What is the Late Filing Penalty for Form 1120?

Question: I have not filed my S-Corp Form 1120s for two years since inception. Will I have to pay a penalty even though the business had a loss.

— Noney in Florida

Jacob Dayan answers…

This is an excellent question. Unfortunately, unlike form 1040 personal income tax returns, form 1120S S-Corp returns carry a late file penalty — even if the business recorded a loss and has no tax balance due.

Form 1120S Corporate returns are different in many ways than a personal 1040 return. On a personal 1040 return, any late file penalty is calculated based on a percentage of the tax due, so there’s no late file penalty as long as you don’t owe.

But an 1120S Corporate return has different rules.

Need help with your business taxes? Get started with a free consultation today!

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Rules for S Corporation tax form 1120S

Form 1120S Corporate returns have a late file penalty equal to $195 per shareholder per month for up to a maximum of 12 months — regardless of whether there is tax due or if the business recorded any loss. If an 1120S Corporate return is 12 months late with one shareholder, the late file penalty is $2,340. If there are two shareholders, the penalty is $4,680, and so on. So the maximum late file penalty per shareholder is $2,340 for each unfiled return.

As you can see, these penalties can add up if you have multiple shareholders and multiple years of unfiled returns. The IRS understands that sometimes businesses have hardships and might owe a balance. However, it’s critical that you stay on top of your return filings each and every year.

If you’re looking for the best way to tackle these returns, I strongly recommend you file at least the most recent return as fast as possible. If you file quickly, you may be able to avoid the maximum late file penalty if you file it less than 12 months late. After you file both 1120S returns, you may also want to try filing a penalty abatement on IRS form 843.

You may qualify for the “one-time” abatement of the late file penalty for the first late filed tax year. You may also be able to argue that you had “reasonable cause” to be late with filing because the business was brand new and you weren’t yet up-to-speed with all the requirements to be in full compliance. There are different options for seeking relief in situations such as yours. Exploring them would require a more thorough investigation.

What you should do

For a situation like yours, I would strongly recommend having an accounting and bookkeeping solution in place. That way, come tax time, filing your S-Corp returns is a simple process for any accountant that you have. While you have seen firsthand, one drawback of an S-Corp, it’s also important to note that S-Corps can provide many useful tax benefits such as planning opportunities for self-employment tax and “pass through” treatment for business income/losses.

I believe you could benefit from working with a seasoned professional to assist you with both your personal and business tax needs. If you have any additional questions, please reach out, and we are happy to help!

Still curious about filing taxes? Learn more about filing taxes from start to finish. You can read more about filing taxes late here.

How to Use Your Tax Refund Wisely

Learn how to use your tax refund wisely and avoid financial headaches.

How to Use Your Tax Refund Wisely

Tax refunds are the most (fine, the only) exciting part about doing your taxes. How do you plan to use yours? Even if you’re itching to spend it on something luxurious, take some time to review how to use your tax refund wisely. Your debt needs you. And your savings account could use some love.

Haven’t filed your taxes yet? Follow our guide that covers how to file taxes. You only get to use your tax refund if you file first!

NOTE: A large tax refund isn’t always a positive thing. If it seems overly large, your employer may be withholding too much from your paychecks. Even though it’s always nice to get a little gift for tax season, it can be better to have that money back month-to-month during the year.

Method 1: Use your tax refund to pay off debt

Paying off your debt with your tax refund is the wisest thing you can do when you get that check.

Whether you have credit card debt, student loan debt, or you’re behind on any other payments, the absolute best use for your tax refund is paying back your lenders. No, it’s not the most fun thing to spend your money on. But in the end, you will have more financial freedom.

TIP:

When you use this method, make the payment as soon as possible. Otherwise, you will owe more interest on what you could have paid off quickly with the refund.

 

Method 2: Save your tax refund

The best home for your tax refund may just be in the bank.

Can you hear that? It’s your savings account calling. It’s been a long time. If you are one of the lucky people without serious debt issues, saving your tax refund is the second-best option for your tax refund. Even if you do have debt, it’s beneficial to put away at least some of your refund for emergencies so you don’t dig yourself further into debt in the future.

TIP:

If you don’t have a savings account already, shop around for one with a high interest rate and low fees. You want your money to make money, not just sit there!

 

Method 3: Use your tax refund to buy a home

Your tax refund might give you the boost you need for a down payment on a new home.

If you’re having trouble qualifying for a mortgage loan because of debt, refer to method 1. If not, consider using your tax refund to help with closing costs on a new home. Down payments and closing costs can be some of the biggest obstacles between you and your dream house, so take advantage of a large tax refund when you get it.

TIP:

Although using your whole tax refund on a down payment may help in the future, keep some for yourself if your budget is tight now or if you have no emergency fund.

 

Method 4: Use your tax refund to buy a car

If you’ve been looking for a new car, your tax refund could help you finally purchase it.

