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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Congress passed H.R. 3151, a bipartisan bill known as the Taxpayer First Act (TFA), in June 2019. The president signed it into law on July 1. Title I of the new law, entitled “Putting Taxpayers First,” improves procedures for assisting taxpayers and handling appeals. Title II, entitled “21st Century IRS,” improves identity theft protections and directs the agency to make technological upgrades. This bill replaced an earlier version, H.R. 1957, which had been introduced in March. A series of media reports in April led to criticism of several provisions in the first bill. Those provisions were removed in the reintroduced bill.

Office of Appeals

Section 1001 establishes the Internal Revenue Service Independent Office of Appeals (IOA) to “resolve Federal tax controversies without litigation.” The TFA identifies three main goals for the office:
1. Fairness towards both taxpayers and the IRS;
2. Consistent enforcement of tax law, along with “voluntary compliance” by taxpayers; and
3. “[P]ublic confidence in the [IRS’s] integrity and efficiency.”

Taxpayers who receive a notice of deficiency can request a referral to the IOA. If the IRS denies the request, the TFA requires it to provide written notice to the taxpayer explaining the reasons for the decision and explaining the procedure for filing a protest.
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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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