Employee Holiday Gifts May Be Taxable

Article Highlights: 

  • De Minimis Fringe Benefits 
  • Cash Gifts 
  • Gift Certificates 
  • Group Meals 
  • FICA and Wage Withholding 

It is common practice this time of year for employers to give their employees gifts. A gift is infrequently offered and has a fair market value so low that it is impractical and unreasonable to account for it; the gift’s value would be treated as a de minimis fringe benefit. It would be tax-free to the employee, and its cost would be tax-deductible by the employer. 

De Minimis Benefits – In general, a de minimis benefit is one that, considering its value and the frequency with which it provides, is so minor as to make accounting for it unreasonable or impractical. De minimis benefits are excluded from income under Internal Revenue Code section 132(a)(4) and include items not expressly excluded under other Code sections. Examples of de minimis benefits include such things as: 

  • Controlled, occasional employee use of a company photocopier. 
  • Occasional snacks, coffee, doughnuts, etc., furnished to employees. 
  • Occasional tickets for entertainment events are given to employees. 
  • Holiday Gifts from the employer to the employees. 
  • Occasional meal money or transportation expenses paid for by the employer for employees working overtime. 
  • Group-term life insurance on the life of an employee’s spouse or dependent with a face value, not more than $2,000. 
  • Flowers, fruit, books, etc., are provided to employees under particular circumstances, such as birthdays or illnesses. 
  • Personal use of a cell phone provided by an employer primarily for business purposes.

In determining whether a benefit is de minimis, you should always consider its frequency and value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation. 

Whether an item or service is de minimis depends on all the facts and circumstances. Also, suppose a benefit is too large to be considered de minimis. In that case, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously that items with a value exceeding $100 cannot be considered de minimis, even under unusual circumstances. 

Holiday Gifts – A cash gift, regardless of the amount, is considered additional wages and subject to employment taxes (FICA) and withholding taxes. Caution: If the gift recipient is a W-2 employee, the employer may not issue them a Form 1099-NEC or a 1099-MISC for a holiday gift of cash; the amount must be treated as W-2 income. 

When an employer gives gift certificates, debit cards, or similar items that are convertible to cash, the value is considered additional wages regardless of the amount. However, suppose the gift is a non-transferable coupon and convertible only into a turkey, ham, gift basket, or the like at a particular establishment. In that case, the gift coupon is not treated as a cash equivalent. 

Holiday group meals, cocktail parties, picnics, or similar events for employees are also treated as de minimis fringe benefits. 

If you have questions about the tax treatment of holiday gifts to employees, please contact us

What Happens if You Missed the October 15th Tax Extension Deadline?

We’ve all been there. Life is super busy. We have to take care of our families and friends, work obligations, and other everyday responsibilities. With all of the hustle and bustle, you realize that the October 15th tax extension deadline has passed, and unfortunately, you still haven’t filed. What should you do now? 

This article provides guidance when you miss the tax extension deadline and the next steps you should take. 

Will I Be Penalized for Filing After the Deadline? 

Yes, if you missed the October 15th filing deadline, you can be penalized. The IRS allowed you an additional six-month extension of time to file your taxes (from April 15th to October 15th). That was not an extension to pay taxes, only an extension to complete your return. In addition to any interest and penalties that you may owe as a result of failing to file (and pay) your tax on time, you will now be subject to a late filing fee on any unpaid taxes. The penalty, which includes interest, is generally 5% per month of any outstanding balance for up to 5 months. This penalty can increase to up to 25% of the remaining balance owed. To make matters worse, the interest continues to accrue until any liability is finally paid. 

If you file your taxes more than 60 days late, you may receive an additional penalty of $435. That is the minimum late filing penalty, which is the lesser of what you owe in taxes or the $435. It’s crucial to go ahead and file even if you can’t pay the outstanding balance in full and work with the IRS to create a payment arrangement. Even if you are missing some information you need to file, you can file now and amend later when the information becomes available. 

What Happens if the IRS Owes Me a Refund? 

