Quick Guide to Late Filing, Amended Returns, and Late Payment Penalties

For taxpayers that end up owing taxes, April 15 is the deadline for most folks to file their return AND pay any taxes that are due on that return. If you don’t file on time, you potentially face one set of penalties. If you don’t pay by this date, there’s another set of penalties that applies.

If you weren’t able to pay your entire 2012 tax bill with your return or your extension, there’s good news: The late payment penalty isn’t nearly as stiff as the late filing penalty.

The reason for this is because the IRS is far more interested in knowing how much you owe rather than having you pay it on time. They rely heavily on people filing their tax returns in order to make the proper tax assessment (never let the IRS do your tax return for you!). Knowing how much you them starts a well define process, but when the IRS doesn’t know how much you owe, they can get pretty grumpy about it.

Of course, the more you pay with your tax return or extension, the lower your penalty and interest charges are going to be in the long run. This is because all of your penalties and interest are a percentage of the unpaid balance due after April 15th.

The penalty for not filing a tax return is typically 5% per month or part of a month. One day is considered “part of a month”. This penalty caps out at 25% of the unpaid balance. Do note that if you properly file an extension, and pay the balance with the extension, then there is no penalty. The extension form essentially gives the IRS the same bottom line “amount due” number that they are looking for, just without the math showing how you came up with it. With your extension, you must pay at least 90% of the balance due on the final return in order to avoid penalties.

As already mentioned, the penalty for not paying is far less than the penalty for not filing. This amount is one half of one percent per month (or part of a month).

If you are subject to both the non-filing AND non-payment penalty in the same month, the combination of the two penalties is capped at 5%. If you file your return more than 60 days after the April 15th deadline (or after the extension deadline), then the minimum penalty is the lesser of $135 or the entire balance due.

What should you do if you already filed your federal tax return and then discover a mistake? That’s where our friend 1040-X, Amended Return, comes in.

Amended returns allow you to correct errors, change filing status, add or remove income and deductions, and do all the other things you’d normally do on a tax return. In my tax representation practice, I’ve fixed countless tax returns that were prepared incorrectly, even by licensed tax professionals. So, if you have any doubt at all about the accuracy of your tax return, get a second opinion.

Like everything with the IRS, there are deadlines for filing an amended return. You must file 1040-X within three years of the date you filed the original return, or within two years of paying the tax if you owed. It is not uncommon for individuals to be owed a refund on an old return, but they can’t claim it because they caught it more than three years later. Don’t miss out on potential refunds by waiting too long to amend.

Amended returns must be printed and mailed — they cannot be electronically filed. As such, it can take two to three months for the IRS to process these returns. If you are working with a Revenue Officer on an existing tax debt situation, the Revenue Officer will usually request that you file original and amended tax returns directly with them for faster processing.

I hope that this quick primer on late filing, penalties, and amendments will help save you some money. In summary:

  1. File a return, or at least an extension, by April 15 every year.
  2. If you owe, or expect to owe, pay as much as you can by April 15th in order to minimize penalties.
  3. File amended returns within three years of the original due date in order to avoid losing potential refunds.

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Understanding tax breaks for higher education

If you’ve been effected by the economic downturn and decided to return to school to further your own education, or you support a dependent that is a college student, there are three education tax breaks that you should be aware of.

Each of the three is unique, and only one of them can be claimed for any particular student in a given tax year. But, you can claim one type of education credit for a child, for example, and another type of credit for yourself.

The three most common tax breaks for higher education are:

  1. American Opportunity Credit (AOC)
  2. Lifetime Learning Credit (LLC)
  3. Tuition and fees deduction

All three of these tax benefits can be claimed regardless of whether you itemize or claim the standard deduction. The AOC and LLC are claimed using Form 8863, and while the IRS didn’t start processing tax returns filed with this form until late in the current tax return filing season, they are now doing so. The tuition and fees deduction is claimed using form 8917.

A few legislative notes:

  1. The “fiscal cliff” bill passed Jan 2, 2013 by Congress extended the AOC through tax year 2017.
  2. The same law also retroactively extended the tuition and fees deduction through tax year 2013, since it actually had expired at the end of 2011.
  3. The LLC is a permanent part of the tax code (at least for now – that could change tomorrow, of course).

It should be noted that none of these tax benefits can be claimed by a non-resident alien, nor a person filing as Married Filing Seperately.

