Do I really have to file a tax return?

You may wonder if you in fact can slip thru the cracks by not filing a tax return. After all, the IRS has to handle the entire population of the US, over 300 million people, plus corporate tax returns.

After considering how disorganized many government agencies can be, it might be tempting to just not file and see what happens.

The fact that you are contemplating this question could be because you heard from a friend that you don’t need to file. Or it could be other factors, such as family illness, stress, or lack of paperwork organization.

From my experience, whether you file your taxes or not makes a difference. Here’s why:

  1. If you file your taxes on time, generally the IRS only has three years to make a change or audit of your return. But if you don’t file a tax return on time, you aren’t starting the clock. So you are essentially giving the IRS more time to audit you.
  1. If time goes by and the IRS has received a W-2 or a 1099 indicating that you earned income, oftentimes they will file an SFR, Substitute for Return. When the IRS files a tax return for you, they have no knowledge of any of your deductions. They don’t know whether you have children that you can claim a deduction for, or any credits for that college course you took. So the IRS will allow you only the bare minimum deductions and assess your tax based on that. Chances are their calculations will result in your owing a lot more tax than actual.
  1. If you did not file a tax return on time, but should have received a refund, after 3 years you can no longer get the refund. It will be too late and the IRS will not issue the refund to you.

In the last six months, I have worked on two client cases where both clients did not file taxes for over ten years. Now, they were in IRS collections. One of them was having their entire paycheck taken by the IRS every payday. The other was about to have his house seized. In both cases, this stress could have been completely avoided by simply filing tax returns on time.

 

reneeRenee Sieradski is a tax professional in Phoenix, AZ. She specializes in assisting businesses and individuals who have fallen behind on their taxes to take advantage of government programs that enable them get their finances under control and stay on track. Renee has been in practice since 1999, but has specialized in the Real Estate Industry for the past 10 years, assisting a local Phoenix billion dollar real estate holdings firm who owned property across the US, as well as working with several local Realtors and Mortgage Loan Officers and Brokers.

Renee regularly post tax advice blogs on her website at tax-intervention.com.

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.

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!

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.”

Attention Truckers: Don’t forget to file Form 2290 this week

If you are a tractor-trailer operator or run other heavy highway equipment, you are probably already familiar with IRS Form 2290 and the payment of heavy vehicle highway use taxes. In general, this return is due on August 31st, along with payment for your vehicles that are taxed as heavy vehicls.

The deadline generally applies to Form 2290 and the accompanying tax payment for the tax year that begins on July 1, 2012, and ends on June 30, 2013. Returns must be filed and tax payments made by Aug. 31 for vehicles used on the road during July. If you put a new vehicle into service after July 2012, you will need to file another return and pay the tax on that vehicle by the end of next month after placing the vehicle in service. So, if you put a new rig into service in November, the return and the tax are both due on December 31.

The highway use tax applies to highway motor vehicles with a taxable gross weight of 55,000 pounds or more, which generally includes trucks, truck tractors, and buses. Ordinarily, vans, pick-ups, and panel trucks are not taxable because they fall below the 55,000-pound threshold. The tax of up to $550 per vehicle is based on weight, and a variety of special rules apply, which are explained in the instructions to Form 2290.

If you have not yet filed and paid these particular taxes, they are eligible for electronic filing and electronic payment through EFTPS. If you need help with the return, or getting the payment made, feel free to contact me.

Tips for Avoiding a 2012 Tax Bill

With the summer of 2012 coming to a close, it’s a good time to look at your tax payments you’ve made this year and see if you’re likely to accrue a tax liability for this year or not.

You should act soon to adjust yor tax withholding to bring the taxes you must pay closer to what you actually owe. If you’re ahead of schedule in terms of payments for the year, then you can reduce your withholding and actually keep more of your paycheck for the rest of the year.

Most people have taxes withheld from each paycheck or pay taxes on a quarterly basis through estimated tax payments. Each year millions of American workers have far more taxes withheld from their pay than is required. Many people anxiously wait for their tax refunds to make major purchases or pay their financial obligations. It is best, however, to not tie major financial decisions to your anticipated refund — especially if you owe back taxes for previous years, because the IRS is simply going to keep that refund, even if you filed an Offer in Compromise this year.

Here is some information to help bring the taxes you pay during the year closer to what you will actually owe when you file your tax return.

Employees

New Job? When you start a new job your employer will ask you to complete Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use this form to figure the amount of federal income tax to withhold from your paychecks. Be sure to complete the Form W-4 accurately.

