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Articles Posted in IRS Tax Debts

It seems at times as though the IRS is an all-knowing, all-powerful entity that no one can escape. You can’t run, and you can’t hide. They know how much money you make, how much you have in your bank and investment accounts, and even how much you won while playing roulette at the casino last week. But the real question is: do they truly know all of this? Or do we just assume they do? How can they obtain all this personal information? The answer is pretty simple. In reality, the IRS does have plenty of financially insightful access to everything from your bank accounts to every tax form submitted with your name and social security number on it. But is there a limit to “Big Brother’s” financial access?

How Does the IRS Know That I Have Undisclosed Income?

The IRS uses a sophisticated computer system in order to match up your income as reported on your tax return with everything that your employers have reported under your name and social security number. For example, if you submit a return that only has the money that you’ve made from one client or job, neglecting to enter any of your other income, the IRS’ computers will catch the mistake. Then, you’ll receive a letter from them informing you of their findings and their impact on your current tax situation.

Audits are not a welcomed entity in anyone’s eyes. So, if you’ve just received a notice informing you of an impending IRS audit and state audit, do not panic. In some cases, people or businesses are selected for an audit at random. In others, an IRS audit is triggered by issues with your tax return, either because something appears irregular or incorrect or people associated with you, such as your business partners, are being audited as well. This dreaded process if often filled with stress and fraught with mixed emotions, because it may result in you having to pay fines or back taxes if the IRS or state agents find discrepancies on your filed tax forms. The good news is that riding out an audit doesn’t have to be scary or intimidating, as long as you have professional tax accounting guidance and representation.

How Will You Be Informed of a Pending Audit?

Depending on the type of audit and the inconsistencies found in your taxes, you’ll either receive a certified letter or an official IRS agent will come knocking on your door. In most cases, a letter comes first. It will describe the type of audit that you’re facing (more on that below), as well as how the IRS will further contact you in order to obtain your records.

Let us begin with a simple question: who prepares your taxes? Many individuals and small businesses attempt to go it alone to cut costs, which can be problematic in a few different ways. Many times, you do not have sufficient time to prepare the documentation properly, so you opt for shortcuts that result in audited by the IRS. You might also make simple, unintentional mistakes because you are trying to balance your company’s financials and your daily business operations, leading to mistakes in your accounting. Though it will require an upfront expenditure, it will save you time, money, and future headaches.

Here are some of the many benefits that a tax professional can bring to the table for your business.

Making Estimated Payments to the IRS

Life can get busy, and sometimes, things slip your mind, especially when you’re moving in eighteen different directions at the same time. However, when that “something” consists of your tax returns, you could be in quite a bit of trouble with both the state and the IRS. Even if you regularly pay taxes and should be receiving a refund every year, you still need to file your returns by the deadlines set forth by both the Federal Government and the government of the state in which you reside. Otherwise, you face having to pay steep penalties, having your refund check delayed, and other serious issues. If you owe back taxes, you could face even more severe financial ramifications, such as having liens placed on your property or having your bank accounts levied.

What to Do If You Haven’t Filed Your Taxes in Years

No matter the reason is as to why you haven’t filed your taxes, it’s important that you take the first step necessary to remedying the situation. Although you should always seek the help of a professional tax expert who can walk you through the situation and negotiate with the IRS or state on your behalf, there are some initial actions that you can take on your own.

Divorcing your spouse can be a complex undertaking and involves more than simply splitting up jointly owned bank accounts and properties. It also means ensuring that your taxes are completed and filed properly. A number of issues can pop up while completing taxes in the middle of a divorce, some of which may require you to file tax return(s) with your soon to be ex-spouse. In other cases, a change of marital status can result in having to file taxes quite differently than you are used to, leading to the high probability of making a mistake.

Filing Tax Returns Jointly

According to current IRS regulations, two spouses who are in the middle of a divorce, yet not officially divorced at the end of the tax year can file a joint tax return. Even if both individuals are no longer residing in the same location, as long as they are still legally married and no official divorce decree has been approved by the courts, that joint return is valid.

The IRS must follow a series of procedures to collect unpaid taxes. The first step is to send written correspondence to the taxpayer informing them that their tax return is overdue and advising them of the penalties for continuing to fail to file. From there, the IRS may place a lien on a taxpayer’s property, followed by the execution of a levy. It could hand long-delinquent cases over to private debt collectors. Our Los Angeles tax advisors have observed that the IRS recently announced that revenue officers (ROs) will be visiting high-income taxpayers with at least one unfiled tax return in 2020. “High-income” in this instance means annual income of more than $100,000.

What Is a Revenue Officer?