For taxpayers who believe they are owed a refund from the Internal Revenue Service, you have three years from the original due date of the return to file and claim your refund. However, if you wait too long, you will forfeit any refund you might be entitled to. 

If you are filing your tax return after the October 15th deadline and do not owe any tax, there will be no late filing penalties or interest. 

What Happens If I Don’t File My Return? 

Suppose you don’t file your tax return with the IRS. In that case, they will likely create a substitute return on your behalf based on income data such as W-2s, 1099s, and other documentation provided to them by your employer and other financial institutions. 

It’s important to understand that this substitute return will not include any calculations for credits and deductions that you may be qualified for. Consequently, the substitute return will likely result in a higher balance owed and penalties than if you prepared your return. 

What Happens If I Can’t Pay the Tax Balance Owed? 

If you can’t pay your tax obligations with the IRS, it is crucial to go ahead and get the tax return filed and then work with the Internal Revenue Service to set up a payment plan. 

The IRS’ Fresh Start Program allows taxpayers with balances of less than $25,000 to set up a monthly installment plan, allowing you to make payments on your balance over several years. 

There is an “Offer In Compromise” option that allows you to settle your tax debt for less than the amount owed for those experiencing more financial difficulty. 

The interest and penalties for filing your tax return after the final tax deadline can be severe. It is important to get your return filed, even if you need to make arrangements to pay the balance owed to the IRS. 

If you have any questions about the steps you should take if the October 15th tax extension deadline has passed you by, or for more information about our tax planning and preparation services, please contact us.

Don’t Miss Out on Year-End Tax-Planning Opportunities

Article Highlights: 

  • October 15 extended due date for filing federal individual tax returns for 2019. 
  • Late-filing penalty. 
  • Interest on tax due. 
  • Other October 15 deadlines. 

Because of the COVID-19 pandemic emergency, the IRS postponed the original due date for filing 2019 returns to July 15, 2020. If you could not complete your 2019 tax return by July 15 and filed a request for additional time to file, that extension expires on October 15, 2020. Failing to file before the extension period runs out may cost you late-filing penalties. 

There are no additional extensions available (except in designated disaster areas), so if you do not or will not have all of the information needed to complete your return by October 15, please contact this office. We can explore your options for meeting your extended filing deadline. 

If you are waiting for a K-1 from a partnership, S-corporation, or fiduciary return, the extended deadline for those returns is September 15 (September 30 for fiduciary returns); so you should probably make inquiries if you have not received that information yet. 

Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month (or part of a month) if a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return and do not do so, the state will also charge a late-file penalty. The filing extension deadline for individual returns is also October 15 for most states. 

 Interest continues to accrue on any balance due, currently at the rate of 3% per year, and this rate is subject to quarterly adjustment. 

If this office is waiting for some missing information to complete your return, we will need that information at least a week before the October 15 due date. Please contact this office immediately if you anticipate complications related to providing the required information so that we can determine a course of action to avoid the potential penalties. 

Additional October 15, 2020 Deadlines – In addition to being the final deadline to file 2019 individual returns on an extension, October 15 is also the deadline for the following actions: 

  • FBAR Filings – Taxpayers with foreign financial accounts exceeding an aggregate value of $10,000 at any time during 2019 must file a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically with the Treasury Department. The original due date for the 2019 report was April 15, but individuals have been granted an automatic extension to file until October 15, 2020. 
  • SEP-IRAs – October 15, 2020, is the deadline for a self-employed individual to set up and contribute to a SEP-IRA for 2019. The deadline for contributions to traditional and Roth IRAs for 2019 was July 15, 2020, instead of the usual April 15 contribution due date because of the COVID-19 emergency, but no further extension is available. 
  • Special Note: Disaster Victims – If you reside in a presidentially declared disaster area, the IRS and most states provide additional time to file various returns and make payments. 

Please contact us for information on extended due dates of other types of filings and payments as well as extended filing dates in disaster areas.

Did You Know Unemployment Benefits are Taxable?

Article Highlights: 

  • CARES Act 
  • Unemployment Benefits 
  • States Taxation of Unemployment 
  • Will Unemployment Be Taxable? 

