The State You Live In and IRS Tax Audits

When time to file federal and state income taxes approaches, a common question that arises is: What are my chances of being audited by the IRS or my state tax authority? While the answer to this question is not simple, there are several factors that can increase the odds of facing a tax audit. While we control many of these factors such as being sure to complete all paperwork and include all required documentation when filing taxes, there are some factors that can be a little more difficult to control.

In an article on Accountingtoday.com, California, Colorado and Nevada had the most users of taxauditdefense.com who faced IRS tax audits in 2014, while New York, Massachusetts, and Alabama faced the most state tax audits. Included in the top ten for most IRS tax audits was also Vermont, Missouri, New Mexico, Arizona, Massachusetts, Florida, and Rhode Island. Rounding out the top ten states with the most tax audits were Delaware, Michigan, Mississippi, Arkansas, Oregon, Montana, and Maine.

While being number one is a great thing for sports fans, reading these statistics may have a tendency to cause a California taxpayer to cringe. However, this statistic should not worry you since California is also the state where the most income tax returns are filed with the IRS. According to the IRS of 240,075,782 total returns filed for fiscal year 2013, 28,590,971 tax returns were filed in California. This is a significantly greater amount of returns than any other state. For example, in Ohio 8,478,748 tax returns were filed, North Carolina had 6,726,971 returns filed, Indiana had only 4,629,917 returns filed, Tennessee had 4,301,190 returns filed, and Kentucky only had 2,874,239 returns filed. This case of less returns filed leading to less tax audits doesn’t hold true in the case of Colorado. While taxauditdefense reported Colorado as the state facing the second most tax audits, Colorado only had 4,367,301 returns filed, and Nevada which was reported as third only had 2,064,632 returns filed.

It seems that in some instances, more returns can certainly lead to more audits, however as proven by the listed statistics some states do seem to face more tax audits. Ultimately, it is most important to focus on the factors that you can control when filing your taxes with both the IRS and state taxation authorities.

 

 

Sources:
Accounting Today

Market Watch

IRS

What No One Tells Us About Tax Debt

Remember that feeling of your first paycheck in your hands Remember spending your hard earned money on that first album, cassette tape, cd and now mp3? Do you also remember years after that when your assets were frozen by the IRS, state, or local taxation department? If this has ever happened to you, you are not alone.

learning about the IRS, income taxes, tax debt and tax collection practices including wage garnishments, tax liens, and bank leviesWhen children become old enough to learn about working to earn money there are several opportunities to teach them good habits that they will carry with them through life.  Putting the dishes away earns you $5, taking the trash out $8, folding laundry $3 dollars and a bonus of $2 if it’s put away.  But what about teaching them about taxation? According to Benjamin Franklin “In this world nothing can be certain, except death and taxes.”1 Parents have taught their children about death during the sad flush of the toilet when the goldfish dies but when do they have the opportunity and the right timing to teach them about taxes? According to Jennifer Woods’ article on Forbes.com “most kids know the word but few understand what taxes are.” It is safe to say that most kids don’t understand the penalties are of not paying taxes either. When teens get their first job hopefully someone has explained what deductions come out of their hard earned wages. When they first do their own individual taxes, unclaimed by their parents, confusion is an understatement. A lesson once taught in Home Economics seems to be laced with questions once applied to real life.

Now flash forward to the part when they filed incorrectly and a few months later they receive a notice in the mail that is hard to understand and since they were never taught about the repercussions of paying taxes correctly, soon thereafter their assets are frozen by a tax lien or wage garnishment. The process can take several months and sometimes years for the IRS to catch up to the non-payment or error, but when they do, it can carry hefty penalties and interest charges.  For some tax payers it is a small tax penalty found due to an error in filing and easily cleared up by payment to the local IRS office. If your tax debt is greater than $10,000 you should consider speaking with a tax attorney to assess options which may involve an offer in compromise to dramatically reduce the total debt or setting up a tax payment plan to stop accruing additional tax penalties.  According to Topic 201, The Balance Due Collection Process, there are many options to settle the balance of tax debt including installment agreements and direct pay.  If the balance is too large to pay and you are unable to pay it in full to the IRS, an offer in compromise (OIC), which is a proposal to the IRS to accept a smaller amount as payment in full, is a viable option. At this point, it may be in your interest to consult a tax attorney who regularly handles tax IRS problems with the IRS, State and local taxation authorities.  As with most things regarding taxes there are forms after forms and handling all of them yourself can be taxing, no pun intended. Therefore, it is a good idea to consult with a tax attorney who regularly deals with the IRS and can work to set up an acceptable tax relief solution.

