A tax problem solution can have an approach that is as unique and varied as the taxpayer's individual circumstances. An IRS notice is usually the first clue to a taxpayer that they have a tax problem and require a solution, but government studies have proven the IRS to be wrong 50% of the time. It follows that a necessary step to arriving at a tax problem solution begins with handling and responding appropriately to these notices. Notices for additional taxes dues, penalties, missing returns, liens to be filed and wage levies are all indicative of tax problems requiring different solution alternatives.
One tax problem solution alternative is penalty abatement (relief or cancellation). Almost all penalties assessed by the IRS have an opportunity to be cancelled if the taxpayer can show he or she acted in good faith. Meeting the "good faith" condition simply means you had a reasonable, non-frivolous reason (usually resulting from a misunderstood application of tax law) for making the mistake that resulted in the penalty. Of course with government studies showing the IRS to be wrong 50% of the time you can have penalties abated simply by proving their error.
A less common tax problem solution is interest cancellation. If you owe past due taxes interest on those taxes can significantly increase your total tax bill over the years, often doubling the original amount. A tax return subject to an audit or assessment a couple years after being originally filed, can result in not only additional taxes but added interest calculated from the date the return was originally due. In these circumstances a taxpayer is often penalized because of the bureaucratic delay in examining their return. If a taxpayer can show there was a delay by the IRS in deciding that additional tax should be assessed, the taxpayer is entitled to relief from having to pay interest on the additional tax for the period of the delay.
The IRS has ten years from the date tax is assessed to collect that tax. A tax problem solution commonly employed for some taxpayers that have multiple years of back taxes, is to wait for the collection statute to expire on the oldest liabilities. This tax problem solution can be implemented by a simple "do nothing" or waiting strategy, or it can be implemented when a taxpayer qualifies for "hardship" status because his or her income does not exceed national and local standards for basic necessity expenses. Several actions can suspend and extend these statutes, and many taxpayers may voluntarily agree to extend these statutes out of ignorance. Adopting a "do nothing" approach successfully often requires the careful analysis of a qualified tax problem solution professional.
Far and away however, the most familiar tax problem solutions are the installment agreement and the offer in compromise. The offer in compromise is prominent more so for it's use in advertisement rather than practical application. On the other hand the installment agreement is almost universally applicable if the taxpayer has a demonstrated ability to pay something toward the outstanding liability on a monthly basis. It's not uncommon for an installment agreement to be the final component of a complex tax problem solution that implements other solution options first. More common than not a taxpayer's problem will be solved by a combination of identifying IRS errors, penalty abatement and interest reduction, resulting in a revised tax bill that can be divided into affordable monthly payments by the taxpayer over a period of time.
A taxpayer may have the right to discharge back taxes in a chapter 7 bankruptcy. Filing chapter 7 is a way to eliminate back taxes if you meet the conditions for discharging those back taxes. Chapter 7 will completely eliminate qualifying debt, including back taxes. Under recently updated bankruptcy laws back tax debt is treated the same in both chapter 7 and chapter 13 filings. However, not all back tax debt qualifies for discharge in a bankruptcy. There are five conditions that must be satisfied for back taxes to be discharged in chapter 7 bankruptcy, and these conditions apply to each tax year, each tax return and each tax assessment independently. If back income taxes tax satisfy these conditions they may be discharged in chapter 7. The five conditions back taxes must meet to be discharged in chapter 7 are: the tax return must be due at least three years ago, the tax return must have been filed at least two years ago, the tax assessment (there may be multiple assessments in a given tax year) is at least 240 days old, the tax return is not fraudulent and the taxpayer is not guilty of tax evasion.
In order for a back taxes to be dischargeable in chapter 7 they must result from an income tax return that was due at least three years before the bankruptcy petition is filed. This includes any extensions filed. In addition to being due three years prior, the return must have actually been filed at least two years before the bankruptcy petition is filed. The two year condition is most applicable to late filed returns. A taxpayer is not permitted to simply file late returns for back taxes due three years previously and then immediately file a chapter 7. The two year filing time requirement begins from the date the taxpayer actually filed the return. Tax assessments resulting in back taxes must be a minimum of 240 days old to qualify for chapter 7. The IRS may assess taxes because the taxpayer had a balance due on his or her return that was never paid, the IRS audited the return and assessed additional taxes, or a proposed assessment has become final. It is possible then for a single tax year to have multiple assessments which need to reach the 240 day threshold independently before those back taxes may be discharged in a chapter 7.