With the passage of the CARES Act stimulus package earlier this year, the federal government added $600 to the standard state weekly unemployment benefits and increased the number of benefit weeks to a total of 39. 

In many cases, workers are receiving unemployment benefits for the first time in their lives, and they may not be aware that the benefits are fully taxable for federal purposes. Making matters worse is that most states also tax unemployment benefits, which may come as a surprise with a potentially unpleasant outcome for many when it comes time to file their 2020 tax return next year. 

Those who received unemployment benefits will be sent a Form 1099-G (Certain Government Payments) from the state that paid the benefits. This tax form shows the amount of unemployment benefits received and the amount of tax withheld, if any. 

There are several states where unemployment benefits are not taxable. Seven states do not have a state income tax, so obviously, unemployment benefits are not taxable in those states, which are: 

  • Alaska 
  • Florida 
  • Nevada 
  • South Dakota 
  • Texas 
  • Washington 
  • Wyoming

 Seven states have state income tax but do not tax employment benefits. They include: 

  • California 
  • Montana 
  • New Hampshire 
  • New Jersey 
  • Oregon 
  • Pennsylvania 
  • Tennessee 
  • Virginia 

Two states exempt 50% of amounts above $12,000 (single taxpayer) or $18,000 (married taxpayers). They are: 

  • Indiana 
  • Wisconsin 

If you’ve collected unemployment compensation this year, your benefits’ impact on your tax bill will depend on several factors. These factors include the amount of unemployment received, what other income you have, if you are single or married (and, if married, whether you and your spouse are both receiving unemployment benefits), and whether you had or are having income tax withheld from benefit payments. 

If you have questions about the taxation of unemployment compensation, please contact us.

Foreign Account Reporting Due October 15

Article Summary:

  • Foreign-Account Reporting Requirement
  • Financial Crimes Enforcement Network
  • Penalties for Failure to File
  • Types of Accounts Affected
  • Form 8938 Filing Requirements

United States entities with financial interests in, or authority over, one or more foreign financial accounts (e.g., bank accounts and securities), need to report these relationships to the U.S. Treasury if the aggregate value of those accounts exceeds $10,000 at any time during the year. The reporting requirement is pertinent to all U.S. entities, including citizens, resident aliens, corporations, partnerships, and trusts. Failure to file the required forms can result in severe penalties.

The U.S. government wants this information for two reasons. First, foreign financial institutions may not have the same reporting requirements as U.S.-based financial institutions. For example, they probably won’t issue the 1099 forms to report interest, dividends, and sales of stock. By requiring those in the U.S. to divulge their foreign account holdings, the IRS can more easily cross-check to see if foreign income is being reported on the individual’s tax return. The second (and probably more significant) reason is that the information in the report can be used to identify or trace funds used for illegal purposes or to identify unreported income maintained or generated overseas.

Due Date and Extension – For 2019, the due date for filing this report was April 15, 2020, but the government grants an automatic extension to October 15, 2020, for those who didn’t file by April 15. This filing, the Report of Foreign Bank and Financial Accounts (FBAR), is not made with the IRS; instead, it involves completing Bank Secrecy Act forms and filing them electronically through the U.S. Treasury’s Financial Crimes Enforcement Network.

Failure to Report Penalties – A civil penalty of up to $10,000 may be imposed for a non-willful failure to report. The penalty for a willful violation is the greater of $100,000 or 50% of the account’s balance at the time of the violation. Both the $10,000 and $100,000 amounts are subject to an inflation adjustment, which, as of February 2020, brings them to $13,481 and $134,806, respectively. A willful violation is also subject to criminal prosecution, resulting in a fine of up to $250,000 and jail time of up to five years.

CAUTION: On Schedule B of the Form 1040 tax return, you must state whether you have a financial interest in or signature authority over one or more foreign financial accounts. If you answer yes but don’t file the FBAR, your failure to file may be considered willful, subjecting you to the more massive fine and jail time.

