep in mind that the first IRS notice you receive is not necessarily when your liabilities are assessed. Specifically, there is a Collection Statute Expiration Date (CSED), which marks the last day the IRS can collect tax debt. After the CSED, the IRS cannot legally collect your tax debt, which means that your tax debt essentially disappears.
If you want to find your CSED, you can count 10 years from the date on your Notice of Federal Tax Lien. You can also request a transcript of your IRS account to find the date your liability was assessed and filed. However, keep in mind that there are several actions that can delay the statute of limitations, thus pushing out your CSED.
Which Actions Extend a CSED?
There are several qualifying events that can extend a CSED, including the following.
Filing for Bankruptcy
When an individual files for bankruptcy, the Collection Statute of Limitations is typically tolled, meaning it is paused or suspended for the duration of the bankruptcy proceedings. The IRS will pause the statute of limitations while your bankruptcy filing is pending, starting from the filing date until the court decides. The CSED will remain suspended for an additional six months.
Living Abroad
Living abroad can also have implications for the Collection Statute Expiration Date. The IRS will pause the statute of limitations while you live abroad for six consecutive months or longer. The CSED could remain suspended for six months after you return to the United States.
Requesting an IRS Installment Agreement
The IRS will pause the statute of limitations while it reviews your installment agreement application. If the agreement is rejected, the CSED will remain suspended for 30 more days. This is also the case if your installment agreement defaults. If you appeal your rejection, the CSED will remain suspended until a decision is final.
Submitting an Offer in Compromise
When you submit an Offer in Compromise (OIC) to the IRS, the CSED is typically tolled or suspended for the duration of the consideration period, which can last several months or even longer. Once a decision is made, the suspension ends. If your offer is rejected, your CSED will remain suspended for 30 more days.
Requesting Innocent Spouse Relief
When a taxpayer requests Innocent Spouse Relief, the CSED is typically tolled or suspended for the duration of the IRS’s consideration of the innocent spouse claim. However, the suspension will only apply to the spouse applying for relief. The IRS will extend the CSED until you either receive a waiver or the 90-day petition expires, whichever happens first. If you appeal the tax court decision, the statute of limitations will be suspended until a final decision is made. In any of the above case, the IRS will also extend the CSED an additional 60 days.
Requesting a Collection Due Process (CDP) Hearing
When a taxpayer requests a CDP hearing, the IRS generally suspends the CSED. The IRS will pause the statute of limitations while it reviews your request to stop a levy or remove a lien until a determination is made or until you withdraw your request. Additionally, if there are less than 90 days left in collections when a final decision is made, the IRS will extend the CSED 90 more days.
Military Deferment
A military deferment can also have implications for the Collection Statute Expiration Date. The IRS will pause the statute of limitations during military service and for an additional 270 days afterward. If you serve in a combat zone the CSED will be suspended for up to 180 days after military service.
Being Sued By the IRS
While this event rarely happens, the IRS will pause the statute of limitations during the court proceedings.
Can I Ignore My Tax Debt Until the IRS Collection Statute Expires?
You might be enticed to just wait out the IRS collection statute of limitations. However, this strategy is generally not recommended since it would mean ignoring your growing tax bill and IRS notices. Under these circumstances, simple actions like getting a job, purchasing a home, registering a vehicle, and operating a business would be very difficult. Working with the IRS will typically be your best option, but doing so alone can be tedious, intimidating, and stressful. Working with a credible and experienced tax relief company can help save time, money, and stress. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt.
Owing the IRS doesn’t just stop with your tax balance. If your tax obligations are not met, you could face penalties that can make your debt even more unmanageable. Understanding common IRS penalties and how to avoid them is essential for taxpayers to stay on the right side of the law and minimize financial consequences. Here are some of the most common IRS penalties and how to avoid (or reduce) them.
