In recent years, taxpayers have been investing in virtual currency to exchange monies in the virtual marketplace or hold on to as investment assets. One of the subgroups of virtual currency is cryptocurrency, or a digital form of currency traded or secured using cryptography. The emergence of this digital asset has yet to provide definitive tax guidelines for taxpayers and tax practitioners, particularly for taxpayers who are concerned about their privacy rights in cryptocurrency. However, one thing is clear when it comes to virtual currency: taxpayers must pay their taxes on the gains made from the profits on virtual currency. If not, taxpayers will reap the consequences of enforcement from the IRS.

The IRS has provided some guidance to the virtual currency debacle in the form of Notice 2014-21. The IRS defines virtual currency as a digital representation of value that functions as a medium exchange, a unit of account, and/or a store of value. Virtual currency can act as a substitute for real currency, also known as “convertible” virtual currency, but does not have legal tender status in any jurisdiction. An example of a convertible virtual currency is Bitcoin, which can be digitally traded between users and exchanged into US dollars, Euros, and other real or virtual currencies.

Based on that comprehensive yet confusing definition of virtual currency, taxpayers may wonder how virtual currency might be treated for federal tax purposes. According to the IRS, virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency. That means taxpayers who receive virtual currency as payment for goods or services must include the fair market value of the virtual currency, measured in US dollars, the date that the virtual currency was received. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.

Last month, the House Ways and Means Committee unanimously approved a bill to allow same-sex couples who married before the overturn of the Defense of Marriage Act (DOMA) to amend their filing status and claim their tax refunds as jointly-filed spouses. If enacted, this bill would be a huge step for the government because it would make an exception to the three-year statute of limitation rule for taxpayers to claim their refunds.

The purpose of H.R. 3299, or the Promoting Respect for Individuals’ Dignity and Equality (PRIDE) Act of 2019, is to permit legally married same-sex couples to amend their filing status for income tax returns outside the statute of limitations and to amend the Internal Revenue Code of 1986 to clarify that all provisions shall apply to legally married same-sex couples in the same manner as other married couples. It incorporates language from H.R. 3294, the Refund Equality Act, and H.R. 1244, the Equal Dignity for Married Taxpayers Act. This bill would provide same-sex couples, who married before the Supreme Court’s decision in U.S. v. Windsor, an opportunity to claim their tax refunds and would remove gendered language such as “husband” and “wife” from the Internal Revenue Code to accommodate same-sex married couples.

Prior to the Windsor decision, federal law defined marriage for federal purposes as the union of one man and one woman, and allowed states to refuse to recognize same-sex marriages granted under the laws of other states. DOMA barred same-sex married couples from being recognized as “spouses” for purposes of federal laws, effectively barring them from receiving federal marriage benefits such as the filing of joint tax returns and federal refunds from those joint returns. Although the Supreme Court declared section 3 of DOMA unconstitutional under the Due Process Clause of the Fifth Amendment, the IRS lacks the authority to override the three-year limitation on which a claim for refund can be made.

Our tax system requires most taxpayers to make regular payments to the IRS throughout the year. The tax return that is due to the IRS every April 15 shows the final amount of tax owed for the year, as well as the amount of tax already paid by, or on behalf of, the taxpayer. If the amount paid is less than the amount owed, the taxpayer could be liable for underpayment penalties. In January 2019, the IRS announced that it was expanding eligibility for waivers of underpayment penalties. Taxpayers who paid at least eighty-five percent of their final tax bill can have their entire underpayment penalty waived.

Ongoing Tax Payments

Federal income tax is a “pay-as-you-go” system. Taxpayers must pay tax on the income they earn as they earn it. Payments are due every quarter.

Employers can withhold taxes from their employees’ paychecks. The amount of withholding is based on information provided by each employee on Form W-4. Every quarter, employers must remit all amounts withheld from payroll.
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Federal tax law is complicated, to put it lightly. Taxpayers routinely find themselves having difficulty understanding various provisions of tax laws and regulations. Congress has tried to help by creating the Taxpayer Bill of Rights (TABOR), which identifies ten key rights, and which serves as a directive to the Internal Revenue Service (IRS) Commissioner and all IRS employees.