Financial Account – The term “financial account” includes securities, brokerage, savings, checking, deposit and time deposit accounts, commodity futures and options, mutual funds, and even nonmonetary assets (e.g., gold). Such an account is classified as “foreign” if the financial institution that holds it is located in a foreign country. Shares of a foreign stock or a mutual fund that invests in foreign stocks are not considered foreign if they are held in an account at a U.S. financial institution or brokerage, so they do not need to be reported under the FBAR rules. Also, an account maintained at a branch of a foreign bank is not considered a foreign financial account if the branch is physically located in the U.S.

Unforeseen Foreign Accounts – You may have an FBAR requirement and not even realize it. For instance, say that you have relatives in a foreign country who have put your name on their bank account in case of an emergency. If the value of that account exceeds $10,000 at any time during the year, you will need to file the FBAR. The same would be true if your name were added to several of your foreign relatives’ smaller-value accounts that add up to more than $10,000 at any time during the year. As another example, if you gamble at an online casino that is located in a foreign country and your account exceeds the $10,000 limit at any time during the year, you will need to file the FBAR.

Additional Filing Requirements – You may also have to file IRS Form 8938, which is similar to the FBAR but applies to a broader range of foreign assets and has a higher dollar threshold. This form is filed with your income tax return. If you are married and filing jointly, you must file Form 8938 if the value of your foreign financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, these thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of the amounts above. The penalty for failing to file Form 8938 is $10,000 per year; if the failure continues for more than 90 days after the IRS provides notice of your failure to file, the penalty can be as high $50,000.

Failure to comply with the foreign-account reporting requirements can lead to very severe repercussions. Please contact us as soon as possible if you have questions or need assistance meeting your foreign account reporting obligations.

October’s Extended Tax Deadline: Due Date Is Fast Approaching

Article Highlights:

  • October 15 extended due date for filing federal individual tax returns for 2019.
  • Late-filing penalty.
  • Interest on tax due.
  • Other October 15 deadlines.

Because of the COVID-19 pandemic, the IRS postponed the original due date for filing 2019 returns to July 15, 2020. If you could not complete your 2019 tax return by July 15 and filed a request for additional time to file, that extension expires on October 15, 2020. Failing to file before the extension period runs out may cost you late-filing penalties.

There are no additional extensions available (except in designated disaster areas). If you do not or will not have all of the information needed to complete your return by October 15, please contact your Tarlow advisor so that we can explore your options for meeting your extended filing deadline.

Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month (or part of a month) for which a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return and do not do so, the state will also charge a late-file penalty. The filing extension deadline for individual returns is also October 15 for most states.

In addition, interest continues to accrue on any balance due, currently at the rate of 3% per year. This rate is subject to quarterly adjustment.

If we are waiting for some missing information to complete your return, we will need that information as soon as possible. Please contact us immediately if you anticipate complications related to providing the needed information so that we can determine a course of action to avoid the potential penalties.

Additional October 15, 2020 Deadlines – In addition to being the final deadline to file 2019 individual returns on an extension in a timely manner, October 15 is also the deadline for the following:

  • FBAR Filings – Taxpayers with foreign financial accounts exceeding an aggregate value of $10,000 at any time during 2019 must file a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically with the Treasury Department. The original due date for the 2019 report was April 15, but individuals have been granted an automatic extension to file until October 15, 2020.
  • SEP-IRAs – October 15, 2020, is the deadline for a self-employed individual to set up and contribute to a SEP-IRA for 2019. The deadline for contributions to traditional and Roth IRAs for 2019 was July 15, 2020, instead of the usual April 15 contribution due date because of the COVID-19 emergency, but no further extension is available.
  • Special Note: Disaster Victims – If you reside in a presidentially declared disaster area, the IRS and most states provide additional time to file various returns and make payments.

Please contact us for information on extended due dates of other types of filings and payments as well as extended filing dates in disaster areas.

Here’s What Could Happen If You Try to Short-Change the IRS

Article Highlights:

  • Self-employed taxpayers
  • Underreported income
  • Unscrupulous tax preparers
  • Phony deductions or credits
  • Inflating the Earned Income Tax Credit
  • Taking fake education credits
  • Petty cheating

Some refer to it as “creative accounting” or just “a little fudging here and there.” However, if your tax return is missing some income that should have been reported or includes overstated deductions, regardless of whether you prepared your return or had it prepared, you are the one who is ultimately responsible. If you get caught, there can be very unpleasant consequences, including substantial monetary penalties and the possibility of jail time for blatant cases.