First, wait for your check to arrive. You’ll want to have an accurate budget in mind when you start looking. Next, use a car affordability calculator to figure out how much you should be spending on a vehicle. Once you have a budget, you can start seriously looking.

When you’ve found the car for you and you’re ready to make a deal, you have a choice to make regarding your tax refund. You can

  1. use it for a larger down payment that will reduce monthly payments
  2. pay a smaller down payment and use the refund toward larger monthly payments
  3. or make a principal payment to get lower interest

TIP:

If you decide to just use your tax refund for monthly payments, keep your monthly budget in mind. Once the refund well has run dry, will you have enough to cover the payments?

 

Method 5: Invest your tax refund

If you’re more of an adrenaline-junkie or you like to play the long game when it comes to money, invest your tax refund.

As long as you aren’t afraid of a little risk or a long wait, this could really pay off. Have questions about investing? Take a look at our article titled “7 Simple Principles to Invest Your Money Wisely No Matter Your Age.”

Wondering if you should skip paying your debt in favor of using your tax refund to invest in the stock market? Take it from Howard Dvorkin, CPA: “You’ll have more money at the end of the day if you use the extra cash to pay down debts that are charging you interest.”

TIP:

Don’t put all of your tax refund investment eggs in one basket. It’s important to diversify.

How to File Taxes

Learn how to file taxes without losing your head.

how to file taxes

It’s almost tax season, and you’re starting to get worried. Where are all your forms? Are the documents you need still where you left them? Did you forget to record or claim something? Is your employer forgetting to give you anything? Don’t panic – we have some better questions for you to ask yourself. Asking the right questions in the right order can help you learn how to file taxes with the least amount of hassle possible.

Each step of this guide answers a question about your tax situation. Once you find all the answers, you should be good to go for this tax season. So, take a breath! Worrying isn’t on the list.

 

Step 1: Where should I file my taxes?

To start, you need to decide what platform to use to file your taxes.

There are a few different options here. You can file online, by mail, or go through a tax preparer. If you file online, visit the IRS website to see which software you may be able to use for free. Remember, if you need any professional advice or more advanced schedules, you will usually be charged. E-filing opens January 28th and closes October 15th.

If you send your tax return via mail, check this page to ensure you are sending it to the correct service center. In some cases, you are required to use paper filing. You must send your tax return in by standard mail if you:

  • Claim a dependent, but another taxpayer already claimed them.
  • Need to file a tax form that can’t be filed online, like a multiple support agreement.
  • File before or after e-filing begins/ends.
  • Are married, filing separately, and living in a community property state (Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, or Wisconsin).

If you choose to pay someone to file your taxes, they will likely file online. There are numerous tax professionals both online and locally that you can employ. You can also get free help with your taxes in person.

TIP:

No matter which method you choose, there are multiple ways to pay if you end up owing the IRS. You can use a credit or debit card, a direct bank transfer, a check, a money order, or even cash.

Estimated time: 1-2 hours

 

Step 2: What forms do I need to file my taxes?

Gather all the forms you need, which will depend on what you need to report.

Here are some of the forms you could need:

  • W2: If you filled out a W4 when you got your job, then your employer is responsible for giving you a W2 form. It reports your wages for the fiscal year and you should receive it in your office or by mail sometime in January.
  • 1099: If you were employed as a contractor you may be issued 1099 forms when you need to report miscellaneous income. This could mean you did some freelance work, you are self-employed, you won a prize, etc.
  • 1099-B: A 1099-B form reports money from broker or barter exchanges. Each person involved in the exchange must file one.
  • 1099-R: A 1099-R reports pension income or any distributions you took from a retirement savings account.
  • 1095: Forms 1095-A, B or C are the Tax Forms used to report what Health Insurance you and your dependents received.

TIP:

Search the IRS Tax Map by topic if you think you require any special forms for a type of income we haven’t mentioned.

Estimated time: 2 hours

 

Step 3: What is my adjusted gross income?

Calculate your adjusted gross income (AGI) by adding up all income and subtracting all deductions and related payments.

If you’re filing online, you don’t have to worry about calculating your AGI at all. The software you use will do it for you. If you’re one of those people who likes to do it by hand, read more about adjusted gross income in this article from Intuit.

TIP:

Use this guide to calculate adjusted gross income yourself, or hire a professional to ensure your AGI is accurate.

Estimated time: 30 minutes

 

Step 4: How do I determine my tax bracket?

Your tax bracket is determined for you when you report your income, but it’s good to know where you stand.

Income taxes range from 10% through 37%. Your status and your income level affect which of the seven brackets the IRS places you in. For example, if you are filing as head of household instead of as single, you will be in a different tax bracket. If you want to know exactly which tax bracket you fall into, check out this list from the IRS.

TIP:

Since your tax bracket is determined by your income, make sure you are reporting all your earnings correctly.

Estimated time: 15 minutes

 

Step 5: How do I find tax deductions?

Determine your deductions by either using the standard deduction or itemizing.