The AOC is aimed at full time college students completing their first four years of undergraduate education. Students must be at least a half-time student for at least 5 months out of the year to claim this credit, and they must also not have any felony drug convictions. The Lifetime Learning Credit, as the name implies, is applicable to all students, including part-time and graduate students. The tuition and fees deduction generally provides the least direct tax benefit, but can usually be claimed by people that can’t claim one of the other two for some reason.

The most common reason for not being eligible for one of the other two tax credits is due to income limitations. For 2012, the AOC starts to phase out for single taxpayers with adjusted gross incomes over $80,000 (double that for married couples), and the LLC starts to phase out for single taxpayers with AGI’s over $52,000 (also doubled for married couples).

The AOC can be as much as $2,500, and up to $1,000 of that is refundable. These amounts are per student. Refundable credits increase your refund even when your annual tax liability is zero. The AOC is also the only education tax break for which expenses other than tuition and fees can be claimed. The most common example is textbooks, which are AOC-eligible expenses, but are not for the other two tax breaks.

The LLC can be a maximum of $2,000 for an entire tax return, and is not a refundable credit. This means that the LLC can be used to reduce your tax liability to zero, but you don’t get a refund of the excess.

The tuition and fees deduction is just that — a deduction against taxable income. The maximum deduction for 2012 is $4,000, and the full amount can be claimed by joint filers with modified AGI of up to $130,000 (half that for single filers). The tuition and fees deduction requires only one course to be taken, and it does not need to be part of an actual degree program, but it does still need to be taken at an eligible post-secondary institution.

One of the most common questions I get regarding education tax breaks has to do with what’s reported on the student’s 1098-T. The tuition and fees reported on the 1098-T may actually differ from what you can actually claim as expenses for the tax credits, so be sure to speak with a tax professional or refer to the form instructions for clarification on what to actually claim.

It should also be noted that tuition and fees paid with loan proceeds are still eligible to be claimed, but not so for tuition paid with scholarships, grants, and tuition assistance. You must subtract scholarship and grant money from tuition and fees paid, and only claim the remainder for purposes of these education tax breaks. Also note that scholarship money in excess of tuition could be taxable income, and if it’s used to pay for living expenses, it’s definitely taxable income.

If you or a dependent are in school, I would encourage you to take advantage of these tax breaks. Remember the motto: Pay what you are legally required to in taxes, but not a single penny more!

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Firefighter and ambulance meal deduction facts

There is a pervasive myth within the emergency services professions regarding a tax deduction for meals during their on-shift days.

This myth is most common with the firefighter ranks, but is also seen within ambulance, police, and other emergency services professions.

Where this myth comes from, I’m not certain. But it definitely maintains it’s urban legend status due to being passed from one person to another. It can only be assumed that tens of thousands of emergency services personnel illegally take this deduction every year.

So let’s set the record straight: There is no on-shift meal deduction permitted for emergency services personnel.

It doesn’t matter if you work a 24-hour shift, and it doesn’t matter what you do for a living (this isn’t limited to emergency personnel, it’s EVERYBODY): If you’re at your job, in your home area, regardless of shift length, there is no meal deduction. Period.

Meal deductions, including per diem (Meals and Incidental Expenses – M&IE), are only permitted when you travel away from home for business or work, and are not reimbursed. If you actually get paid per diem, you can’t also deduct it (no double dipping, in other words).

Here is what firefighters and other workers can do, however. Some fire stations, police stations, and other work places where it is common to work long shifts have what is called a common meal fund. Basically, everybody pitches in a certain amount of money per day, and it pays for food for the entire crew for that day.

If everybody does it, and it’s required by the employer, then it’s deductible. In other words, your fire department or other agency must have made it a mandatory participation practice. In this case, the money you put into the food bucket every day is deductible on Form 2106 under Miscellaneous Deductions, which are subject to a “floor” of 2% of your Adjusted Gross Income.

Hopefully this will clarify this practice. If you work in emergency services, do your co-workers a favor, and refer them to this blog post — it may help them avoid an “undesired IRS interaction.”

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Cheapest Tax States To Reside In

Choosing to reside in a state with low tax rates can be an effective way to reduce your cost of living, often by a double digit percentage. State taxes come in a variety of forms, including income, sales, real estate, and personal property taxes. All states charge at least one of these taxes, and most charge all four to varying degrees. Your lifestyle will often dictate which type of tax is most critical for consideration when evaluating where to live. In this article, I’m going to present four states that offer different tax benefits for residents.