Those who fudge on their taxes may think that they are just cheating the government out of money. In actuality, however, the government is going to get the taxes it needs from somewhere, so those who fudge on their taxes are causing others to pay more.

Currently, just short of 50% of all U.S. taxpayers pay no income tax. A large percentage of these folks get money back from the government because their income is low, and they qualify for certain refundable tax credits. How many of those not paying taxes are either not reporting all of their income or exaggerating their deductions? There are no statistics on the issue, but it would seem to be a large number.

One of the most significant areas of cheating involves self-employed individuals not reporting cash payments. Some will even go so far as to offer discounts for cash payments; these discounts, of course, are attractive, and customers often opt for them, thus enabling the self-employed individuals to cheat on their taxes. However, if self-employed individuals get caught, perhaps because their reported income doesn’t support their lifestyles, they can end up with a high tax bill and penalties. Additionally, when the IRS finds a cheater, that person’s returns, or their company returns, are often audited for other years.

Some individuals who underreport their income are not just avoiding income taxes, but qualifying for low-income tax credits and other subsidies meant for those who need them.

Unscrupulous tax preparers also cheat, and you could end up being the victim. Here are some of the schemes they pull:

  • Adding false deductions or credits – They do your return correctly and tell you what your refund is. Then, before they e-file it, the preparer adds false deductions or credits to inflate the refund. The refund amount you expect is direct-deposited to your account, but the extra amount is sent to their bank account.
  • Inflating the Earned Income Tax Credit – Earned Income Tax Credit (EITC) is a refundable tax credit for low-income taxpayers that is based upon the amount of the taxpayer’s income from working (earned income). The credit increases up to a point as the taxpayer’s earned income increases then phases out for higher-income taxpayers. This credit is the frequent target of scams, and one of the most common is to create earned income by fabricating self-employment income of an amount that will result in the maximum EITC. Even though this may create more taxes, the EITC is higher than the taxes, netting an increase in the taxpayer’s refund.
  • Taking fake education credits – Another frequent scam is to claim a higher education tax credit, especially the partially refundable American Opportunity Tax Credit (AOTC), using made-up education expenses. The AOTC can be as much as $2,500, and $1,000 of that amount is refundable.

If you were a victim of an unscrupulous tax preparer and need assistance, please contact your Tarlow advisor.

Petty cheating is also prevalent. The following lists common areas of fraud and the steps that the IRS takes to counter them.