Standard tax deductions are pretty easy. As long as you know your status (single, married filing jointly, married filing separately, etc.) you can just scroll down a list and find out what your deduction is. There are a few limits, though. For example, if someone claims you as a dependent, your deduction gets reduced. If you are married but filing separately, your standard deduction could be denied if your spouse files itemized deductions. If you were the victim of a federally declared disaster, your standard deduction could increase. All nonresident aliens must itemize all deductions.

Itemized tax deductions are a little more difficult than standard because they are more labor-intensive. Instead of claiming one deduction, you go item by item – hence, the term “itemized deductions.” Some things you can itemize for are:

  • State and local taxes (limited to $10,000)
  • Home mortgage interest
  • Real estate property taxes
  • Private property taxes
  • Casualty and theft losses
  • Work-related expenses
  • Medical expenses
  • Charitable contributions
  • State and local sales taxes
  • Misc. deductions.

If you are doing your taxes yourself and your total itemized deductions would be larger than the standard deduction, choose to itemize instead.

TIP:

Tax software will decide whether standard or itemized deductions will get you the best refund, so don’t worry about which one to pick.

Estimated time: 1 hour+

 

Step 6: What are my tax credits?

Tax credits mean you get to take even more money off your taxes, depending on your life and financial situation.

There are many things you can claim tax credits for. For parents, there’s an additional child tax credit (ACTC). Students can be eligible for student tax credits, and elderly and disabled people also receive a tax credit. Additionally, you can claim a tax credit for earned income (the earned income tax credit or EITC). See what else you may qualify for here.

TIP:

If you’re not sure what tax credits you may qualify for, double check. Better to waste time checking than to lose money by not claiming a credit!

NOTE: If you claim the ACTC and EITC tax credit, it can cause a delay in receiving your tax refund if you file your taxes early. Under the new tax reform law, refunds that claim these credits can’t be issued until mid- to late-February.

Estimated time: 1 hour+

 

Step 7: What are my tax exemptions?

For 2019 filing, there are no personal tax exemptions.

This is good news and bad news. The good news is that you don’t have to deal with yet another facet of your taxes, and some of the tax changes for this season have offset the removal of personal tax exemptions. The bad news is that, well, you don’t get any personal tax exemptions.

TIP:

Don’t sweat this one!

Estimated time: None

 

Step 8: How do I file taxes late?

To file taxes late, use IRS Form 4868.

This form is a request to extend your deadline. Penalties for failing to file are worse than the penalties for failing to pay. So, even if you can’t pay the full amount on time, file anyway. Penalties start accruing right away. If there is a reasonable cause for you filing late (and you can actually prove it), then you can avoid late filing fees altogether.

If you file for an extension and still don’t make the extension deadline in October, you will be charged a failure-to-pay fee. This is 5% of the unpaid taxes for every single month, compared to only half of 1% if you file anyway. To learn more, check out the IRS’s articles about penalties and collections procedures.

TIP:

If you do end up with tax debt, Debt.com can connect you to a professional that can help.

Estimated time: 1 hour+

 

Bonus: How have taxes changed this year?

There have been a few major tax changes in the last couple of years that will affect this year’s returns. U.S. News reports that there are six major changes that the average taxpayer should watch out for:

  • Child tax credits: Make sure you claim your dependents because child tax credits are higher this year.
  • Estate planning: Inheritance tax exemption is higher this year.
  • Business income: There are more ways to deduct expenses.
  • Alimony payments: This is the final year that divorce payments can be taken out of your taxes.
  • Charitable/medical deductions: Charitable deductions can help some people pass the standard deduction and become eligible for itemized deductions. The threshold for deducting medical expenses is lower, so if you have a lot of medical bills, this will help.
  • Tax rates: Tax rates changed and, in most cases, they are lower.

What does the government shutdown mean for my taxes?

According to the most recent reports, the government shutdown should not affect your returns. If you are a victim of tax identity theft, though, you will have to wait until IdentityTheft.gov reactivates to report it.

How Long Does It Take The IRS To Catch Cheating on Taxes?

Question: My younger brother didn’t pay his federal income taxes last year because he says he doesn’t have the money. (Nevada doesn’t have state income taxes.) Instead, he paid off one of his high-interest credit cards, because he figures he’ll save more in interest than the IRS would charge in penalties – if the IRS even catches him.

Now he’s planning on doing the same thing this year: Skip his taxes and pay off the other high-interest credit card he has. Once he does that, he says he’ll have the money to pay his back taxes.

So my questions are: How can the IRS not know he hasn’t paid his taxes? How do you know what the penalty is for not paying taxes? (I’m pretty sure my brother hasn’t done the math to figure out if he’s really saving money.) And finally, how much trouble can he be in with the IRS?

– Beth in Las Vegas

Jacob Dayan answers…

First, let’s get this out of the way: Tax debt and credit card debt aren’t the same, so do not treat them as such. Here’s why…

Can I settle my tax debt as easy as I settled my credit card debt? And this is taxing questions. Hi, I am Jacob Dayan, CEO and co-founder of Community Tax.