The Taxpayer Bill of Rights

1. Information

Taxpayers have a right to know what tax laws and regulations affect them. To the greatest extent possible, the IRS has a duty to explain the Internal Revenue Code (IRC) and IRS regulations. It has met this duty through a truly impressive volume of publications, including instructions for every tax form.

2. Quality Service

This involves the right to prompt, polite, and helpful interactions with the IRS.
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Businesses are required to file annual income tax returns with federal and state tax authorities, and they may also have to file payroll and sales tax reports. Failing to file a return on time can lead to penalties, interest, and other consequences. Even if you or your business is not able to pay the full amount of tax owed, it is better to file a return on time. For most types of tax, the IRS and state authorities are willing to allow a payment plan. The most notable exception is federal payroll tax. To avoid any penalties, you should promptly consult a California tax lawyer who can advise you on your obligations.

What Taxes Does My Business Have to Pay?

Businesses in California must pay federal and state income tax. The federal form they must use depends on the type of business entity, such as a corporation, limited liability company (LLC), partnership, or sole proprietorship.

If a business has employees, it must pay payroll taxes and file a separate return with the IRS. Employers must also pay into federal and state unemployment insurance funds. Businesses that sell goods or provide services deemed taxable by state and local law must collect sales tax from customers and file reports with the state.
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Bankruptcy allows individuals and businesses in financial distress to obtain relief from their debts. “Financial distress,” in this context, typically refers to situations in which one’s income is not enough to continue making required debt payments. The “relief” offered by bankruptcy may involve a discharge of debt after a period of making payments or liquidating assets. Not all debts, however, are eligible for discharge. Discharge of tax debt in bankruptcy is particularly tricky. It depends on the type of taxes owed, and the circumstances in which the debtor accrued the tax debt.

A bankruptcy case is often a difficult process for debtors. This is largely by design. Federal bankruptcy law requires debtors seeking relief to undergo an extensive process of accounting for all of their assets and debts. A court-appointed trustee oversees the debtor’s property, known as the “bankruptcy estate” while the case is pending. The trustee notifies the creditors and holds a meeting to allow them to present their claims. The debtor has to abide by payment schedules created by the trustee.

Three chapters of the Bankruptcy Code form the most common types of bankruptcy cases. Chapter 7 allows for discharge of debts after liquidation of assets. Chapter 11 involves a restructuring of debts and debt payments. Chapter 13 establishes a plan for payment of debts, followed by a discharge of remaining debts. Individuals and families usually file for bankruptcy under either Chapter 7 or 13. Businesses can file under Chapter 7 or 11, but they can only obtain a discharge of debts under Chapter 11.
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The IRS recently issued out a warning to taxpayers who owe tax and have not filed their 2018 tax return, or a valid extension, to act before Friday, June 14, before facing higher penalties. Although the IRS lowered the threshold for imposing under withholding and underpayment penalties earlier this year during tax season due to the complications in the 2017 tax law and various changes it made in the withholding rules, the leniency did not apply to the failure-to-file penalty.

Under section 6651 of the Internal Revenue Code, a failure-to-file penalty is assessed if a taxpayer has unpaid tax and fails to file a tax return or request an extension by the April due date. This penalty is usually 5 percent of tax for the year that’s not paid by the original return due date. The penalty is charged for each month or part of a month that a tax return is late. But, if the return is more than 60 days late, there is a minimum penalty, either $210 or 100 percent of the unpaid tax, whichever is less.

However, the IRS is not completely heartless in the application of the failure-to-file penalty. The IRS recognizes special deadlines that affect penalty and interest calculations for certain taxpayers who qualify, such as members of the military serving in combat zones, taxpayers living outside the U.S., and taxpayers living in presidentially declared disaster areas.  Taxpayers in combat zones, such as members of the military, can extend the filing deadline and find the details of the extension in Publication 3, Armed Forces’ Tax Guide.