Learning about taxes early can help you to avoid small errors that can be very costly in the end. Teaching our children the importance of earning money, filing taxes and the repercussions of not valuing both should be clear from the time they learn what money is.  Covering topics about debt are important too in order to establish and maintain good credit throughout their lives. Jennifer Woods suggests in her Forbes.com article that age 10-12 is a good age to start the discussion of Taxes.  If you are just learning about tax debt or options for tax debt relief contact Sheppard Law Offices for more information and tax help.

 

 

  1. Benjamin Franklin http://www.brainyquote.com/quotes/quotes/b/benjaminfr129817.html
  1. Tax Problems  http://www.sheppardlawoffices.com/columbus_ohio_tax_lawyer.html
  1. IRS http://www.irs.gov/taxtopics/tc201.html

Net Investment Income Tax, Do I Need to File? A Quick Overview

When filing your income tax returns with the IRS, you may need to file a form 8960 if you owe Net Investment Income Tax. This tax is on Net Investment Income, which includes but is not limited to:

  • Interest
  • Dividends
  • Capital Gains
  • Rental Income
  • Royalty Income
  • Non-Qualified Annuity Interest

It is important to understand that if you will owe Net Investment Income Tax you should   plan ahead because if the estimated or quarterly tax payments that you make during the year does not cover the Net Investment Income Tax you may be subject to an estimated tax penalty in addition to the rest of your taxable income.

The Net Investment Income Tax, which went into effect January 1, 2013, and which applies at a rate of 3.8%, needs to be filed by those who have a modified adjusted gross income above specified thresholds.

Current thresholds for AGI + NIIT specified by the IRS as of December, 2014:

  • $250,000 – Married Filing Jointly
  • $125,000 – Married Filing Separately
  • $200,000 – Single
  • $200,000 – Head of Household (with qualifying person)
  • $250,000 – Qualifying Widow or Widower (with dependent child)

This article is intended to provide a brief overview of the Net Investment Income Tax and some of the qualification requirements. Because there are numerous regulations, and those regulations are subject to change by the IRS you may wish to contact an experienced tax advisor to better determine if you are required to file, what specific income should be included, and what expenses are deductible.

What Problem Does The IRS Have With Me?

IRS Tax Problems for small business owners, individuals and familiesIt is not uncommon for those who are facing problems with the IRS to not actually know what that specific problem is. This presents an issue in itself, since it is difficult to prepare to defend against a problem with the IRS without knowing what tax dispute you will need to be defending in order to appropriately prepare. It also happens that as time passes, records may have been misplaced or damaged, or may not even have arrived at the IRS. And it’s sometimes the case where the IRS also loses track of some or all of your documents.

The IRS maintains a Master Report on each of us. For a flat fixed fee, as your tax attorney we can obtain the IRS master report and transcripts for your account, and prepare a comprehensive report for you outlining the issues that the IRS has with your account. As part of this service we provide easy to understand details informing  you of the initial cause of your  tax problem, and what the IRS views to be your  problem. The report will also include details on the extent of your tax liability, or what the IRS believes to be your tax liability. Additionally, we will outline the best options for you to resolve  your tax matter with the IRS.

One thing that holds true is that the longer we wait to understand and plan a resolution to problems with the IRS, the worse the problems will likely grow. This includes incurring additional fees and penalties, wage garnishments, bank levies, tax liens, and in some rare cases can lead to jail time. Therefore, we work with our clients to help them to understand their tax issues, the level of significance of the issues they are facing with the IRS, and what can be done to resolve their tax problems.

TAX SEASON DELAY WILL AFFECT SOME TAXPAYERS

On Tuesday, October 22, 2013, the Internal Revenue Service announced that the 2014 tax season for filing 2013 tax returns will be delayed one to two weeks due to the recent federal government shutdown.  In December, the IRS will provide a specific date to the start of the 2014 tax season.

2013 Federal Income Tax Form 1040The impact of this delay is that some filers who file early will have to wait to have their tax returns accepted and processed by the IRS.  This means that tax refunds will be delayed to these early filers.  The IRS will not process paper tax returns or e-filed tax returns until the tax season begins.

The federal government shutdown lasted 16 days, and now the IRS has to play catch-up on the work that was not completed during the shutdown.  The reporting systems the IRS uses to process the 150+ million tax returns it receives would have been partially programmed and tested during the government shutdown.

This should not discourage you from preparing your returns early since this delay will have no impact on the April 15 deadline to file your 2013 individual income tax returns.

Streamlined Procedures for Installment Agreements

Under current IRS administrative procedures, all IRS offices, not just the Collection Division, can approve an installment agreement up to $25,000 when the taxpayer agrees to pay the amount due in five (5) years or less. In addition, for accounts up to $25,000, the IRS will not require the taxpayer to submit a Collection Information Statement.