Sadly, no. Settling tax debt is very different from settling consumer debt like credit cards. If you miss a credit card payment, you get a firm but polite reminder and a late fee. The IRS isn’t so forgiving. The agency will consider a settlement program called an Offer in Compromise if you don’t have enough money to make installment payments or if you don’t have any substantial assets, like equity in a home. Offers in compromise allow you to pay less than you owe to the IRS. But there are steep requirements.

The paperwork is tremendous, and it can take up to a year for the IRS to approve an offer in compromise request. The IRS rejects a majority of the requests. During this waiting period, the IRS will not levy your bank accounts or paycheck, but they could still file a lien. If you think you may qualify for an offer in compromise, I strongly advise you to consult a tax expert. You can call Debt.com to speak with myself or a member of my team.

Now let’s get into the IRS part of the question.

No one really knows the formula for determining when the IRS will enforce collection actions. In general, certain situations are more likely to lead to quicker enforcement. For example, cheating on taxes, higher debt amounts or failure to pay payroll tax — but the reality is that they can only enforce to the extent they have the manpower to do so.

In my experience, I’ve seen clients who were able to get away with cheating on taxes and fly under the radar while others were not so fortunate. I know that isn’t the clearest answer, but there’s no perfect answer to that question.

With respect to penalties, the answer is more clear. The IRS actually published its stance. You can find that information in this report. In short, the IRS charges a number of different penalties. The most significant of them is “failure to file.” If your brother never files a tax return, he will be taxed a 5-percent penalty for each un-filed month, up to a total of five months or 25 percent of the balance.

A failure to pay a penalty of .5 percent will also be payable up to a maximum of 25 percent, as well as interest on the outstanding debt. While in some cases your brother is correct that the penalties and interest owed to the IRS can amount to less than an interest rate on a high-interest credit card, the IRS will always take priority when collecting over other creditors.

Ultimately, there are always some cases where individuals can’t afford to pay the IRS, and that’s why the IRS offers resolution programs, and companies like mine exist. However, if you are in a position to pay the IRS back, I would never advise someone not to do so.

I hope this helps give you a little bit better understanding of your brother’s situation.

Jacob Dayan is co-founder of Community Tax LLC, a full-service tax company helping customers nationwide with tax resolution, tax preparation, bookkeeping, and accounting.

Can The IRS Really Tax My Forgiven Debts?

Question: I had a rough patch in my life and succeeded in getting some credit card debt “written off.” I thought this meant I didn’t have to pay anything.

But now I got a letter from the IRS saying I have to pay income tax! On the forgiven debt! How is DEBT considered to be INCOME? If I had income, I wouldn’t be in debt! SMH!

This is ridiculous! Can you explain this to me? Is it even legit? Or am I being scammed? If it’s true, what can I do? I’m nearly broke as it is, and I was actually thinking about bankruptcy. Would that help?

– Moses in California

— Nida in Pennsylvania

Jacob Dayan answers…

That is a great question, and I completely understand your frustration. I know it can seem almost like a cruel joke being played on you. But unfortunately this is not a scam. When credit card debt is forgiven, it’s rarely a simple process. Here’s a quick video primer…

Hi, I’m Jacob Dayan, the CEO and Co-founder of Community Tax. That is a great question, the answer to your question is relatively straightforward, but as always, I have to caution you that everyone’s tax circumstance is different. As such, it’s often advisable to speak with a tax professional prior to making a decision related to this. Before I break down the answer, let’s review some basics about collections and taxes.

The short answer is that a credit card company will write off a debtor’s balance after months if not years of collection efforts. The credit card company will issue the debtor a 1099 cancellation of debt. What this means, is that the debtor – you – are then required to pay back income tax on the amount that was canceled or forgiven.

The IRS essentially treats any unpaid, forgiven debt as income. And you definitely don’t want to ignore the IRS. If you want to know more about what happens if you do, read the report Understanding the IRS Collections Process available on Debt.com. There is, however, an exception to the requirement of paying taxes on any canceled credit card debt.

The taxpayer will not be responsible for paying taxes if they can prove they are insolvent at, or before, the cancellation of debt. Insolvent means that you have no assets or that your financial situation is basically upside down. Credit card companies will generally wait three years before issuing a 1099 cancellation of debt. Why? Because they must show a consistent attempt to collect the unpaid balance. Credit card companies are not in the litigation business. So, they tend to sell past due accounts to law firms that will collect on the outstanding debt.

If a credit card company fails to collect after roughly six months, they may engage a collections law firm to take over collections. The law firm will try to work out payments of the debt prior to filing suit in a civil court. After three years of attempting to collect, the credit card company will finally write off the debt and issue a 1099 cancellation of debt. I hope this helped clear things up. If you have any other questions, feel free to give myself or my team a call, or visit Debt.com

Now let’s dig into Moses’ particulars.