Alaska has the lowest overall tax burden per resident of any state in the Union. Alaska is one of only two states that has neither a state income tax nor a state sales tax. Local municipalities in Alaska are allowed to levy their own local sales taxes, which can be as high as 7.5 percent, although many towns do not levy a sales tax. Alaskan property taxes are on par with the national average. Because of oil revenues to the state, Alaska is the only state that actually pays residents for living there. Alaska Permanent Fund Dividends vary each year, and were $878 per eligible resident in 2012.

New Hampshire
New Hampshire is the other state with no state sales tax and no state tax on ordinary income. The state does levy a tax on dividends and capital gains, so individuals who earn a large portion of their income from these sources should take this into consideration. Local municipalities in New Hampshire do not have sales tax, but New Hampshire’s state and local property taxes are the highest in the United States. Therefore, New Hampshire can be a zero tax state if you are a wage earner and do not own property.

South Dakota
While South Dakota does levy a 4 percent state sales tax, and local municipalities may also levy sales taxes, South Dakota has the second lowest overall tax burden for residents of any state. This is primarily because of the lack of a state income tax, and some of the lowest personal property taxes in the country. However, while real property tax rates exceed New York state’s, low property values statewide keep the actual property tax bills low. South Dakota is one of the most popular residency states for full time RVers that don’t own real estate, and is growing in popularity as a “tax home” for Americans living abroad for extended periods of time.

Like most low-tax states, Nevada lacks a personal income tax. The state’s 6.85 percent state sales tax, with up to an additional 1.25 percent tacked on in some municipal areas, makes Nevada less attractive in comparison to other low-tax states. Nevada is unique among all states in that it charges property taxes on only 35 percent of the assessed value of property. Of particular interest to retirees, Nevada will rebate up to 90 percent of property taxes paid by those over age 62 who meet certain income criteria, making Nevada particularly attractive to retirees who engage in limited shopping.

While there is no one perfect state in regards to taxation, some states are definitely more attractive than others. Factors such as whether you will own a home or not, and how you earn your income, are important factors in determining whether one state or another is better for your situation.

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Bankruptcy vs IRS Offer in Compromise

If you have a large amount of other debt besides just tax debt, bankruptcy may be an option you end up considering. Is this the right thing to do when you have tax liabilities?

For some people, bankruptcy can be the right way to go. While bankruptcy will not erase most tax debt, the bankruptcy court determines what you pay each creditor, and may remove some of the penalties and interest, depending on the case.

The interest rate that the IRS charges, to be honest, isn’t that bad. The rate is adjusted several times per year, and it currently sits at 4%. What kills people are actually the penalties. It is not uncommon for our clients to max out all their penalties, which tacks on a whopping 45.5% to their principal, and THEN interest accrues on the whole thing.

To determine whether bankruptcy is the best route for you, you’d have to consult with a bankruptcy attorney, as I am not a lawyer and cannot provide any sort of legal advice. If *all* you have is IRS debt, and don’t have significant other creditors and/or don’t want the bad credit associated with bankruptcy, but you cannot otherwise go on a monthly payment plan, then I would encourage you to consider an Offer in Compromise with the IRS. It’s a good non-bankruptcy alternative for folks that might otherwise have no other choice but to file Chapter 7, but would only be filing chapter 7 because of their IRS debt.

If you do choose to file for bankruptcy, it’s important to have a contingency plan for those taxes that cannot be discharged. For example, Trust Fund Recovery Penalty assessments, property taxes, and sales taxes will not generally be flushed in a Chapter 7. So, if your tax liability consists of those tax types, you need to be looking at other options.

Personal income taxes (1040 taxes) can be discharged in bankruptcy if they meet certain criteria. In general, income taxes must be at least three years old to be discharged in bankruptcy, and the tax return on those tax debts must have been filed at least two years ago. So, if you haven’t filed the actual tax returns that will incur the tax debt you want to discharge in bankruptcy, you’re going to have to file the returns and then wait two years.

Filing bankruptcy is obviously not a decision to be taken lightly, and you must consider the tax debt implications of doing so. However, bankruptcy isn’t nearly as bad of a thing to go through as many people think it is (and I’m talking from experience, by the way). Consult with both your tax professional and your bankruptcy attorney regarding this important decision.

