Offer in Compromise Program

With tax time ending, many people are faced with the harsh reality of paying owed taxes. For the taxpayers that have considerable debt you hear about ways to settle with the IRS for a fraction of what you owe. This settlement program is an offer in compromise (OIC). It gives the taxpayer a chance to pay a slightly lower amount over several years. Even though this is a highly talked about program, it is an extremely hard program to qualify for.

In 2013, the IRS only approved 31,000 OIC applications despite the millions of people in debt to them. In contrast, there are over 4 million installment agreements in 2013 for those that owe taxes. When it comes to OIC, it is a rare occurrence to be approved for two reasons: The taxpayer does not qualify for the program, or if they qualify, they still cannot pay the amount offered.

The first question to ask: Do I qualify for an OIC? The answer may be simple to answer. Can you pay back the amount due before the collection statute expiration date? The way he IRS determines this is through a formula. You can find an OIC pre-qualifier tool on the IRS website at www.IRS.gov. This calculator figures the chance to repay before the expiration date by using the net equity in assets plus any future income. This process can be the most confusing part of the process, and subjected to the most debate, but the results are very clear, either you can or cannot repay in the allotted time.

The next question after determining if you qualify: Can you pay the OIC offered amount? There is once again a formula used to determine the qualifications. This calculation is a bit more complicated and needs to be taken with care and diligence. If done incorrectly then the offer will be too costly to accept. A true financial hardship has to be there to prove that the taxpayer is unable to the taxes before the collection statute expires. Once this is determined and the results come in, many people think it is better to establish a payment plan.

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States Talking Changes to Estate Taxes

For most of the US, Estate taxes are something only the extremely wealthy plan for, but in 16 states, mostly in the northern US, state estate taxes catch middle and upper class taxpayers. The federal exemptions for individuals are $5.34 million for individuals and $10.68million for married couple. This is indexed to inflation, so it will continue to rise, but in the 16 states the tax exemptions can be as low as $675,000 a person (New Jersey) and some of them even tack on an inheritance tax.

For many people in these states, the only solution has been to move to a state that does not have estate taxes. When they move, their home state loses other taxes, including sales tax, property and income taxes. This has caused many states including New York and Washington DC to reevaluate their estate tax laws.

The proposed change would bring the estate taxes closer to the federal government requirements. Some states, such as Indiana have eliminated the inheritance tax, while Tennessee is in the process of phasing it out. Ohio has even taken steps to end its estate tax.

If key states take action to eliminate estate taxes and inheritances penalties, this could cause other states to follow their example. Until this happens, it is important that people who have money that is more than their states exemptions, but less than the federal, take steps to protect their money from unwanted taxes.

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Tax Tips for End of the Year

It is that time again, the end of the year is approaching and then it is tax time, but why wait to think about taxes in January, when there is still time this year for some last minute adjustments. By using last year’s tax return as a starting point, you can evaluate and make changes that could positively change your taxes for 2014. The following at steps and planning strategies to consider when review finances at the end of the year.

  • Double Check Withholdings: You do not want to pay the IRS anymore that you have to. Adjust your withholdings so just enough comes out and you break even. If you can live without the extra pay coming in, put it in a savings account or add it to you retirement account.
  • Refinance Debt: Lowering your mortgage interest rate, not only give you a lower interest rate and payment, but if you use any of the proceeds to make physical improvements to your home, the amount could be subjected to alternative minimum tax (AMT).
  • Prepay Taxes: If you are not subject to ATM, consider prepaying estimated quarterly state taxes and property taxes. If you are able to prepay, the deductions can be taken for the 2013 return if paid before December 31.
  • Avoid ATM: If you live in a high tax state, have a duel income, and have children you might want to look at your chances of paying the alternative minimum tax. To avoid paying this tax, you should talk to you tax professional, but also consider deferring payments of state and local taxes until the new year, and accelerate you income to the point where you are no longer subjected to the tax. In many situations, this is a multiyear planning, so now is a good time to start.
  • Check up on Portfolios: Harvest any losses to help offset capital gains, rebalance any tax-deferred retirement accounts by allocating funds for the accounts, and consider your cash flow.

It is important to act before the end of the year if you are wanting the deductions for January taxes, then now is the time to act. Anything paid on or after January 1 will be on next year’s taxes.

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Changes to Innocent Spouse Relief

With today’s divorce rate of first marriages at 50%, the ‘happily ever after’ that most people seek can be elusive. If things go sour in a marriage then they could go sour in other areas also, including jointly filed tax returns. When a couple files jointly they can be many benefits, but they are also both fully responsible for any taxes owed, interest and penalties. This also applies to any couple that lives in a community property state even if they file separately. This can detrimental to anyone going through a divorce financially if the person filing the return underreports or over deducts.

There is relief for the innocent spouse. The IRS has three ways to help innocent spouses with joint return that have gone awry, and they include:

  • Innocent Spouse Relief: which provides you relief from additional taxes that you may owe that your spouse failed to report, improperly reported, or if they claimed credits or too many  deductions.
  • Separation of Liability Relief: allocates additional taxes owed between you and your former or current but separated spouse on items not reported correctly. It allows you to pay what you owe.
  • Equitable Relief: may be applied for when you do to qualify for either innocent spouse relief or separation of liability for something not reported properly on a joint return, or for the right amount, but the payment remains unpaid.