Yes, debts can be taxable

Under IRS guidelines, canceled debt counts as taxable income. In ordinary circumstances, receiving a loan is not considered income, and paying it back is not a deduction. But when a lender cancels the debt, the IRS treats the amount of canceled debt as if it is indeed taxable income.

There are exceptions

This is one of the harshest provisions in the tax code because it punishes folks who are already struggling. But there may be help! There are some instances when this “canceled debt income” can be excluded from income, and you can escape tax on it.

For example, if the canceled credit card debt was from a bankruptcy, or if you can prove to the IRS that you owed more total debt than the value of your assets (home, car, retirement accounts, etc.) at the time of the forgiveness, you may be able to avoid tax on the canceled debt income.

Resolution programs

The IRS also has resolution programs specifically designed for those with financial difficulties — such as a payment plan, “Currently Not Collectible” hardship status, or a settlement if you qualify. If you would like more information, we have tax professionals on staff who can conduct an investigation into your tax situation and determine if you might qualify for some relief.

Jacob Dayan is co-founder of Community Tax LLC, a full-service tax company helping customers nationwide with tax resolution, tax preparation, bookkeeping, and accounting.

For help with your tax debt, check out Debt.com’s Tax Debt Solutions.

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How to Stop IRS Wage Garnishment

Identify the right solution for back taxes to end IRS wage garnishment and save your paychecks.

How to Stop IRS Wage Garnishment

 

When you have tax debt, it’s possible that the IRS will garnish part of your wages in what is known as “continuous levy.” If you don’t respond to their request for repayment, the IRS will inform your employer and a large part of your paycheck will automatically go toward your tax debt balance. They can take a quarter or more of your monthly income, which can mean heavy financial strain. Fortunately, there are many options for how to stop IRS wage garnishment. Decide which option is best for you so you can stop IRS wage garnishment and minimize the financial burden.

 

Method 1: Pay off the debt in one lump sum

Pay off the debt up front.

If you have the means, pay off your tax debt as soon as you find out about the wage garnishment. You have to fail to reply to the IRS for the wage garnishment to start, but it’s possible you missed these communications. You can pay over the phone, by mail, via money order, or online with your debit or credit card or straight out of your bank account. This is the fastest method for stopping wage garnishment if you have the means to make it happen. If you need an extra boost to pay off the IRS, you may consider selling or liquidating an asset.

TIP:

If you have never promised to pay your debt in full before, the IRS may fully release your wage garnishment with a mere promise to fully pay your tax bill within 60 days.

Estimated Time: 1+ hours

 

Method 2: Set up a repayment plan

Apply for a payment plan for paying off your tax debt.

An installment agreement between you and the IRS means that you can pay off all of your debt in small installments. You make monthly payments that fit your budget based on a financial statement or a fixed monthly amount for up to six years. Review the plans and start the process online or over the phone. The IRS will charge a user fee to your overall balance when you set up an installment agreement.

TIP:

If you are a low-income taxpayer, you may be eligible for a fee waiver that covers the user fee for your plan.

Perform Time: 15 minutes – 6 hours

Response Time: 1-3 months

Payment Time: Varies by plan

 

Method 3: Settle your tax debt for less than you owe

Negotiate a payment plan that allows you to pay less than you actually owe.

Visit the IRS website and complete the OIC pre-qualifier to see if you may be eligible to settle your debt for less than what you owe. If you qualify, it will reduce the overall amount of tax debt you have to pay back with a legal settlement. Before the IRS will consider permitting you to use an OIC, you must file all your tax returns. If you are granted an OIC, you must also stay completely up to date on your taxed for five years following.

TIP:

If your OIC request is rejected, you can appeal the rejection within 30 days of receiving your assessment from the IRS.

Perform Time: 3-6 hours

Response Time: 4-6 weeks

Assessment Time: 4-24 months

Appeal Processing Time: 1-6 months

Payment Time: 2 years or less

Need help setting up an offer in compromise? Debt.com can connect you to a tax debt professional.

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Method 4: Declare hardship

Contact the IRS and explain that the wage garnishment is causing you financial hardship.

If the IRS hears your story and determines that you really need the income they would take, they may stop the levy on your wages. However, this doesn’t mean that you never have to pay off your tax debt. Declaring hardship will just buy you more time because you qualify for Currently Not Collectible status. The IRS will only start collection actions again once your financial situation improves.

TIP:

Do your research about your financial situation before you call the IRS to make the process go faster.

Perform Time: 2-8 hours

 

Method 5: Declare bankruptcy

File for bankruptcy to get tax debt discharged.

You can stop IRS wage garnishment if you declare bankruptcy. When you file for bankruptcy, you get an automatic stay that stops all collection actions, including garnishment, repossession, and foreclosure. This can result in a big hit to your credit score, so don’t take this option lightly. But bankruptcy can be a good way to get a clean break from debt, including back taxes.