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The Tax Shelter Over Your Head

Home prices, which had been on a tear, have leveled out and even fallen in places. The housing “bubble” definitely appears to be over. So, the question becomes: Is real estate still a good place for your money?

Despite uncertain real estate prices, buying a house is still a smart choice for most families. Buying, rather than renting, replaces nondeductible rent with deductible mortgage interest. You can borrow tax-free against your home’s growing equity. And you can still sell your home for up to $500,000 profit, tax-free. This particular capital gains tax break isn’t likely to disappear in 2013, despite all the rhetoric about classic tax breaks disappearing.

Mortgage Interest

Tax-deductible mortgage interest is a cornerstone of tax planning for many families. You can deduct interest on up to $1 million of “acquisition indebtedness” you use to buy or substantially improve your primary residence and one additional home. You can deduct interest on up to $1 million of construction loans for 24 months from the start of construction. (Interest before and after this period is nondeductible.) Plus, points you pay to buy or improve your primary residence are generally deductible the year you buy the home if paying points is an established practice in your area. This deduction, while discussed as one that could get the axe by Congress, is too politically sensitive to actually be taken away from American voters in 2013.

Home Equity Interest

You can deduct interest you pay on up to $100,000 of home equity loans or lines of credit secured by your primary residence and one additional residence. Using home equity debt to pay off cars, colleges, and similar debts lets you convert nondeductible personal interest into deductible home equity interest.

Make sure you compare after-tax rates before you refinance consumer debt with home equity debt. If you can buy a car with a special interest rate, your nondeductible personal interest may still cost less than deductible home equity interest. If you can transfer a credit card balance to a new card with a low introductory rate, you could save money and avoid the paperwork needed to refinance your home.

If you pay points to refinance your home, you can’t deduct those points immediately. However, you can amortize them over the life of the loan. If you pay off the loan before fully deducting your points (including refinancing with a new lender), deduct the remaining balance the year you retire the loan.

You can still deduct the interest you pay on home equity balances over $100,000 if you use the proceeds for a deductible purpose. If you use home equity debt to buy stocks, for example, you can deduct it as investment interest; if you use it to finance your business, you can deduct it as a business expense.

Property Tax

You can also deduct property taxes you pay on your primary residence and vacation homes. Microsoft founder Bill Gates can deduct over $1,000,000 he pays on his Seattle-area compound. But be aware that property tax deductions may be limited by the AMT.

Tax-Free Income From Selling Your Home

The Taxpayer Relief Act of 1997 made important changes when you sell your primary residence. The old law, effective for sales before May 5, 1997, let you roll unlimited gains into a new home and offered a one-time $125,000 exclusion if you sold your home after age 55. The new law lets you exclude up to $250,000 of gain ($500,000 for joint filers) every two years, with no need to roll your gains into a new home.

You can exclude $250,000 if:

  1. You owned the home for two of the last five years,
  2. You occupied it as your primary residence for two of the last five years, and
  3. You haven’t used the exclusion within the last two years.

You and your spouse can exclude up to $500,000 if:

  1. Either of you owned it for two of the last five years
  2. Both of you used it as your primary residence for two of the last five years, and
  3. Neither of you has used the exclusion within the last two years.

You can exclude part of your gain (calculated by dividing the number of months you qualify by 24) without meeting that two-year minimum, if your move is due to:

  • Change in employment (you, your spouse, a co-owner of the house, or any other person whose principal abode is in the home accepts a job whose location is at least 50 miles farther from the home than their previous place of employment);
  • Health (a qualifying person or their relative moves to treat a disease, illness, or injury or to obtain or provide medical care for a qualified individual); or
  • “Unforeseen circumstances” (including, but not limited to, involuntary conversion, natural or man-made disaster, or a qualifying individual’s death, unemployment, change in employment or self-employment status, divorce, or multiple births from the same pregnancy).

Taking advantage of the tax shelter over your head won’t guarantee gains. You have to consider how long you will own your home, the cost of maintaining and repairing it, and the eventual cost of selling it. But the tax shelter over your head is still likely to prove a long-term winner.