There are two excellent advantages to this streamlined procedure. First, the taxpayer does not need to disclose personal and/or business income, expenses, assets, or liabilities to the IRS.  Second, as long as the taxpayer adheres to the payment schedule, then the IRS will not file a Federal Tax Lien.

Here is an excellent strategy if the taxpayer is filing a tax return, but knows it cannot submit payment in full at the time of filing the tax return.  Although Form 9465 (Installment Agreement Request) is typically filed in response to a bill from the IRS, it can also be submitted with a balance-due tax return. A decision by the IRS to accept the request can be expected within thirty (30) days of filing the tax return and Form 9465.  Therefore, if the taxpayer owes tax at the time the tax return is filed, Form 9465 should be completed and filed with the tax return. As long as the assessed amount is $25,000 or less and the payment schedule can be paid in five (5) years or less, the IRS will be flexible concerning the monthly payment amount.

The advantages of obtaining an installment agreement at the Examination Division level through the streamlined procedures are that the taxpayer does not have to submit a CIS, no tax lien will be filed, and the Collection Division is avoided. If the taxpayer owes more than $25,000 the Examiner cannot enter into an installment agreement with the taxpayer. If the taxpayer can pay the amount of tax debt that exceeds $25,000 first, then the Examiner may proceed to enter in an Installment Agreement with the taxpayer.

The $25,000 figure stated above refers to the entire tax amount due, not just the tax liability. This means that the taxpayer’s account must be $25,000 or less, which includes penalties and interest, in order for the taxpayer to enter into an installment agreement with the IRS. This is an important distinction because the IRS is required by IRC Section 6159(c) to enter into an installment agreement with a taxpayer if the tax liability alone is $10,000 or less, excluding penalties and interest.

IRC Section 6159(c) also provides that the IRS is required to enter into an installment agreement (for up to three years) with a taxpayer if:

  • within the previous five (5) years, the taxpayer has not failed to file or to pay, nor entered into an installment agreement
  • the installment agreement provides for full payment of the tax liability within three (3) years)
  • the taxpayer complies with any request by the IRS for financial statements in order for the IRS to determine that the taxpayer cannot pay the tax due in full, and
  • the taxpayer agrees to continue to comply with tax laws and the terms of the installment agreement while the installment agreement is in place.

More information about IRS installment Agreements

What to Expect at a Tax Audit

The mere sound of the words “tax audit” sends chilling thoughts through taxpayer’s minds.  There are different types of tax audits.  There are tax audits that just require a taxpayer to mail in information to substantiate an entry he or she made on an income tax return.  These are called Correspondence Audits.  And then there are tax audits that require the taxpayer to attend a meeting at the taxing authority’s office.  Likewise, there are tax audits where a field agent visits the taxpayer at his or her home or place of business.

In-Person Audits

Although most tax audits are the kind where you just need to send in proof of a deduction, expense, or other entry on your tax return, the in-person audits cause the greatest anxiety to taxpayers because of the uncertainty of what will occur at the tax audit and then what the fallout or consequences will be once the agent has received the taxpayer’s responses during the tax audit.

In-person audits can be in the form of office audits or field audits.  The office audit requests that you appear at the office of the IRS or other taxing authority office and bring with you specific documentation.  The field audit can take place at your home, place of business, your attorney’s office or your accountant’s office.

During the in-person audit, the agent is seeking to gather facts of your personal situation, i.e. your assets and standard of living as well as your business income, expenses, and operations.  The agent will request a broad range of information and you should comply with only reasonable requests.  Based upon the letters you receive prior to the audit, you should provide only that information related to the tax years in question subject to the audit.  In other words, don’t allow the agent to go on a “fishing expedition”.  The type of documentation that should be provided to the agent includes personal and business bank statements, expense reports, income reports, canceled checks, credit card statements, mileage logs, receipts, and corporate records.

At the end of the tax audit there may be additional documentation that the agent may request of you to send in within a certain period of time.  Nevertheless, after the audit is completed, the agent will prepare a report showing the findings of the tax audit.  The report may show a finding that additional taxes and penalties may be applicable.  If you disagree with the agent’s findings, you have a right to appeal the findings.  If you agree with the agent’s findings, then the next step would be to negotiate a payment plan, including an installment agreement.  The IRS or the taxing authority may request that you waive your right to appeal, which you do not have to sign.