TIP:

Read up on bankruptcy taxes to prepare for the aftermath of filing.

Time:  6-60 months, depending on your filing

 

Method 6: Get professional help

Contact a tax debt professional to help you stop IRS wage garnishment.

Having your wages levied is a complicated and stressful experience. Ensure you are making the right decisions and understand all of the options available to you by hiring a professional who knows exactly how to stop IRS wage garnishment. A good tax professional will be able to leverage your financial information in a way that protects you and results in a solution to the IRS Collections problem you are facing. You can get a free consultation from a certified tax resolution specialist to identify the right solution for your needs. Beware of tax professionals who are not experienced in IRS collections.

TIP:

Debt.com can help you find the right tax debt professional for your needs.

Estimated Time: 30 minutes – 1 hour

 

Method 7 (the crazy, not-at-all-advisable method): Quit your job

Resign or switch jobs.

This isn’t the wisest option. But, because it takes a while for the IRS to file for wage garnishment with a new employer, quitting is a way to avoid paying your tax debt right away but the IRS will almost always catch up with you and when they do, they will likely have less empathy.

TIP:

Create a game plan before you even think about putting in your two-week notice.

Time: 2+ weeks

You don’t need to do something crazy to get rid of your tax debt. Find out how Debt.com can help you.

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How to Get Rid of a Tax Lien

Learn everything you need to know, from paying off IRS liens to how to remove a tax lien from your credit report.

How to Get Rid of a Tax Lien

When you don’t pay your tax debt, the IRS can file a tax lien, which is a legal claim to your property. This is different from a levy, which would mean the IRS is actually seizing the property. A tax lien shows other creditors that their interest in your property comes first. What does this mean for your credit? Nothing good. Besides potentially affecting your credit score, tax liens on your credit report can make it harder for you to buy a house or get a business loan. These instructions explain how to get rid of a tax lien by working with the IRS. We also explain how to remove a tax lien from your credit report, if you still have tax liens that appear.

Note on 2017 Tax Lien/Credit Report Updates: In July of 2017, the guidelines that credit bureaus follow for listing tax liens on credit reports changed. The bureaus considered a lien’s information complete when it had a birth date or Social Security number, a name, and an address. The 2017 changes mean that supplementary data is now necessary for publishing liens on credit reports. If fewer than 3 out of 4 of these data points are missing (which is the case for many tax liens) then the lien will not be present on your credit report at all. These steps will help you get rid of the tax liens still present on your report even after these rule changes.

 

Step 1: Pay off your tax debt

Pay off your tax debt in one lump sum or in smaller installments.

This is the most direct way to get rid of a federal tax lien.  Even if the Notice of Federal Tax Lien is not impacting your credit, it will impact your ability to sell or obtain property. Any time a debt exists to the IRS, there is a statutory lien in place making the IRS a priority creditor. There are a ton of options to get into an IRS program that will resolve the tax lien.

TIP:

Debt.com can connect you to a tax debt professional who can guide you through the process of paying off your tax debt.

Estimated Time (Lump-sum Payment): 30 minutes – 1 hour

Estimated Time (installment agreement): Varies by program but generally up to six years.

 

Step 2: See if you are eligible for withdrawal

Check the guidelines for applying to have a tax lien withdrawn.

You can apply if you meet the following requirements:

  • The IRS released your lien and you paid off all of your tax debt.
  • Withdraw of the tax lien will facilitate collections of the tax liability.
  • Withdraw is in the best interest of both the taxpayer and the government.

Other guidelines were created under the IRS Fresh Start initiative, which made it easier for taxpayers to repay loans.

Fresh Start also made it possible for taxpayers to have their lien withdrawn if they agreed to a Direct Debit installment agreement. A Direct Debit installment agreement takes monthly payments toward your tax debt directly from your checking account. Tax lien withdrawal requirements for those in a Direct Debit installment agreement are as follows:

  • The balance of your tax debt must be $25,000 or less.
  • You must pay all of your tax debt either before the expiration of the collection statute or within 60 months, whichever comes sooner.
  • All of your other files must be in compliance.
  • You’ve paid 3 Direct Debit payments in a row.
  • You have no history of defaulting on any Direct Debit installment agreements.

When you meet these requirements, you can begin the lien withdrawal process.

TIP:

Double- and triple-check these criteria against your personal finances to increase your chance of having your withdrawal accepted on the first try.

Estimated Prep Time: 1-2 hours

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Step 3: File for withdrawal

Send your application for lien withdrawal to the IRS.

Start by filling out IRS Form 12277. It’s a simple, one-page form. This is basically a request to reverse IRS Form 668(Y), which is the Notice of Federal Tax Lien you received when the IRS created the lien. If everything goes as planned, you should receive IRS Form 10916(c) in the mail. This form is a statement of tax lien withdrawal, meaning that the lien can officially be removed from your credit report.

TIP:

Make copies of the completed form or take notes during the phone call to keep for future reference.