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10 Questions To Ask When Choosing An Accountant

The vast majority of small businesses could use the services of an accountant. The number of ways in which it is possible to introduce errors into your business through accounting practices is staggering. Your accounting includes issues related to payroll, monitoring profitability, inventory control, avoiding penalties and interest on taxes, and much, much more. It is wise to select a competent professional in this field to help you navigate the minefield of accounting pitfalls. Selecting such a professional can be difficult, especially since not all accountants are created equal. Here are some questions to ask to help ensure that you are selecting the best accountant you can for your business.

1. Are they recommended by a trusted colleague?

One way to start the search for an accountant is to ask people that you already trust for suggestions. Your banker, insurance agent, attorney, and financial planner most likely know and work with accountants on a regular basis. Also inquire to the companies that you do business with, such as you barber, florist, butcher, and plumber. Chances are, these sorts of business owners use an accountant for some business functions, since these tend to be the types of business owners that are excellent at what they do, but not so great with dealing with the complexities of taxes and accounting.

2. Ask around your Chamber of Commerce.

If you are familiar with your local Chamber, they can be an excellent resource. You can ask at Chamber events for referrals to accountants, and you are likely to meet many such service providers at Chamber functions, trade events, and leads groups. Also, many Chambers have an internal complaint system and can let you know whether or not complaints have been issued locally against an accountant or firm.

3. Do they have any complaints with the Better Business Bureau?

When many individuals decide to take action and make a complaint against a firm, they often think first of the BBB. Check with your local division, or look them up online, and make sure that the company you are considering hiring has a good record with the BBB. If they have a Gold Star award from the BBB, then you’re on the right track to working with a company that is reputable and stands by their word. The BBB’s new letter grading system can also help you in selecting a good firm.

4. Have they ever been investigated by your state Attorney General’s office or state board of accountancy?

This is another place to do your own due diligence. Complaints with the state AG or Board of Accountancy is an automatic red flag and should be highly considered before selecting a firm.

5. What services do they provide, and what services do you NEED?

Think about exactly what you’re looking for in a service provider. Do you need full service accounting, outsourcing all functions to another person or firm? Or do you just need year-end tax preparation? Knowing the answer to what services you need will help you pick the best person to do what you need, and will affect your budget for getting it done. For example, if you just need tax preparation, then you might be better off with an experienced tax preparer instead of a CPA firm that mostly does auditing and general accounting. If you only need payroll services, then you might want to hire a payroll company rather than a bookkeeper that does payroll on the side. If you need the books updated weekly or monthly, most communities have competent, independent full charge bookkeepers that you can hire.

If you’re looking for somebody to come set up your books and show you how to use your accounting software, you may want to consider a general CPA or a competent bookkeeper. If you do all your own books using Peachtree, Quickbooks, MS Money, or another popular commercial software package, it can be very helpful to have somebody to call should something go wrong. The large commercial accounting software publishers all provide some sort of certified expert rating system for individuals that are experts on using their software. You may want to look for and consult with such a certified expert on your particular accounting software. For example, Intuit offers its Quickbooks Certified ProAdvisor program to consultants. Finding one of these certified individuals can really help you a lot if you’re doing the books yourself.

If your only interest is in tax compliance, look for a CPA that specializes in taxation, or an Enrolled Agent (EA). An EA is an individual licensed directly by the U.S. Treasury to handle tax matters, and this individual can represent you before the IRS just like a CPA or an attorney. By nature of the credential, EAs are dedicated tax professionals and are generally more competent in areas of tax issues than a general CPA, unlicensed tax preparer, or bookkeeper.

Selecting the type of professional you need is a serious consideration in this process, and depends largely on what you plan on doing yourself, and what you expect to need help with.

6. Are they licensed in some way?

Credentials are not always the most important thing to consider, but they do reflect at least a minimum level of professional competency, in theory. If they are a CPA, they’ve passed a rigorous four part examination and have at least a bachelor’s degree in accounting and two years of professional experience, at a minimum. If they are an Enrolled Agent, they have passed a very rigorous three part exam covering individuals, businesses, and practices and ethics that is administered directly by the Internal Revenue Service.

The individual preparing your tax returns, doing your books, or processing your payroll doesn’t necessarily need credentials in order to do the tax and do it right, so experience is a critical piece of the puzzle you’ll want to inquire about.

Do keep in mind that if you’re audited by the IRS, only CPAs, EAs, or attorneys can represent you, unless you wish to represent yourself, which is not recommended.