  • Inflating the value of noncash goods donated to charity – This is probably one of the most commonly inflated tax deductions.
    IRS Countermeasures: The IRS requires documentation from the charity, and if the value of the donation is more than $500 for the year, a detailed list of the items that the taxpayer contributed. The IRS will generally include charitable contributions in every audit, no matter what triggered the audit in the first place. 
  • Claiming fictitious cash contributions – This typically involves claiming that cash was donated through a house of worship’s collection plate or holiday charity kettle.
    IRS Countermeasures: All cash contributions must be verified with a bank record or a written record from the charity. Without such a document, no deduction is allowed. 
  • Purchasing an item at a charity event – Generally, when you receive something of value for donating, the amount of that item is not a deductible charitable contribution. Thus, the cost of pancake breakfasts, charity auctions, Girl Scout cookies, car washes, and the like are not deductible as charitable contributions.
    IRS Countermeasures: The IRS requires charities to include the value of goods or services provided to the donor on the charity’s receipt, making it easy for the IRS to detect when improper deductions are taken when it examines the receipts during an audit.
  • Donating cars to charity – At one time, individuals were donating vehicles that were close to being scrapped and then deducting the blue book value for the car as if it were in good or better condition. This trend became so prevalent that Congress actually stepped in and limited the vehicle contribution to $500 (generally).
    IRS Countermeasures: The IRS now requires the charity to issue a Form 1098-C to the donor; this form includes the information that needs to be reported if the vehicle contribution meets the requirements for a contribution greater than $500. 
  • Using a business vehicle for personal purposes – Have you seen pickups and other trucks with company logos on their doors towing boats and trailers down the highway? There is a good chance that the drivers of these trucks are writing off the mileage through their businesses.
    IRS Countermeasures: The IRS generally requires businesses, primarily closely held ones, to verify the business use of their vehicles (particularly those that are suitable for personal use) with a log, including the odometer readings for the start and finish of each business use. 
  • Deducting more home mortgage interest than entitled – Tax law limits the amount that can be deducted for home mortgage interest to the interest paid on $1 million in debt ($750,000 for debt incurred after December 15, 2017) from purchasing or improving a home. This limit applies to a taxpayer’s first and second homes only. Many taxpayers simply take the mortgage interest from the Form 1098 provided by the lender without any regard to these limitations.
    IRS Countermeasures: IRS Form 1098 requires lenders to include additional information that will allow the IRS computer to determine whether the limits have been exceeded. 
  • Making repairs on a personal home and deducting the expenses on a rental or business property – It is pretty easy for landlords or owners of business real estate to make repairs on their homes and then deduct those repairs on their rental or business properties.
    IRS Countermeasures: An auditor will look at the dates and addresses on receipts to ensure that they make sense. If an auditor catches such a violation, expect him or her to become very aggressive in other areas and to possibly invoke substantial penalties due to the intentional disregard of laws and regulations.
  • Falsifying investment costs to minimize gain – Until a few years ago, it was up to taxpayers to track their basis in the securities they owned. Inflating the price was prevalent before the IRS required brokers to begin monitoring basis.
    IRS Countermeasures: The IRS modified Form 1099-B, issued by brokers when stocks, bonds, etc., are sold, to include the basis if known, and to indicate otherwise if basis was unknown. Then, the IRS developed Form 8949 to separate investment sales into those for which the broker was tracking the basis, and those for which the broker did not know the basis or wasn’t required to track it. The information on these forms allows the IRS to focus on the sales for which the taxpayer was tracking the basis. 

If you suspect your tax returns could be fraudulent, or if you know someone who has been the victim of a dishonest or inept tax preparer, please contact us.

Is It Time for a Payroll Tax Checkup?

Article Highlights:

  • Tax Reform
  • Underpayment Penalties
  • W-4 Modifications for 2020
  • Withholding Estimator
  • Penalty Abatement

Was your 2018 federal tax refund less than normal, or did you owe taxes despite usually receiving a refund? If so, this was most likely due to the last-minute passage of the Tax Cuts and Jobs Act at the end of 2017. Because the law was only passed late in the year, the IRS did not have adequate time to adjust its W-4 form and the related computation tables to account for all the changes in the law. Thus, even if your taxes were lower for the year, the lack of adjustments to the W-4 and payroll-withholding tables meant that you likely had lower withholding and higher take-home pay for 2018. The bottom line is that, because your withholding was lower than it should have been, either your refund was lower than normal, or you ended up owing money instead of getting a refund.

This situation surprised many taxpayers, some of whom faced financial hardships because they depended on their federal refunds to cover other expenses, such as home property taxes.

Throughout 2018, the IRS issued nearly weekly warnings that the W-4 form and its corresponding withholding tables did not properly account for the tax reform’s changes. The warnings stated that in many cases this caused the 2018 withholding amounts to be inappropriate. The problem was so widespread that Congress asked the IRS to waive underpayment penalties for taxpayers who ended up with a balance due but who had prepaid at least 80% of their 2018 tax liabilities. (Normally, taxpayers need to prepay 90% of their tax liabilities to avoid this penalty.)

Unfortunately, this problem will not be solved in time for the 2019 returns. Despite the problems in 2018, the IRS is waiting until 2020 to implement a new W-4 and to revise the accompanying computations to accommodate the tax reform’s changes. As a result, the problem of insufficient withholding will persist for many taxpayers in 2019.