Failure to File
One of the most common penalties imposed by the IRS is the failure to file penalty. If you don’t file by the tax deadline, or the requested extension deadline, and you owe taxes, you will be charged with a failure to file penalty. This penalty is 5% of your unpaid tax for every month or partial month that your return is late. Like the Failure to Pay penalty, it caps out at 25% of your balance. To avoid this penalty, it’s crucial to file your tax return on time, even if you are unable to pay the full amount owed. Filing for an extension can also help avoid this penalty, but it’s important to remember that an extension to file is not an extension to pay any taxes owed. The deadline to file your 2023 tax return is April 15, 2024.
Failure to Pay
In addition to the failure to file penalty, the IRS also imposes a failure to pay penalty for taxpayers who do not pay their taxes by the due date. The 0.5% penalty is applied to any unpaid taxes for every month or partial month the tax is not paid. However, it will not exceed 25% of your unpaid taxes. There are some scenarios in which this penalty can increase or decrease. One example is if the IRS sends a notice with an intent to levy. In this case, you have 10 days to pay your taxes. If you do not, the Failure to Pay penalty increases to 1% per month or partial month. However, if you set up a payment plan, the penalty is reduced to 0.25% per month or partial month.
Underpayment of Estimated Tax
If you don’t withhold enough taxes throughout the year, you need to make quarterly estimated tax payments. If you don’t pay the correct amount of estimated tax, or if you pay late, you may be penalized. Estimated payments are due every April 15th, June 15th, September 15th and January 15th of the next year. The penalty can change quarterly. As of Q1 of 2024, individuals are charged 8% on underpaid tax while large corporations are charged 10%. You can avoid this penalty by meeting one of two requirements:
Pay 90% of the tax you owe for the current year in four equal estimated payments, or through paycheck withholding
Pay 100% of last year’s tax bill, before withholding or tax credits. If you have an AGI of more than $150,000, you should pay 110%.
Accuracy-Related Penalties
Taxpayers who file inaccurate tax returns may be subject to accuracy-related penalties. Common reasons for receiving this penalty are if you don’t report all your income or if you claim deductions or credits you don’t qualify for. The two types of this penalty are:
Negligence or Disregard of the Rules of Regulations Penalty: This penalty is common among those who do not follow tax laws or are careless when preparing their return. Examples include not reporting all income or not checking tax deductions that result in a refund that seems too good to be true.
Substantial Understatement of Income Tax Penalty: This penalty is given to those who understate their tax liability by 10% of the tax required to be shown on your return or $5,000, whichever is greater.
Both of these accuracy-related penalties charge 20% of the portion of underpaid tax that resulted from negligence, disregard, or understated income. Avoiding this penalty is rather simple. Taxpayers should ensure that their tax returns are accurate and complete. Furthermore, they should maintain documentation to support their income, deductions, and credits claimed.
IRS Penalty Abatement
Penalties imposed by the IRS can significantly increase the amount owed by taxpayers and can be financially burdensome. However, under certain circumstances, taxpayers may be eligible to have these penalties reduced or eliminated entirely through penalty abatement. Taxpayers may request penalty abatement for reasons such as reasonable cause, statutory exceptions, or administrative waivers.
Reasonable Cause: One common reason for requesting penalty abatement is demonstrating “reasonable cause.” This means showing that there was a valid reason beyond the taxpayer’s control that prevented them from complying with tax obligations. Examples of reasonable cause may include serious illness, natural disasters, or death in the family, among others. Taxpayers must provide documentation or evidence to support their claim of reasonable cause.
Statutory Exceptions: Some penalties may have statutory exceptions that allow for penalty relief under specific circumstances. For example, certain penalties may be waived if the taxpayer can demonstrate that they acted in good faith or relied on incorrect advice from the IRS.
Administrative Waivers: In some cases, the IRS may offer administrative waivers for certain penalties. These waivers are typically granted on a case-by-case basis and may be available for first-time offenders or taxpayers who have a history of compliance with tax laws.
Penalty relief may be requested via phone or by mailing Form 843, Claim for Refund and Request for Abatement. If the IRS denies your request, you may be able to appeal the decision.