7. How much experience do they have?

How many years have they been doing what they do? What type of companies do they generally work with, such as which industries and what size companies? Inquire as to how many of each of your type of entity they work with each year. If they’re experienced working with your type of legal entity, within your industry, or your size of company, they might be a good fit.

8. How do they charge, and how much?

Don’t be afraid to ask about the money. Some firms will charge by the hour, or on a piece rate for the type of work being done. Bookkeepers will usually charge an hourly rate, while tax preparers often charge a flat rate per form and schedule. If your tax return is pretty complex, expect to pay more, which could be a base rate plus an hourly rate for doing accounting work to generate the numbers needed for various line items on the return. If you’ll be seeking software assistance, find out what they will charge for this, usually at an hourly rate. It can’t hurt to know whether you’ll be over your head in terms of what you can reasonably afford for the services you are seeking.

A word of caution: Price should not be the ultimate determining factor when decided who to use and what services to do yourself. If you’re genuinely over your head when it comes to certain tasks, don’t be afraid to spend the money. There’s an old saying that goes like this, “Do what you do best, hire out the rest.” Accounting can be one of the most frustrating aspects of owning a business, and trying to do it all yourself can take time away from what you should be doing, which is running your business to the best of your ability to generate a profit.

9. Are you comfortable with the individual?

Even if you hire a large firm to do your accounting, there is still going to be an individual person that will be doing the work and with whom you will work with almost exclusively. You need to sit down with this person and make sure that you are comfortable working with them. If anything makes you uncomfortable in any way, you need to find somebody else. Think about it: This person is going to have access to an incredible amount of private financial information, so it has to be somebody you feel comfortable trusting.

10. Don’t be afraid to make a change.

Even after selecting somebody to work with, don’t be afraid to find somebody else if things aren’t working out. Your accounting is too important to the success of your business to leave it in the hands of an incompetent person or somebody you don’t completely trust. Problems with your current accountant could range from having just plain bad interpersonal chemistry to gross incompetence on their part, or perhaps you have the wrong specialist to meet your needs. Regardless, don’t hesitate to take your business elsewhere, since your accounting, bookkeeping, and taxes are simply that important to the life of your business.

Using the ten steps outlined in this article will give you a great start towards finding the accountant that is right for you. Identify the type of professional that can best provide the services you need, ask around for referrals, then check them out and interview them personally. This process will ensure that you get the best accountant for your business needs.

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Are you still struggling with tax debt?

When you originally signed up for the Taxing Times email newsletter, you most likely did so because you were looking for information on reducing your tax liabilities and fighting against IRS collections actions.

I do hope that the advice and tips that I share in the newsletter and in the blog have been helpful to you in working out a solution to your tax debts. However, if you are still struggling under the burden of IRS Collections, and are in a position where hiring full service representation simply isn’t financially feasible to you, I’d like to make you an offer of assistance that you’re simply not going find anywhere else.

I recently put together a comprehensive “Do It Yourself Kit” that includes the instructions for negotiating your own tax relief. This kit, which I’m tentatively referring to as the Personal Tax Resolution Toolkit, contains not only instructions for negotiating your tax resolution, but also includes little tidbits of “tribal knowledge” gained through years of working with the IRS that most people simply don’t know.

On top of that, the kit includes the necessary forms, template letters, and other materials that you’ll need in order to represent yourself in front of the IRS.

But wait, there’s more! :)

Since I want to get this kit into the hands of a few real life customers in order to have them put it to the test for themselves, I’ve decided to add in some additional personal guidance and assistance from myself in order to help out with their case.

Now as you probably already know, I take on very few new clients, and heavily guard my time, especially via the telephone. However, for the next few days only, I’m going to include some personal assistance as a bonus for the first few Personal Tax Resolution Toolkit customers.

What kind of personal guidance am I including? For the rest of this week, I’m basically giving away the store:

  • A 30-minute telephone consultation with me to review your situation and advise you on a course of action (worth $125)
  • Power of Attorney Service (worth $195): I will become your Power of Attorney with the IRS and monitor your IRS account activity.
  • IRS Notice Advisement (worth $495/year): Advise you on what IRS notices mean and what you need to do about them, as they arrive.
  • Investigation of Liability (most firms charge $500 to $1,000 for this service): Obtain and analyse your IRS account transcripts, and advise you as to what you need to do to correct them and what options may be available to you, such as Appeals actions.
  • 60 days of unlimited email access to me as you work through your tax situation (value: at least $2,500, if not more)

Again, this is only going to last for the next few days, and I can absolutely guarantee with 100% certainty that I’m never going to make this offer again, especially for such-a-low-price-it’s-almost-free. But, I want to get the toolkit into a few people’s hands so they can work with it and give me feedback on the system from the perspective of somebody that is not a tax professional.