ROs work at IRS field collection offices located around the country. Their job is to collect unpaid taxes, but their powers in that regard are somewhat limited. They are civilian employees, not law enforcement officers. They therefore do not wear a uniform or carry a firearm, and they cannot make arrests. They carry identification cards, not badges.

If an RO has reason to believe a criminal offense, such as tax fraud, has occurred, they must refer the matter to the IRS’s Criminal Investigation Division (CID). CID agents carry badges and can make arrests.

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Student loans account for a substantial portion of this country’s total indebtedness. Outstanding student loan debt is estimated at $1.5 to 1.6 trillion. The U.S. Department of Education (DOE) holds almost all of this debt, giving it substantial power over repayment, forgiveness, and discharge. Normally, discharge of debt is considered a taxable event. The IRS has established revenue procedures creating a “safe harbor” for discharges under certain DOE programs. Our Los Angeles tax advisors observed that it recently issued a new revenue procedure expanding that safe harbor.

Student Loan Discharge Programs

The DOE maintains several programs that allow partial or total discharge of student loan debt in specific situations. These programs only apply to student loans made or guaranteed by the DOE.

Closed School Discharge

The Higher Education Act (HEA) of 1965, as amended in 1986, directs the DOE to discharge the student loan debt of a borrower who is unable to complete their studies because their school closes, or because of certain fraudulent actions on the part of the school. Borrowers must apply to the DOE to obtain a discharge under this program. They must be able to demonstrate that they were either enrolled in the school or on an “approved leave of absence” at the time of closure, or that they withdrew 120 days or less before the school closed.

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The Social Security program has provided benefits for millions of people in its eighty-five years of existence. Political compromises have kept the program going as the cost of living has increased faster than wages. One of these compromises resulted in the assessment of federal income taxes on some Social Security benefits. This only applies to taxpayers with income above a threshold amount. Even if an individual’s income is above the threshold, only part of their Social Security benefits are taxable. Not all benefits payable by the Social Security Administration (SSA) are subject to federal income tax, and our Los Angeles tax advisors can explain the extent to which tax rules apply.

Types of Social Security Benefits

The SSA is an independent federal agency, meaning that while it is part of the Executive Branch of the federal government, it is not part of a federal executive department. Much of the funding for SSA programs comes from payroll taxes. The agency administers numerous benefit programs, including:
Retirement benefits, which are available to people who have made a minimum number of payments into the program through their payroll taxes, and who have reached the age of sixty-two;
Social Security Disability Insurance (SSDI), which helps eligible individuals who are unable to support themselves because of an injury or medical condition;
Survivors benefits, which provides assistance for family members of SSA beneficiaries; and
Supplemental Security Income (SSI), which pays benefits to elder individuals, blind individuals, and individuals with disabilities.

Most of these benefits are taxable if the individual meets the income threshold. Dependent or survivor benefits received by a child are usually not taxable, unless the child has sufficient income to file their own income tax return. SSI benefits are not subject to federal income tax under any circumstances.

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At the end of the year, some employers reward their employees with year-end bonuses. This can be a nice way to close out the year, but it can also bring questions about taxes. How will the IRS treat your year-end bonus when taxes come due in a few months? If your employer withholds taxes from your paychecks, they have already done most of the work for you. Depending on the size of the bonus, our Los Angeles tax advisors feel that it is often still a good idea to make sure you will not get any surprises in your tax return.

Which Bonuses Are Taxable?

Year-end bonuses can be extremely generous, or they can be a token of an employer’s appreciation (emphasis on “token.”) A bonus could take the form of a fruit basket or other gift item, or it could come in check form.

Small gift items are not necessarily considered “income” for federal tax purposes. You probably do not have to report that fruit basket, for example. Larger gifts, like a car or something similarly pricey, will count as “income.” If your employer hands you a check at the end of the year, that is definitely taxable income.
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Retirement planning is crucial to a person’s financial well-being. Contributing to a retirement account as early and often as possible can offer peace of mind, with the knowledge that many years of hard work will pay off. Certain types of retirement accounts can also offer tax benefits, either now or in the future. Starting in the early 1970s, Congress authorized favorable tax treatment for employee contributions to individual retirement accounts (IRAs). Our Los Angeles tax professionals can advise you on the benefits that each type of IRA may provide.

What Is an IRA?

An IRA is a type of financial account that offer tax advantages as a way to encourage people to save for retirement. Many employers include IRAs as a benefit for their employees. Individuals may also open IRAs on their own. The IRS refers to these accounts as “individual retirement arrangements.”

The two most well-known IRAs are:

Traditional IRA: Congress established the tax benefits of a traditional IRA in the Employee Retirement Income Security Act (ERISA) of 1974.
Roth IRA: The Taxpayer Relief Act of 1997 created this type of account, named for Senator William V. Roth, Jr. (R-DE).

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