In the past, the IRS has allowed a two year window to file for relief, but this has recently changed. Now as long as the statute of limitations has not expired then you can still file for relief, the two year window no longer applies. With this change, if you have applied for relief and were denied solely on the two year window, then you may reapply using the Form 8857 as long as the statute of limitations has not expired.

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How to Prepare for an Audit

This is the time of year that the IRS conducts tax audits. While it can be scary, there are ways to prepare before the audit. If you are meeting the auditor in person there are a few things you should prepare ahead of time.

Before the Audit

Whether you are meeting an auditor by yourself or with a professional, it is important to be prepared. Find all records that relate to and back up your tax return. The IRS has the right to look any records used to prepare your tax return, so to make it easy. Organize the records use to prepare your tax return. This will also help refresh your memory before the audit meeting.

Remember that neatness counts. The more receipts the auditor goes through, the more chances they will find something else. Auditors tend to reward good recordkeeping and give the benefit of doubt if any problem arises. Pinpoint potential problems and be able to show why your right to take a deduction. Do some research, if necessary.

What to Bring to the Audit

A successful audit is backing up your tax return with documentation. Proof should be in writing, even though auditors are allowed to accept oral explanations. You should bring bank statements, canceled checks, and receipts. Also electronic records, ledgers, journals, and printout of any computer data will also make it easier to show proof. Do not make the IRS guess because they will assume guilt. Anything that will help give proof should be available for the auditor to review.

It is important to stay calm and be prepared to answer any questions the auditor would ask. The success of the audit depends on proving the return is correct.

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Steps to Prepare for the Tax Season

The start of a new year is a busy time for any individual. Although the year has just begun, it is time to start preparing for the tax season. By starting the preparations early, it is easier to avoid mistakes and ensure the paperwork is ready before deadlines start coming up.

Gather and Organize Paperwork

Although the W2 forms are not normally sent out or even prepared until the middle to the end of January, the forms are only part of the paperwork involved in taxes. Paperwork will also include the tax deductions, charity donation receipts and other receipts related to taxes.

Gathering as much paperwork and documentation as possible beforehand will make it easier to put the information into the tax documents after the W2 forms finally arrive. Early organization and preparation simplifies the amount of organization that is required later, which makes it easier to complete and submit the IRS forms before the due date.

Write Down Questions

Tax paperwork and preparation can lead to many complicated questions. Taking extra time to write down any questions that arise will prevent confusion when the paperwork is being prepared. The taxes that are related to new events, such as filing jointly after marriage when compared to filing separately, can lead to many questions.

When new situations arise or new tax laws are applied to the paperwork, it is important to write down the questions and find out the answers before working on the paperwork. The preparatory step makes it easier to avoid accidental mistakes.

Review Any Changes to Laws

Laws related to taxes are constantly changing as world events and the situation of the country takes different paths. Since the laws can change when new regulations are passed, every individual should learn about any changes to the filing system or any regulations that might apply to a personal situation.

After learning about any changes, determine if other questions arise. The legal aspects of taxes are often confusing and complicated, particularly when it differs from previous years. If any new questions arise related to legalities, then it is important to add the question to the list.

Look for Mistakes

Financial statements are not always accurate. Before using any financial statements on tax paperwork, it is important to look for and correct any mistakes. Although mistakes are uncommon, catching problems and changing the data to accurate figures will reduce the risk of accidentally filing the wrong information.

With the tax season around the corner, it is important to start taking steps to prepare the paperwork and documentation. Early organization is a key part of simplifying the process and avoiding complications when the tax paperwork is filed.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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IRS Payment Plan

If you were unable to file your taxes by April 15, you are not alone. Around 5.5 million business tax extensions are filed every year. This extra six months is a nice cushion if you just couldn’t get everything done on time, but the next deadline, October 15, is coming. And since the IRS only allows one 6-month extension to file form 1040, it is time to scurry.

It is vital that you file on time or you may be subject to fees and penalties. If you are concerned that you will be financially unable to pay everything you owe immediately, consider the IRS’ installment agreement. Let’s look at this "payment plan" so you are prepared.

It is perfectly acceptable to make monthly payments with the IRS installment agreement if you are financially unable to pay your tax debt.

To proceed with this IRS installment agreement process, you must:

  • File all required tax returns
  • Consider other sources, like a loan or credit card, to pay your tax debt completely to save money
  • Figure out the largest monthly payment you can afford to make, with a $25 minimum payment, and
  • Understand that any future tax refunds will be applied to your tax debt until it is paid off

Next, you can avoid the fee for setting up an installment agreement if you pay the full debt amount within 120 days. If that is your plan, you will need to specify this option when you sign up. But you will still need to call if you owe more than $50,000.

The fees for setting up an installment agreement are:

  • Direct Debit – $52
  • Standard or Payroll Deduction – $105
  • Lower Income Level – $43

There are a few ways to apply for an installment agreement:

  • If you owe $50,000 or less (including individual income tax, interest and penalties), apply online
  • You may call the phone number on your bill or notice
  • You may mail the completed Form 9465-FS.

After all this work to file an installment agreement, be sure to keep your account in good standing. This is easily accomplished by:

  • Paying, at the very least, your minimum monthly payment when it is due
  • Including your name, address, SSN, daytime phone number, tax year and return type on each payment
  • Filing all tax returns on time
  • Paying all taxes you owe completely and promptly
  • Continuing to make all payments even if a refund is applied to the account balance

If you would like to know more, you may contact Crowley Halloran CPA’s at www.crowleyhalloran.com.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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