To take advantage of this offer, or if you know somebody that could use this level of assistance right with an IRS tax debt, please visit the Personal Tax Resolution Toolkit page.

This offer will stand through Friday evening or the first five customers, whichever comes first, at which point the free access to a licensed tax professional will be removed from the offer.

If you’re still struggling with an IRS tax liability, take advantage of me now while I’ve got some free time, and save a ton of money over traditional tax representation.

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2013 Tax Numbers Announced, Plus 2013 Tax Planning Advice

A variety of numbers that are important for 2013 tax planning were recently released by the Internal Revenue Service and Social Security Administration.

First, let’s talk retirement accounts. In 2013, maximum 401(k) contributions from your own paycheck will be capped at $17,500 for the year, an increase of $500 over 2012. For folks 50 and older, the “catch-up” limit remains the same, at $5,500. Personal IRA contributions will be limited to $5,500 for those under 50, and $6,500 for those age 50 and older. For SIMPLE accounts, the maximum contribution increases to $12,000, with a $2,500 catch-up limit for those 50 and over.

While elimination of the Social Security taxable wage limit is one of the proposals on the table in Washington, D.C., the inflation adjusted cap for 2013 is currently slated to be $113,700, up from $110,100 for 2012. This is the maximum salary level per year per person on which Social Security taxes are charged. Your wages above that amount are not subject to that particular tax. Expect this to be a hotly debated item during the next Congressional session.

Also on the Social Security front, retirees that have not yet reached full retirement age for their birthdate can earn up to $15,120 in 2013 from employment without losing any Social Security benefits.

If you provide cash gifts to others, you’re in luck in 2013: The annual gift tax exclusion has increased to $14,000 for 2013. Do note, however, that this is als a hotly contested item, and may be on the retroactive chopping block for 2013.

Lastly, Health Savings Account (HSA) contribution limits will increase to $3,250 for individuals and $6,450 for families next year.

In case you didn’t notice, the makeup of Congress and the White House had zero significant change in this year’s election. The Obama Administration may see some slight personnel changes, but control of the House remains with the GOP and the Senate with the Democrats, with only a few new faces coming in. Neither party, in neither house, saw a significant turnover in elected representatives as many had predicted.

Given this, and the pending fiscal cliff, I am advising clients to take full advantage of every tax break they can for 2012. Sometimes, it is best to defer certain taxable actions until the following year. However, given the likely continued gridlock in Washington, I personally predict that 2013 will be a very bad year in regards to tax deductions and tax credits that many take for granted.

If you have capital gains items that you can lock in your profits on now, and pay the current reduced tax rate on, I would encourage you to take your profits now and pay the tax in 2012. Similarly, if you have been considering deferring compensation, I would generally advise against it, as the Obama Administration and Senate Democrats are serious about pushing through higher marginal tax rates. I would also encourage you to take any green energy tax credits and education tax breaks that you can in 2012, as they probably won’t exist in 2013.

Looking into the magic 8-ball, I also anticipate reduced limits on charitable contributions and the home mortgage interest deduction. In fact, many Congress-critters want to eliminate the home mortgage interest deduction entirely, or at least implement a drastic phaseout. You should also be prepared for greater Alternative Minimum Tax (AMT) hits, even for those earning less than $75,000 per year. Also be ready for a higher AGI threshold for deducting medical expenses, and look for little things like the $250 deduction for teachers spending their own money on classroom supplies to go away.

In my opinion, 2013 is set to be one of the most “interesting” years in the field of U.S. tax regulation since 1986, when the entire tax code received a major overhaul. While I say “interesting” as a tax practitioner from an academic standpoint, that can be translated to “very, very bad” for most middle and upper income taxpayers. I expect that anybody earning more than about $35k or $40k per year will feel the effects of 2013 tax law changes directly in the wallet, despite political rhetoric to the contrary.