The taxpayer, whether an individual or a business, may appeal an agent’s findings within 30 days after receiving the agent’s report.  There are different avenues to make an appeal.  A taxpayer may appeal to the agent’s supervisor, to the IRS directly, to the U.S. Court of Federal Claims, or to the U.S. District Court.  If an appeal is not pursued within this 30 day period, a Notice of Deficiency will be issued.  Thereafter, the taxpayer’s appeal rights are to the U.S. Tax Court within 90 days of issuance of this Notice of Deficiency.

IRS Commissioner Steven Miller Fired Today… More action soon to follow

During the past few days, the Internal Revenue Service (IRS) has come under harsh scrutiny for how it has conducted itself in handling the applications of conservative non-profit organizations attempting to gain tax-exempt status. The IRS appears to have been acting with political overtones as opposed to following IRS guidelines for deciding whether to grant or deny tax-exempt status to these conservative non-profit groups.IRS non-profit tax exempt status The problem appears to have originated in Ohio, but according to U.S. Attorney General Eric Holder the problem is being discovered and investigated in nationwide IRS branch offices. President Obama expressed his anger today during a press conference and vowed to fully investigate this matter and bring those responsible for this misconduct to justice.

Although I do not concentrate my tax practice in assisting non-profit organizations gain tax-exempt status, I understand the practical effect of dealing with IRS officials on a daily basis, and I understand the protocol IRS Representatives must adhere to. When the IRS fails to follow federal law and its own procedures and policies, tax clients can achieve success in resolving their tax problems and issues. The national attention this issue has received was obviously magnified because of the political implications it contains. President Obama cannot allow the IRS to go un-checked; the first step has taken place, that is acting Commissioner of the IRS was forced to step down.

At Sheppard Law Offices, we deal with the IRS on a daily basis. While this specific issue has gained national attention, I want the public to know that if you have an IRS tax debt issue, there are certain guidelines and procedures in place that the IRS must follow. My job is to make sure they are doing just that, while assisting my tax clients’ to attain the most favorable outcome of the tax case with the Internal Revenue Service.

Did you fail to file your taxes or request an extension by the April 15th deadline this year?

Now that the April 15th filing deadline has passed, most people have either filed their taxes or filed for an extension with the IRS. If you happen to be part of the group that has not, the sooner that you take care of filing the better.  If you do not owe, the IRS can be very forgiving, however if you owe taxes and have failed to file, the penalties can quickly Late filing taxesbecome quite steep. The longer you procrastinate, the greater your penalty will be. The IRS charges a combined late filing and late payment penalty of 5% for each month that the return is late, up to 25% of the net amount due. If your taxes remain unpaid after five months, the 0.5% per month failure to pay penalty will still continue to accrue up to 25%. This leads to a total failure to file and failure to pay penalty of up to 47.5% of the tax dollars owed.

Even if the net amount of your taxes is relatively low, if your return is over 60 days late the IRS imposes a minimum failure to file penalty of $135. Also important to note is that if the IRS has made several collection attempts and has issued an intent to levy, the 0.5% late payment penalty will be increased to 1%.

Amending Prior Years’ Income Tax Returns

If you believe that your prior years’ income tax returns contained errors warranting a refund, you should seek to have those tax returns amended.

Here’s the most important federal (IRS) rule that one should know:

To claim a tax refund, Form 1040X (Amended U.S. Individual Income Tax Return) must be filed within 3 years from the date of your original tax return or within 2 years from the date you paid the tax liability, whichever is later.

And it’s important to point out that tax returns that were filed before the due date (without regard to any extension) are considered to be filed on the due date.

Some of the reasons for amending a tax return include a change in filing status, the reporting of income properly, and the taking of deductions and credits that were not previously claimed.

The IRS and other tax professionals may suggest that taxpayers should not to file an amended tax return for simple math errors; however, Tax Attorney Kenneth Sheppard disagrees. A taxpayer should never rely on the IRS or any taxing authority to correct mistakes that are in favor of the taxpayer. If a math error is discovered, you should affirmatively act to file an amended tax return.

For each tax year that a claim for tax refund is sought, a separate Form 1040X is required to be filed. Form 1040X must be filed through regular mail; it cannot be electronically filed through the e-file system. It will take the IRS approximately 8-12 weeks to process your Amended Tax Return.

The filing of an amended federal income tax return will generally warrant amending one’s state income tax return as well. For example; In the state of Ohio, you can claim a tax refund within four (4) years from the date of the overpayment of the tax, interest or penalty. The statute of limitations period begins on the date that the Ohio income tax return was due (without extensions). 2008 Ohio Forms IT 1040 and IT 1040EZ were due on April 15, 2009; therefore, for 2008 Ohio Forms IT 1040 and IT 1040EZ, the four-year period begins on April 15, 2009.