We are now over halfway through 2019, so it may be a good time to double-check your withholding and projected tax amounts in order to prevent another unpleasant surprise at tax time. Your Tarlow tax advisor can assist you and we encourage you to contact us. If you are conversant with tax terminology, you can use the IRS’s newly updated withholding estimator. This online tool helps you to determine whether your employer is withholding the right amount of tax from your paychecks. However, the results are only as good as the information that you put into the withholding estimator. You must also estimate your income for the year from various sources.

Regarding the underpayment penalty, there are two points to consider:

  • First, if you filed early in 2018 and you had tax due, then you may have paid an underpayment penalty because you hadn’t prepaid enough tax through either withholding or estimated tax payments. As mentioned earlier, the IRS allowed a special exception to the underpayment penalty for those who prepaid at least 80% of their 2018 tax liabilities. However, it didn’t establish the 80% penalty waiver until well into March, so those who filed early may have paid a penalty that they did not end up being liable for. To determine if you paid a penalty, look at line 23 of your 2018 Form 1040. If there is an amount on that line but you met the 80% minimum for the underpayment exception, you will receive a refund from the IRS. On August 14, 2019, the IRS announced that they will automatically refund the penalty to all qualifying taxpayers. There is no need to contact the IRS to apply for or request the waiver.
  • Second, don’t count on the IRS again lowering the underpayment penalty for this year; it has given fair warning to taxpayers, who have had many months to review and adjust their tax withholding amounts. If you need to increase your 2019 withholding, you should do so soon; the end of the year will be here before you know it and spreading out the adjustment over a longer period results in the least amount of pain in your budget.

If you are self-employed, pay estimated tax, or have questions about your federal tax refund, please contact us. We can assist you by performing a tax checkup and answer any questions you may have about a complicated tax return.

IRS Giving a Break to Some Taxpayers Who Under-prepaid Their 2018 Taxes

Taxpayers are required to pre-pay their taxes for any tax year through payroll withholding, estimated tax payments or a combination of the two. Employees and retirees generally accomplish this through withholding, and self-employed individuals and those with investment income by paying quarterly estimated payments.

The late-2017 passage of tax reform that became effective for 2018 and its radical changes added considerable confusion for taxpayers trying to determine how much they should prepay for 2018. This confusion was made worse because the existing W-4 that employees complete and that their employers use to determine the correct withholding was designed for prior law and does not work well with the new tax law. As a result, there has been ongoing concern by the IRS that many taxpayers will end up owing tax this year when they file their 2018 returns, even though they got a tax reduction due to the tax reform changes, simply because their pre-payments through withholding and estimated tax payments were not enough.

For most of 2018, the IRS was issuing alerts that taxpayers may be under-withheld because of tax reform and the fact the W-4 could no longer be relied upon to produce a correct withholding amount.

Taxpayers whose pre-payments are less than certain safe harbor amounts are penalized. Those safe harbors are:

  • 90% of the current year’s tax liability; or
  • 100% of the prior year’s tax liability (110% where the prior year AGI is over $150,000 ($75,000 if married and filing separate returns).

Recently several members of Congress have called upon the IRS to waive underpayment penalties for 2018. On January 16, 2019, although not waiving the penalties entirely, the IRS did change the current year safe harbor from 90% of the 2018 tax liability to 85%, providing a break for some taxpayers.

Even if you don’t meet one of the safe-harbor exceptions, a waiver of the penalty for 2018 may apply if you:

  • Retired (after reaching age 62) or became disabled in 2017 or 2018.
  • You did not make payments because of one of the following situations and it would be inequitable to impose the penalty:
    a. Casualty
    b. Disaster, or
    c. Other unusual circumstance.

There are two other exceptions to the penalty for 2018:

  • If the total tax shown on your 2018 return minus the tax that was withheld is less than $1,000, you will not owe a penalty.
  • If you had no tax liability in 2017, were a U.S. citizen or resident alien for all of 2017, and your 2017 return was for a full 12 months (or would have been had you been required to file), you won’t be charged an under-prepayment penalty.

In addition, where your tax liability and /or tax pre-payments were uneven, the penalty amount may be mitigated by figuring it on a quarterly basis.