And just for the record, I would be writing these exact same words even if Romney had been elected and the GOP had taken control of the Senate. I belong to no political party, and support none. The current U.S. national debt is over $16 trillion, and increased by $1.1 trillion in FY 2011-12. In the first full month of FY 2012-13, which was the month of October, the Federal government already had to go another $200 billion in the hole.

Currently, mandatory spending (which includes interest payments on the debt and legally obligated entitlement programs), accounts for more monthly and annual spending than the U.S. government takes in. In other words, all Federal discretionary spending (which includes defense, education, etc.) is all on borrowed money. The only way to fix the problem is to take in more tax revenue and legislatively change the underlying laws that dictate mandatory spending.

Therefore, it is a mathematical impossibility for any administration, no matter which party is in charge, to both cut taxes and balance the budget. It’s very basic arithmetic, it simply can’t happen. To get anywhere near close to a balanced budget, social programs will require deep cuts in benefits, tax rates must increase, and tax credits and deductions must go away. All three of these moves basically require political suicide on the part of all Federal branches, in both parties.

Therefore, it’s not going to happen, and I anticipate that the next two years until the next Congressional election cycle will simply yield more gridlock, increasing debts, occasional Federal government shutdowns, continued quantitative easing (printing of money by the Treasury, which decreases the value of the dollar), more mudslinging and blame, and everything else we’ve been seeing for the last two years.

Unfortunately, that means many tax breaks will go away — and all of us will have to pay the price. Expect your tax burden to increase in 2013, simply by Congress NOT acting, and plan accordingly.

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Penalty Abatement Statements – A Humorous Example

Taxpayers have the right to request relief from penalties assessed by the Internal Revenue Service. The IRS sets very specific criteria for the granting of penalty abatements. It can be very difficult to demonstrate that a taxpayer’s circumstances meet the criteria for penalty relief. Most of the time, we will request a written statement from the taxpayer explaining the circumstances that lead to the accrual of their tax liability, and then use that to create our own penalty abatement request that fits to one of the IRS criterion, cites case law, etc.

Most of the time, taxpayer’s have some reason for not paying their taxes that ties back to not having the money to do so. Lack of funds does not meet IRS reasonable cause criteria, but the circumstances behind the lack of funds sometimes can be reasonable cause.

Occasionally, the taxpayer’s explanation for failing to pay their taxes doesn’t leave us with a lot to work with. On rare occasions, we receive an explanation that is quite humorous.

This example is from a taxpayer that elected to continue NOT paying his taxes because it was financially convenient. With a struggling business, a divorce, and alimony and child support to pay, the taxpayer was experiencing financial hardship. He wrote:

I financed [business] shortfalls with credit card advances and soon I had unsupportable credit card debts and many other expenses…

As things started to turn around for the taxpayer, he continues:

In early 2001 I noticed that I somehow had enough money to pay my bills. Later, I discovered that I had inadvertently neglected to call in the 941 payment [for fourth quarter], even though the check had been generated by the accounting program. I was consternated but simply didn’t have the money to make good.

This is a common reason as to why people miss a Federal Tax Deposit, often several in a row. They then try to make it up when they can. However, in this case:

I expected a notice from the IRS daily, but nothing happened and when it was time for the next 941 payment I thought, “This is the kind of tax relief I need right now.” As an expedience, I didn’t pay the 941’s for the next several months and used the respite to get back on my feet financially.

Doing this enabled the taxpayer to get current with his vendors, credit cards, etc. He skipped his payroll tax payments for 7 months, then started making them again. By this time, he was on a debt management plan for the rest of his debt, and the business was doing better. However, the taxpayer recognized that this course of action had consequences attached.

Again, the initial non-payment was an unintentional oversight. However, it was so useful in preventing bankruptcy, staying in business, and becoming solvent that I didn’t make another payment for 7 months. By that time I was in good shape and haven’t had serious problems since. I’m grateful to Uncle Sam for the loan, though it is a little like borrowing from the Mafia. However, I’m ready and able to make restitution.

Needless to say, this was an exceptionally difficult penalty abatement for us to craft, and we obviously did not submit this in the form submitted to us by the client. This is actually still an active case, and we are awaiting IRS review of our actual abatement request.

This example, while humorous, illustrates how taxpayers can get in further trouble with the IRS after an initially unintentional oversight. It also illustrates the choices that business owners are having to make in order to stay in business.

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