Estimated Form Time: 15-30 minutes

Estimated Response Time:  30-60 days

 

Step 4: Contact the credit bureaus

Send a letter to the 3 credit bureaus alerting them to the withdrawal of your tax lien.

The three credit bureaus are Equifax, TransUnion, and Experian. To finalize the withdrawal of your tax lien from your credit report, send a letter to all 3 of the bureaus disputing its inclusion in your report.

TIP:

Include a copy of your credit report and the IRS Form 10916(c) that you received in the mail.

Total Time: From 30 days up to 4 months

Talk to someone about your tax debt today and take back control of your financial situation.

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How Does A Supreme Court Ruling Affect My Online Business?

Question: I work as a legal secretary by day, but by night, I sell my own crafts online. Because I’m around lawyers all day, I heard about a case called South Dakota v. Wayfair, which I’ve read up on. It basically says states can now charge tax on purchases that someone makes out of state — and I sell most of my stuff to people in other states. Can you explain this to me? Despite what I’ve read, it still makes little sense to me. And is there anything I can do to avoid these taxes?

— Jo in Nevada

Jacob Dayan answers…

Yes, it’s complicated. Yes, there’s something you can do. Let’s break it down.

Last year, the Supreme Court announced in a 5-4 ruling that states have the right to levy sales taxes on online retailers who do not have a physical presence in the state. This landmark ruling was called South Dakota v. Wayfair, Inc.

Not to get too technical — OK, maybe just a little — but that decision overturned Quill Corp v. North Dakota from way back in 1992. That decision limited the ability to hold retailers liable for sales tax to only retailers who had a physical presence in the state itself.

Hi, I’m Jacob Dayan, CEO, and Co-founder of Community Tax. And this is “Taxing Questions.” When you think of the words “technology” and “taxes,” you usually think of online calculators or chat boxes that can help you properly fill out your annual tax returns. But technology is also affecting merchants who sell their products online and whether they need to charge their customers state sales taxes – even if those merchants aren’t located there.

For years, that answer was no. And it came from non-other than the Supreme Court way back in 1992. But last year the Supreme Court essentially changed its mind in a case called “South Dakota vs. Wayfair” it ruled that states can charge sales tax on merchants who sell to their residents only online. So, of course, other states have been altering their own laws, so they can earn some extra revenue. You might ask what that means to both merchants and customers? Check out my analysis on Debt.com. And if you have tax questions of your own, hit me up there.

The new precedent set by the Court will have far-reaching impacts on the way sales tax is enforced nationwide. What will the new Supreme Court ruling mean to online businesses that may be on the hook to pay a ton of sales tax?

In light of the ever-changing landscape of commerce, perhaps for many, this ruling makes sense. Selling goods and services has evolved over time (like all things) with technology. Sales tax was a relatively simple concept when local shops and businesses made up the majority of retailers. It became more complex as stores grew into national and global chains. But with the emerging popularity and convenience of online retailers in the last 10 years, states were really feeling the pain from lack of sales tax revenue.

States like South Dakota, with no income tax, heavily rely on sales tax revenue. The online retail boom was seriously eroding the coffers, making it a revenue emergency on the state level, as Justice Kennedy states in his opinion.

The opinion further discusses that the Quill ruling essentially created a sales tax loophole that robbed states of the ability to charge sales taxes — but also created larger issues of unfair marketplace advantage. Kennedy’s opinion claims that online retailers were able to avoid the sales tax burden thereby being able to offer “de facto lower prices.”

Perhaps a key summary of the Court’s reasoning to overturn its own precedent is best explained in Justice Kennedy’s own words…

Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents. This Court should not prevent States from collecting lawful taxes through a physical presence rule that can be satisfied only if there is an employee or a building in the State.

Now that the physical presence precedent has been overturned, it is extremely important for business selling online to pay attention to all legislative movement regarding taxation to be imposed by the states. The best-case scenario is that states will be forced to streamline their sales tax requirements, and the Court’s ruling does make clear that state sales taxes imposed on commerce should not discriminate against out-of-state sellers, and it should not place an undue burden on interstate commerce. But it did not lay out explicitly how the states should execute on this new law.

What Jo can do

In South Dakota, there is a “safe harbor rule” exempting out-of-state business from being charged sales tax on less than $100,000 in revenue or less than 200 transactions. Therefore, it is a safe bet for businesses to expect state legislation that will align sales tax laws with something similar to the South Dakota law as it has been upheld by the highest Court in the land.

Although there is still a high degree of uncertainty on how online and interstate business are supposed to comply with all sales tax jurisdictions they sell to, one thing that is certain is that its unlikely consumers will choose paying sales tax at a brick-and-mortar store of the convenience of shopping online even if that comes with sales tax too. At the end of the day, sellers pass sales taxes on to consumers so additional business cost of the ruling should be limited to hiring tax professionals to ensure the business remains compliant with its sales tax obligations nationwide.

