Articles Posted in IRS Tax Debts

Businesses with employees have federal tax obligations besides income tax. The Internal Revenue Code (IRC) makes both employers and employees responsible for paying employment taxes, but the responsibility for transmitting those tax payments to the IRS belongs solely to the employer. If an employer fails to pay employment taxes or file an employment tax return, the IRC authorizes the government to create a return for the employer and assess the amount of tax due. The IRS has created a program that allows automated creation of missing returns, but the program is reportedly understaffed and lacking in other resources. A recent audit by the Treasury Inspector General for Tax Administration (TIGTA) found that these deficiencies in the program caused the IRS to miss billions of dollars in employment tax assessments.

What Are Employment Taxes?

The Federal Insurance Contributions Act (FICA) requires both employees and employers to pay the following employment taxes:
– 6.2 percent of the employee’s wages for “old-age, survivors, and disability insurance,” also known as Social Security; and
– 1.45 percent of the employee’s wages for “hospital insurance,” or Medicare.
The Social Security Administration (SSA) sets a cap on the amount of earnings subject to the 6.2 percent Social Security tax. As of the end of 2018, the cap is set at $132,900. There is no cap on earnings subject to the 1.45 percent Medicare tax.

The Federal Unemployment Tax Act (FUTA) requires employers, but not employees, to pay an excise tax of 6.0 percent of each employee’s wages up to $7,000.
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The federal Internal Revenue Code (IRC) allows taxpayers to deduct various business expenses from their income for the purposes of computing their total tax bill for a given year, with numerous exceptions. Section 280E of the IRC, for example, prohibits deduction of expenditures involved with “the illegal sale of drugs.” More than half of all U.S. states allow the medical use of marijuana to some extent, but it remains a Schedule I controlled substance under federal law. This is causing problems for businesses that are complying with state cannabis laws. In late 2018, the U.S. Tax Court ruled that a California medical marijuana company could not deduct millions of dollars in business expenditures. The company has announced that it intends to appeal this decision on business tax deductions.

IRC § 162 allows taxpayers to deduct all “ordinary and necessary expenses” that they pay or incur as part of their “trade or business,” subject to various exceptions scattered throughout the statute. The exception for the “illegal sale of drugs” applies to any substance included in Schedules I or II of the federal Controlled Substances Act (CSA), or similarly prohibited by the laws of the state in which the taxpayer does business. The CSA classifies marijuana (or “marihuana”) in Schedule I, which requires a finding that a drug has “no currently accepted medical use in treatment.”

California law takes a substantially different view of marijuana, as do the laws of at least thirty-one other states, the District of Columbia, and several U.S. territories. In 1996, California became the first state in the U.S. to allow the use of marijuana for medical purposes, after voters passed Proposition 215, also known as the Compassionate Use Act of 1996. A 2005 decision by the U.S. Supreme Court, Gonzales v. Raich, held that federal law may continue to criminalize marijuana production, distribution, and possession even when state laws allow those activities. Conflicts between federal and state marijuana laws are an ongoing matter of dispute.

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Preparing a tax return can be a time-consuming process. It can also generate a considerable amount of paperwork. Even if you have gone “paperless,” tax records take up space on a computer or external drive that you might rather use for something fun, like family photos or video games. How long should a taxpayer keep tax records? The simple answer is that you should keep records until all applicable statutes of limitations have expired. As is so often the case, though, the simple answer only barely scratches the surface.

What Records Do You Need to Keep?

Almost any document that you used to prepare a tax return could prove to be important down the road. This could include:
– W-2’s, 1099’s, and other forms that show income;
– Receipts, mileage logs, and other documents that show deductions;
– Documents that support any tax credits that you claimed;
– Financial statements for any businesses that you own or operate; and
– Any other documents that support information included in your tax return.

Statute of Limitations for Audits

As a general rule, the IRS has three years from the due date of a particular tax return to audit it. Many exceptions apply, of course. Some are based on the taxpayer’s own alleged conduct, while others are based on the type of information involved.
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The overall percentage of federal income tax returns audited by the IRS has been decreasing over the past several years. This is at least partly due to budget cuts, which leave the IRS with fewer resources to conduct audits. People with particularly high incomes have reportedly seen a steeper decline in audit rates than other people, but they still get audited at a higher rate than the general U.S. population.

The apparent decline in IRS audits is definitely not cause to be less careful with one’s taxes, especially for high-income individuals. The Tax Cuts and Jobs Act (TCJA) of 2017 led to significant tax cuts for many people with high incomes, but it also created opportunities for tax write-offs that are likely to catch the IRS’s attention. It may take the IRS a few years to catch up to some of these new opportunities, but they almost certainly will.

Decline in Audit Rates

In 2017, the IRS audited one out of every 160 tax returns that were filed. This was the sixth year of decline in the total number of audits, and the lowest number in fifteen years. The audit rate for individuals with annual earnings of $1 million or more was higher than the rate for the general population, at more than four percent in 2017. That same group, however, was audited at a rate of almost ten percent in 2015. This is also the lowest rate since the early ‘00s.
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Nearly every adult in the U.S. must file an annual federal income tax return with the IRS that discloses their income, identifies tax deductions and credits, and states the amount of tax that is owed. What happens if a taxpayer fails to file on time? The consequences could include penalties and interest, as well as limits on the ability to obtain relief if they cannot afford to pay their tax bill.

What Are the Tax Deadlines?

Federal income tax returns are due on April 15 of each year. If the 15th falls on a Saturday, Sunday, or federal holiday, the due date is the next business day. California has the same deadline for state income tax returns.

Taxpayers may be able to obtain an extension of up to six months to file their federal tax return. This typically requires filing an extension form, and paying their estimated tax owed, prior to the April deadline.
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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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