Get Help Avoiding and Reducing IRS Penalties
Remember, the IRS charges interest on penalties and interest will continue to increase your balance until it’s paid in full. Since interest on underpayments begin on the tax due date, it’s important to act as quickly as possible to resolve your tax issue. If you can pay your balance in full, you should do so immediately. If you cannot afford to, you should look into options including payment plans or tax relief. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
If you spent time unemployed last year, you might be wondering how that’ll affect your tax return this year, especially if it was your first time ever being without work. When it comes to unemployment and taxes, you might have some questions. Here’s a breakdown of how unemployment affects your taxes.
Is Unemployment Taxable?
Perhaps the first question people ask about unemployment is: “Is my unemployment income taxable?” In short, it is taxable. The IRS requires you to report any unemployment income on your federal tax return with Form 1099-G, Certain Government Payments. Most states tax unemployment income as well, except for the few that don’t tax any income and the few that exempt unemployment benefits from income taxes. You can check with your state’s Department of revenue to see if your income is taxed at the state level.
How Do I Pay Unemployment Taxes?
When applying for unemployment benefits, you can request your state to withhold federal taxes from your checks. In this case, 10% will be used to pay federal taxes. You can also make estimated quarterly tax payments throughout the year. If you go this route, be mindful of the deadlines for each quarter: April 15, June 15, September 15, and January 15 of the following year. Your final option is to just pay all taxes due during tax time. The same three options usually also apply to paying taxes at the state level.
Does Unemployment Affect My Tax Credits?
Receiving unemployment benefits might affect your eligibility for certain tax credits. For example, eligibility of the earned income tax credit (EITC) and the child tax credit (CTC) are determined by earned income. Since unemployment benefits are not considered earned income, it could reduce your credit amount or completely disqualify your eligibility. Since the EITC is worth up to $7,430 and the CTC is worth $2,000 per qualifying child in 2024, it is best to check with your tax preparer to see exactly how unemployment will affect your eligibility for tax credits you rely on each year.
Are Other Government Benefits Taxable?
Sometimes the unemployed seek other financial assistance from the government, including housing subsidies, childcare subsidies, and SNAP benefits. You might also accept food donations from food pantries. These benefits are generally not taxable, but you should check with your local benefits offices to confirm.
What If I Can’t Pay My Taxes?
Being unemployed might mean you’re low on funds and might need extra help if you run into issues during tax time. The IRS offers a free tax filing service on their website and Volunteer Income Tax Assistance (VITA) provides free tax preparation for lower-income taxpayers. If your tax issues are bigger or more complex, it might be best to consider tax relief options. Our team of qualified and dedicated tax professionals can help if you have tax debt. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
When considering investing, you may first daydream of the potential rewards of the risky endeavor. But as a new investor, it can be overwhelming to navigate the world of taxes. However, understanding the basics of taxation can help you make informed decisions and avoid costly mistakes during tax time. In this brief tax guide for new investors, we will cover some of the essential things you need to know.
Capital Gains vs. Ordinary Income
When you invest, you have the potential to earn income through two methods: capital gains and ordinary income. Capital gains are the profits you make when you sell an asset for more than you paid for it. Ordinary income is income earned through wages, salaries, interest, dividends, and other sources.