Life Event? You may want to change your Form W-4 when certain life events happen to you during the year. Examples of events in your life that can change the amount of taxes you owe include a change in your marital status, the birth of a child, getting or losing a job, and purchasing a home. Keep your Form W-4 up-to-date.

You typically can submit a new Form W–4 at anytime you wish to change the number of your withholding allowances. However, if your life event results in the need to decrease your withholding allowances or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days of that life event.

If you need help determining how many exemptions to claim on your new W-4, feel free to get in touch with me.

Self-Employed

Form 1040-ES: If you are self-employed and expect to owe a thousand dollars or more in taxes for the year, then you normally must make estimated tax payments to pay your income tax, Social Security and Medicare taxes. You can use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you are required to pay estimated tax on a quarterly basis. Remember to make estimated payments to avoid owing taxes at tax time.

Again, if you need help determining the estimated tax payments you should be making in order to avoid a big tax bill, along with penalties and interest in 2013, please get in touch with me and I’ll help you with that.

Final Thoughts For 2011 Tax Returns on Deadline Day

Today is April 17th: Tax day. I’m sure that it will be discussed during the day’s talk shows and news broadcasts, and there will be long lines at the post offices that stay open until midnight. There will be reminders aplenty around you today that this is the day, the final day, the deadline, the “do it or go to jail” day.

In reality, that’s all hogwash.

In all actuality, there is only one firm, hard deadline today for most taxpayers: Today is the last day the IRS will accept e-files. If you file tomorrow, you have to mail it in.

What about an extension? Yes, if you want to file an extension, it’s a good idea to do so. But NOT filing an extension doesn’t have any real consequences.

If you owe the IRS money for 2011, then yes, today is theoretically the deadline to pay it. But for most people reading this particular article, the reason they’re reading this info in the first place is because they don’t have the cash on hand to pay their tax bills. So what really happens if you don’t file and pay on time?

Really, nothing of non-monetary consequence.

Yes, you’re going to pay some interest and penalties if you owe. There are both late filing penalties AND failure to pay penalties, and yes, they’re steep. These penalties are a percentage of what you owe, as are interest charges. Interest is compounded daily, which starts to add up.

If you’re able to pay your taxes with cash, a credit card, or borrowing the money from relatives, then do so, and do it on time. Even if you owe several thousand dollars and have room on a credit card to pay it, then do so, and do it on time — the finance charges on the card are going to be a lot lower than what the IRS will charge you over the course of 6 months to a year.

If you owe the IRS so much money that you simply can’t pay it no matter what, then don’t fret too much. If this is the first time you’ve accrued a tax liability, then the IRS has special rules that allow for the forgiveness of penalties for first time offenders.

If you have previous tax liabilities, then this will get added on to your total. As your total grows, so does your eligibility for certain tax resolution programs, such as the Offer in Compromise or the Currently Not Collectible program.

Here’s my bottom line advice: If you can’t pay your 2011 tax bill today by any means, then accept the fact that penalties are going to be added on, and start thinking about what arrangements you can make to take care of the situation. If you have questions regarding your personal situation, then please contact me, I’d be more than happy to speak with you regarding your tax liabilities, at no cost or obligation.

Happy tax day!

Sincerely,

Jassen Bowman, EA
TaxHelpHQ.com

Is the IRS Holding Your Unclaimed Refund Check?

Finally, a happy thought when it comes to taxes: The IRS may be holding money that is yours, and they really, really do want to give it to you!

If you had a job and had income taxes withheld from your paycheck, but you didn’t file a return either because you didn’t have to because of your income level or because you thought you wouldn’t get the money back, you may actually be in for a surprise. It may not necessarily be a lot of money, but I believe you should even file your claim for a $1 refund merely on principle if it’s owed to you.

The IRS keeps millions of dollars every year that they are not legally entitled to keep, simply because taxpayers didn’t realize they could get the money back. In order to file a return for the express purpose of getting a refund, even if you weren’t legally obligated to file a tax return, you need to file the return and request the refund within 3 years of when the tax return was originally due, which is generally April 15th of each year for personal income tax returns. After this three year period, the government says, “Too bad, so sad” and gets to legally keep your money.

If you file a tax return late, but are due a refund, there are no penalties for late filing. They only whack you with late filing penalties if you OWE money, and then it’s a percentage of what you owe (Caution: It’s a BIG percentage if it’s been a while).