If you have questions or would like to make sure your withholding and estimated payments are adequate for 2019, please give us a call.

Do I Qualify for an IRS Offer in Compromise?

If you’re facing outstanding tax debt that you cannot pay, you may want to consider looking into an Offer in Compromise from the IRS. Specifically, an Offer in Compromise is an option offered from the IRS to qualifying individuals that allows them to settle tax debt for less than what they actually owe.

Unfortunately, there seem to be a lot of misunderstandings about Offers in Compromise; many people falsely believe that these are seldom accepted by the IRS. In reality, it is estimated that the current acceptance rate is over 40%, with the average dollar amount of a settlement reaching more than $10,000.

If you’re worried about your inability to pay tax debt, knowing the basic qualifications of an IRS Offer in Compromise and what to expect from the application process can be extremely helpful moving forward.

How to Know if You Qualify

Generally, there are three factors that are considered by the IRS when somebody applies for an Offer in Compromise. Most commonly, the IRS must have a belief that you will not be able to pay your tax debt off at any point in the near future. This means that your financial situation is probably not going to improve anytime soon and that the IRS would not likely be successful in forcing collections on you.

At the end of the day, the IRS needs to believe they are getting a fair deal – so if you have any potential to pay your debt at any point in the near future, you may not qualify.

You might also qualify for an Offer in Compromise if there is doubt as to your actual tax liability; if you have documentation proving that you owe less in taxes than the IRS believes to be true, or if an assessor has made a mistake on your reporting, you may be more likely to have an Offer in Compromise accepted by the IRS.

Finally, if paying your tax bill would create a significant financial hardship, you may also qualify for an Offer in Compromise. Of course, proving financial hardship can sometimes be a challenge.

In addition to all of these considerations, there are several other eligibility requirements that you must meet in order to qualify for an Offer in Compromise:

  • You must pay the application fee 
  • You must have filed all of your required tax returns 
  • You cannot be going through a bankruptcy at the time of filing 
  • You must submit all required documentation 

What to Expect From the Process

One of the most complicated aspects of going through the application process for an IRS Offer in Compromise is filling out and submitting all the required paperwork. There are several documents you may need to complete to even be considered for an Offer in Compromise, including:

  • IRS Form 433-A – this form requires information on your assets, liabilities, expenses, and income to determine your Reasonable Collection Potential
  • IRS Form 433-B – this form needs to be filled out for businesses applying for an Offer in Compromise
  • IRS Form 656 – use this form to apply for an Offer in Compromise so long as there are no doubts as to your tax liability.
  • IRS Form 656-L – use this form to apply if you are disputing your tax liability to the IRS. 

In addition to completing these official forms as part of the application process, you will also need to provide some documentation, such as:

  • health care statements 
  • bank and credit card statements 
  • investment information 
  • proof of living expenses 
  • car loan, mortgage, and similar loan statements 
  • copies of related tax returns 

Working With a Tax Professional Can Help

As you can probably see, the process of determining your eligibility and applying for an Offer in Compromise with the IRS can be quite time consuming and complex. This is where it can be helpful to consult with a tax professional for assistance. A qualified and experienced tax professional will be able to assess your current tax situation and give you a better idea as to whether or not going through the Offer in Compromise application process is worth your time and efforts.

If so, he or she will also be able to assist you with the application process, ensuring that you’re filling out the correct forms and that you submit all required documentation as well. This can increase your chances of reaching a successful offer with the IRS and take a lot of the stress and burden off your chest.

Even if you don’t qualify for an Offer in Compromise, your tax professional may be able to assist you in figuring out other alternatives for making your tax payment more financially manageable for you. This might include options to work out a payment/installment program with the IRS, among other options.

The Bottom Line

Overall, getting an Offer in Compromise accepted by the IRS is nearly a 50/50 shot – but if you meet the eligibility requirements and take the time to correctly submit all paperwork and documentation, your chances of reaching an offer are high. And the best way to get the help you need in gathering this documentation and submitting this paperwork is to consult with an experienced tax professional. Schedule a consultation with us at your earliest convenience to get the ball rolling.