Jacob Dayan is co-founder of Community Tax LLC, a full-service tax company helping customers nationwide with tax resolution, tax preparation, bookkeeping, and accounting.

Can The IRS Come After My Husband For Tax Related Identity Theft Due to His Father?

Question: My husband’s father owned a convenient store that he put under my husband’s name. His father didn’t pay taxes for a year — and  now the IRS is going after my husband, since the store is under his name!

He didn’t acquire any profits, as it was his father’s store. My husband was in Texas at the time his father had this issue in Illinois. We are dealing with a $40,000 fee. Is there a way to get out of this situation?

This happened before we got married. Can the IRS come after my paychecks?

— Nida in Pennsylvania

Jacob Dayan answers…

This question is very difficult to answer with the information provided, but I’ll do my best to try and put your mind at ease.

First off, in the interest of being completely transparent, this is a very serious situation and should be handled with extreme urgency!

Hi, I’m Jacob Dayan, CEO, and co-founder of Community Tax and this is Taxing Questions. Here’s a specific situation that happens all too often: a parent sells or gives a business to a child, but that business hasn’t paid taxes in a long time. The child didn’t know about it, so they didn’t budget for it. Now the IRS comes calling with a five-figure tax bill. Is that child on the hook for the sins of the parent?

As for most things’ taxes, the answer is – maybe. In fact, unless a parent deceived their child, the answer is probably. What bad things can a parent do? Well, for starters, if the child’s information was used without their knowledge or consent, that’s identity theft.

I get into the details on Debt.com. But remember this, whether you start, buy, or were even handed the business spend some time considering the tax implications or you better be prepared to spend a lot of money later.

Now, that being said…

If he didn’t know his dad committed tax identity theft

If your husband’s information was used without his knowledge or consent, then you should consider that identity theft — and treat it like a crime. Here’s what your husband should do:

  • File a police report locally.
  • Contact the IRS and let them know this was caused by identity theft.
  • Your husband will need to file an Identity Theft Affidavit with the IRS, explaining all the details he knows to be true regarding the situation.
  • In the Identity Theft Affidavit, he should include the police report and any notices about the issue.

While it won’t be a short process, odds are you can resolve this situation eventually.

If he did know

What if your husband consented to the business being owned under his name and run by your father-in-law? Then, unfortunately, he can be held responsible for any tax responsibilities for the business.

Since Texas is a community property state, this also means that you can be collectible for any of your husband’s tax debts, even though you are not liable for them. If both you and your husband are collectible for the debt, then there are options available to protect your paycheck. But depending on what stage of collections the IRS is in, time may be of the essence.

What to do now

I highly recommend seeking representation by a licensed tax practitioner. This situation is not uncommon for our professionals, and we would be happy to have a preliminary discussion and investigate your situation. Either way, we wish you and your husband the best of luck in resolving this matter!

Jacob Dayan is co-founder of Community Tax LLC, a full-service tax company helping customers nationwide with tax resolution, tax preparation, bookkeeping, and accounting.

How Long Should I Keep Receipts For Tax Purposes?

Question: How long should you keep receipts? I am not sure if I should keep receipts for auditing or because I may need to amend a return. Is there a rule of thumb in taxes in regards to this?

— Michelle in California

Jacob Dayan answers…

When it comes to taxes, sometimes the simplest questions have the most complicated answers. In your case, Michelle, it’s more vague than complicated. That’s because there’s no one right answer to how long you should keep receipts — because the time frame really depends on the type of income or expense the receipts support.

Let me take a stab at breaking this down so you have useful information to make an informed decision…

A few years — or forever

According to IRS Publication 1035 (Rev. 9-2017) — yes, that’s the intimidating title — “the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don’t go back more than the last six years.”

OK, so that’s one answer: No more than six years.

But then there’s Publication 583 (January 2015), which instructs taxpayers to keep records for “as long as they may be needed for the administration of any provision of the Internal Revenue Code.” What does that mean? It continues:

Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax.

As you can see, the length of time depends on exactly what the receipt is for.

What you should do anyway

Here’s what I recommend regardless.

First, keep good records and receipts to protect yourself in the event of an audit. The IRS may audit personal income tax returns going back three years from the due date, or two years from the time the tax was paid (whichever is later).

If you’re not sure if you owe tax debt, check out Debt.com’s page What Is Tax Debt?

In situations where a tax return was never filed, or a fraudulent return was filed, you must keep receipts forever. If a return did not include all income, and the omission is greater than 25 percent of the income claimed on the original filing, records must be kept for six years.

Finally, employment tax records must be kept for four years after the due date or payment date — again whichever is later.  If you own a small business, or if you’re self-employed, I recommend looking into a bookkeeping/account solution. My team offers free consultations, and we can help you understand all of your options. You can reach us through Debt.com. Hope this helped.

If you need help to settle back tax issues with the IRS, Debt.com can connect you with an accredited tax resolution specialist.

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