If you’re not sure if you would end up owing or getting a refund, here’s a quick tip: Most tax preparers will run the numbers through their computer for you for free, and only charge you if you actually FILE the return. Most franchises of the big tax prep retail chains (H&R Block, Liberty, and Jackson Hewitt) will do this, as will most independent tax preparers. It’s worth at least looking into.

In addition, the IRS receives millions of dollars of refund checks back in the mail every year. If you were expecting a refund check, and it didn’t come, then don’t forget to give the IRS a call (800-829-1040) and ask them where your refund is. There is also a simple and handy “Where’s My Refund?” feature on their web site, at irs.gov.

Lastly, be sure to take every tax break you’re entitled to. If you think your tax preparer either missed some deductions or skipped a tax credit that would pump up your refund (the Earned Income Credit and the Additional Child Tax Credit are two of the big ones), then don’t hesitate to take your tax return to somebody else for a second opinion. Most tax preparers will do this either for free or for a very nominal charge, so if you think you should have gotten a bigger refund, have another tax preparer look over your return.

Unfiled Tax Returns

Do you have past due tax returns? If so, you’re not alone. While the IRS does not publish statistics on this, nor are they really able to track this number, but my own research and statistical analysis (because I’m a numbers geek and do stuff like that), estimates that there are between 5 and 8 million outstanding personal income tax returns in the United States for the past three years alone.

If you owe a tax debt to the government and are seeking to get that situation resolved, you will first need to file any missing returns. The IRS will NOT negotiate a payment plan or a reduced settlement if you have past due tax returns. The reason for this is pretty simple: If you don’t file the returns, they don’t know how much you really owe.

While any tax preparer, CPA, or Enrolled Agent can probably assist you with filing your past due tax returns, it is important to note that many of these tax preparers focus their practices solely on current year tax return filings. Since the tax laws change literally every year, it’s a daunting task just to keep up with the tax code for the current year, so many tax preparers don’t bother trying to keep up with prior year tax matters.

Our firm, on the other hand, does exactly the opposite. As a general rule, we don’t even offer current year personal income tax preparation, unless it’s for an existing tax client. Since the tax code as applicable to prior years is fixed and no longer changes, we can maintain our skills and knowledge on prior years quite readily since we focus almost exclusively on preparing older tax returns. This lack of change in the past tax code and our experience preparing these returns also lets us complete them fairly quickly, since we don’t have to spend time researching the old laws, and therefore you don’t have to pay for that research time, keeping our fees lower for this sort of service.

Basic Rules Regarding Claiming Dependents for 2010 Returns

Question:

What are the basic rules regarding who I can and can’t claim as a dependent on my 2010 tax return?

Answer:

In general, dependents are people that you provide financial support to. However, for tax purposes, there are specific requirements that have to be met in order to claim somebody as your dependent. Dependents are important for tax purposes because, for each dependent you can claim, you are allowed a $3,650 per person deduction on your income tax return, which reduces your taxable income and therefore, your tax liability.

An important thing to keep in mind is that each and every person in the United States that CAN be somebody’s dependent for tax purposes can only be claimed ONCE. So, if somebody claims you as a dependent, you are not allowed to claim an exemption for yourself. Also, a married person cannot generally be claimed as a dependent by anybody else (although there are a few exceptions). Also, your spouse is never a dependent, but you are allowed an exemption for them if filing a joint return.

So what is a dependent? A dependent is a qualifying child or qualifying relative that you provide support for. A qualifying child must be related to you by one of the following means:

–Your son, daughter, stepchild, foster child, or a descendant (for example, your grandchild) of any of them, or
–Your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant (for example, your niece or nephew) of any of them.

Also, the child must be a U.S. citizen or permanent alien, have lived with you for more than half the year, and you must have provided at least half the financial support for the child.

There is also an age test that applies to claiming a child as a dependent. The child must be under 19 and younger than you or your spouse if you file jointly. If the child is a full time college student, the age cap changes, and then the child must be under 24 at the end of the tax year. The only exception to this age rule is if the child is totally and permanently disabled, in which case there is no age restriction.

These are the general rules for claiming a child as a dependent. The rules for another type of relative are quite similar. This relative can be almost any blood relative or step-relative (yep, your mother in law counts!).

Things tend to get a little trickier when there are divorce decrees and joint custody arrangements in place, and there are a slew of “tiebreaker” rules that come into effect to determine who gets to claim a dependent if there is any dispute over whom should claim the dependent. In these cases, talk to your tax professional to make that more in-depth determination.