In addition to the previously discussed conditions and as in other back tax resolutions, the tax return cannot be fraudulent or frivolous and the taxpayer cannot be guilty of intentionally evading tax law. Some back taxes will not be dischargeable in a chapter 7, primarily back taxes resulting from unfiled income tax returns. However, civil penalties and trust fund recovery penalties (from back payroll taxes) will not ever be dischargeable in chapter 7 or any other bankruptcy. On a final note, from an administrative point a taxpayer seeking to discharge back taxes in a chapter 7 petition will be required to prove that tax returns for the four previous years have been filed, as well as provide a copy of their most recent tax return to the bankruptcy court. If you have back taxes and are considering a chapter 7, seek professional guidance to analyze your tax transcripts as a precaution against filing a petition too soon.
Taking a tax deduction for your new iPhone 3G (or other cell phone) and the monthly service bill that accompanies it may be a bit more complicated than you think, even if it is used primarily (or exclusively) for business purposes. It's complicated because cell phones are considered "listed property" by the Internal Revenue Service and have been since 1989. "Listed property" includes items obtained for use in a business but designated by the Internal Revenue Code as lending themselves easily to personal use. The designation of an item as listed property has implications for depreciation deductions taken by the business and the computation of net income if there is an ongoing expense linked to the listed property. In the case of your new iPhone 3G, you have the electronic device (or handset) and the monthly service bill (expense) that accompanies its use.
Claiming any deduction for your iPhone 3G will be dependent on the circumstances. If you are in business for yourself, your new iPhone 3G must be both an ordinary and necessary business expense. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. If you are an employee and use your iPhone 3G to perform your job, it must be both for the convenience of your employer and required as a condition of your employment. For the convenience of your employer means that your use of the iPhone 3G is for a substantial business reason of your employer. Required as a condition of your employment means that you cannot properly perform your duties without your iPhone 3G.
With the mobility of today's workforce and the amount of travel some jobs require, it's not necessarily difficult to meet these conditions. However, just meeting these conditions is not enough because remember … cell phones are designated as "listed property" by the IRS. The use of "listed property" for business purposes needs to be substantiated. In the case of your new iPhone 3G that means making sure you receive an itemized monthly bill, "itemized" means one that lists every phone call made and received, not just the "services" you pay for. If your cell phone service provider cannot provide you with a list of your monthly phone calls you will need to keep a log. Regardless of whether you get an itemized bill or keep a log the business purpose of each call must be noted. This information is used to determine the percentage of business use for your iPhone 3G. Simply, claiming 100% business use won't suffice.
In depreciating your iPhone 3G the depreciation method you use will depend on whether you meet the more-than-50%-use test. You meet this test if you
use your iPhone 3G more than 50% for business purposes. If you meet this test, you can claim accelerated depreciation under the General Depreciation System (GDS). In addition, you may be able to take the section 179 deduction for the year you place your iPhone 3G in service. If you do not meet the more-than-50%-use test, you will be limited to the straight line method of depreciation under the Alternative Depreciation System (ADS). Additionally, you will not be able to claim the section 179 deduction for your iPhone 3G. The percentage of your monthly iPhone 3G service bill attributable to business purpose is deductible against business income. In many cases this percentage could vary each month, detailed records will substantiated the annualized total you claim, making your new iPhone 3G tax deductible.
In summary to claim an income tax deduction for your new iPhone 3G you need to begin by documenting your business use, either by obtaining an itemized bill or keeping a log yourself. Because it's likely the business versus personal usage will vary from month to month throughout the year, the percentage of your bill deductible each month will be limited to that month's business use percentage. When you are finalizing your income tax return at the end of the year, you will simply average each monthly business use percentage for an annualized percentage of business use in determining what depreciation options will be available to you. If your average business use is greater than 50% you will have more depreciation options for your iPhone 3G, including taking a section 179 deduction for the year it was placed in service. It's recommended that you have a tax professional look at the specifics of your situation before claiming any deductions. Remember, with listed property like your iPhone 3G, documentation supporting your claim of business use, is key.