The tax rate for capital gains is generally lower than the tax rate for ordinary income. The tax rate you pay on capital gains depends on how long you hold the asset before selling it. If you hold it for more than a year, it’s considered a long-term capital gain. In this case, the tax rate will be lower than if you hold it for less than a year, otherwise known as a short-term capital gain. Short-term capital gains are taxed as ordinary income. In 2023, the tax rates for long-term capital gains are as follows:
Filing Status
0%
15%
20%
Single
Up to $44,625
$44,626 to $492,300
Over $492,300
Head of Household
Up to $59,750
$59,751 to $523,050
Over $523,050
Married Filing Jointly orQualified Widow(er)
Up to $89,250
$89,251 to $553,850
Over $553,850
Married Filing Separately
Up to $44,625
$44,626 to $276,900
Over $276,900
The long-term capital gains tax rates for 2024 are:
Filing Status
0%
15%
20%
Single
Up to $47,025
$47,026 to $518,900
Over $518,900
Head of Household
Up to $63,000
$63,001 to $551,350
Over $551,350
Married Filing Jointly orQualified Widow(er)
Up to $94,050
$94,051 to $583,750
Over $583,750
Married Filing Separately
Up to $47,025
$47,026 to $291,850
Over $291,850
Tax Implications of Different Types of Investments
Different types of investments are taxed differently. For example, stocks are taxed on capital gains and dividends, while bonds are taxed on interest income. Real estate is also subject to specific tax rules, including depreciation deductions and the potential for tax-deferred exchanges.
It’s important to understand the tax implications of your investments before you invest. For example, if you’re investing in a high-yield bond, you may be subject to higher taxes on the interest income than if you were investing in a low-yield bond. By understanding the tax implications, you can make informed decisions about where to invest your money. Consulting with a financial advisor before making these financial moves can help you make the most informed decision now and prepare for any tax bill later.
Investment Expenses
Investment expenses can be deducted from your taxes, which reduces your taxable income. These expenses can include brokerage fees, investment advisory fees, and other costs related to your investments. It’s important to keep track of these expenses throughout the year, so you can deduct them on your tax return. Be sure to have proper documentation just in case the IRS requests substantiation later.
Selling Investments
Knowing when to sell your investments can have a significant impact on your taxes. If you sell an asset for a loss, you can use that loss to offset capital gains from other investments. This is called tax-loss harvesting and can help reduce your tax bill. Tax-loss harvesting could also help reduce your ordinary income tax liability, even if you don’t have any capital gains to offset. To do this, you would sell a stock at a loss and then purchase a similar stock with the proceeds.
Tax-Advantaged Accounts
Tax-advantaged accounts are investment accounts that offer tax benefits. These accounts include 401(k)s, IRAs, and 529 college savings plans. Contributions to these accounts are tax-deductible, and the investment interest grows tax-free. When you withdraw the money during retirement or for qualified education expenses, you’ll pay taxes on the withdrawals, but typically at a lower tax rate than during your working years. Investing in tax-advantaged accounts can be an effective way to reduce your tax bill and grow your investments over time.
In conclusion, understanding taxes is an essential part of investing. By knowing the tax implications of your investments, keeping track of your investment expenses, and taking advantage of tax-advantaged accounts, you can reduce your tax bill and maximize your investment returns. Remember to consult with a tax professional for personalized advice on your specific situation.
Tax Help for New Investors
Remember, the most important thing you can do during tax time is ensure that you are reporting all income, whether it is ordinary income, interest earned on a bond, or dividends paid out to you that year. Failing to report income during tax time can put you on a fast path to being audited by the IRS. If you need help with a large tax liability because you were unprepared for the tax implications of investments, a knowledgeable and experienced tax professional can assist. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
Today, Phil explains what a tax attorney is, including what it takes to become one and how they can help you with your tax issues.
What is a Tax Attorney?
A tax attorney is a legal professional who specializes in tax law. They are trained and experienced in dealing with complex tax issues, including tax planning, compliance, disputes, and litigation. One of the privileges they have is being able to represent taxpayers before tax authorities, such as the IRS.
Becoming a Tax Attorney
What does it take to become a tax attorney? For one, it means going to and completing law school. It also means passing the bar exam. However, they shouldn’t stop there. Staying updated on changes in tax laws and regulations is essential for tax attorneys to effectively advise their clients and navigate complex tax issues.
Tax attorneys can make a significant impact on their clients’ financial well-being by helping them minimize tax liabilities, resolve disputes with tax authorities, and plan for the future. Just be sure to vet your attorney to ensure they are qualified to represent you before the IRS. Rest assured, the attorneys and enrolled agents at Optima Tax Relief can help.