With the federal tax due date of April 15 fast approaching, some people may worry about being able to pay their tax bill on time. Several options are available, each with benefits and drawbacks. Any taxpayer who worries about covering their bill should carefully consider each of these options. Nobody should skip filing their tax return by the due date. The penalties for failing to file a return on time can be far worse than for failing to pay in full, and it could cut you off from some of the following options for payment extensions in the future.

Request a Payment Extension

Federal tax law permits extensions of time for an individual to pay income tax. The IRS has decided to allow this when a taxpayer can demonstrate that they will experience “undue hardship” if required to pay in full right away. They may request an extension by filing IRS Form 1127.

The IRS states in the instructions for this form that “‘undue hardship’ means more than an inconvenience.” The taxpayer “must show [they] will have a substantial financial loss (such as selling property at a sacrifice price).” This requires submitting substantial information on assets, liabilities, income, and expenses.
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The IRS compiles an annual list of “tax scams,” known as the “Dirty Dozen” list. Its 2019 list, published in March, includes “offshore tax avoidance,” or “failure to report offshore funds.” This refers to taxpayers’ obligation under the Foreign Account Tax Compliance Act (FATCA) to report financial assets held in foreign countries to the IRS. This reporting requirement is different from the Report of Foreign Bank and Financial Accounts (FBAR), which is required by the Bank Secrecy Act (BSA). The two requirements may seem redundant, and they often overlap. They go to different agencies within the Department of the Treasury and have separate penalties for non-compliance.

The “Dirty Dozen” list functions as much as a warning to taxpayers about not perpetrating tax scams as a warning about possible scams targeting taxpayers. Half of the items on this year’s list address scams directed at taxpayers. These include several scams that involve people posing as IRS agents in phone or email communications, “unscrupulous return preparers,” and various identity theft schemes. The other half of the list involves attempts to game federal tax laws and regulations. Aside from offshore tax avoidance, the list includes padding tax deductions, falsely claiming tax credits, “abusive tax shelters,” and “frivolous tax arguments.”

Congress enacted FATCA in 2010 in an effort to identify U.S. citizens, residents, and business entities with financial assets in foreign countries. This includes U.S. citizens living abroad. It requires U.S. taxpayers to self-report foreign financial assets,. It also requires foreign financial institutions (FFIs) to identify and report accounts held by U.S. taxpayers, and in some cases to withhold certain amounts from accounts of non-compliant U.S. taxpayers. The provisions affecting FFIs are generally not enforceable without an agreement between the IRS and the FFI, or the government of the country where the FFI is located.
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The IRS has authority to take certain actions to recover unpaid taxes from individuals and businesses, provided it has given sufficient notice. Some confusion exists over the difference between two tactics that the IRS may use: a federal tax lien and a federal tax levy. The key difference is that a levy involves an actual seizure of property, while a lien is merely a claim on property because of an unpaid debt. The IRS must provide taxpayers with notice before levying property or filing a lien. In either case, the taxpayer may request a hearing to dispute the IRS’s determination.

Federal Tax Liens

A “lien” is an interest in property by someone who does not have the right to possess that property. Mortgage liens are a common example. When a person takes out a mortgage to buy real property, the mortgage lender typically has a lien on that property until the mortgage loan is paid in full. The document creating the lien is filed in the public record and serves as notice that the mortgage lender has a claim on the property. If the owner defaults on the loan, the lienholder can recover the debt through foreclosure. If the owner sells the property without paying off the loan, the lien remains attached to the property, along with the right to foreclose.

A federal tax lien is not attached to a single piece of property. It attaches to any property owned by the taxpayer, including a home or other real estate. A tax lien also covers automobiles, securities and other financial assets, and personal property. Tax liens often have priority over other liens, meaning that it gets paid before other debts.

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