The IRS claims that businesses have withheld billions of dollars in employment taxes that have never been paid. Congress has recently criticized enforcement efforts and in turn the IRS has made collecting these taxes one of their most important tasks. Since the 2002 tax year revenue agents have nearly doubled their success in collecting against past due business accounts. Businesses shutting their doors or experiencing financial hardship resulted in $30 billion in outstanding payroll liability being classified as not collectible last year.
IRS efforts to speed up collections will be focused on the more timely filing of liens and levies, as well as an expedited process to assess the Trust Fund Recovery Penalty. When a business shuts down, the owners, officers and other responsible parties are assessed a Trust Fund Recovery Penalty. This penalty (commonly known as the 100%) penalty represents the "trust fund" portion of an employees wages withheld from each paycheck. The employees' portion of social security and medicare taxes, plus federal income tax withheld from wages is the "trust fund" portion. When applied, the penalty is assessed personally against the owners, officers and responsible parties of the defunct business.
These penalties are not dischargeable in bankruptcy and carry joint and several liability. This means that each party determined to be responsible is obligated to pay the entire penalty and must seek redress from the other parties if the IRS is able to collect the outstanding balance from a single party. This carries particular weight with small and closely held businesses that have a single or small number of stockholders that may serve as officers as well. In other words, really be careful who you go into business with. If you are the "money" behind the "brains" in a business venture and it goes south, the IRS will collect from you, leaving you to collect from the "idea" guy.
S Corporations are particularly at risk considering the establishment of new audit operations targeting these businesses and their desire to "reclassify" profits as wages for self-employed owners. A self-employed small business owner is not only at a substantially increased risk of being audited, but the result of that audit could be disastrous with thousands of dollars in penalties and interest from profits being reclassified as wages to the owner, in addition to the new underlying tax liability. A single year's audit could put many S corps out of business, leaving the owner personally liable for back payroll taxes. If you are a small business owner faced with an audit, seek professional help before, your first contact with the IRS examiner. Failure to do so could cost you not only thousands in additional taxes, but your livelihood as well.
The IRS may generally file a Federal Tax Lien against your personal and real property to secure the government's interest in your outstanding tax debt so it has priority over other creditors. If you receive a notice of federal tax lien, how can you get it removed? Outside paying off your tax debt in full or having the statute of limitations expire, removing a federal tax lien is a difficult task. Hiring a qualified tax professional to advise you and work on your behalf is almost always necessary if you cannot pay the debt in full, or if you cannot post a bond guaranteeing you will pay the debt in full. By law, a filed notice of tax lien can be removed if: the notice of federal tax lien was filed too early or violated IRS procedures, you enter into an installment agreement to pay the debt and the agreement provides for removal of the federal tax lien, removing the federal tax lien will speed up collection of the liability by the IRS, or removal of the federal tax lien would be in the best interest of both the taxpayer and the government.
The law requires the IRS to notify a taxpayer in writing not more than five business days after the filing of a lien. The IRS may give a taxpayer the notice of federal tax lien in person, leave it at the taxpayer's residence or usual place of business, or send it by certified or registered mail to the taxpayer's last known address. A taxpayer has the right to appeal a federal tax lien and can do so by requesting a Collection Due Process hearing by filing Form 12153 with the office listed on the notice of federal tax lien. A request for Collection Due Process Hearing must be postmarked by the date shown on the notice of federal tax lien. Some of the issues that can be discussed at the hearing include: the tax liability was paid in full before the IRS filed the lien; the IRS assessed the tax and filed the lien when the taxpayer was in a bankruptcy and subject to the automatic stay during bankruptcy; the IRS made a procedural error in an assessment; the time to collect the tax (called the statute of limitations) expired before the IRS filed the lien; no prior opportunity to dispute the tax owed was given to the taxpayer; there are alternative resolutions to satisfying the outstanding tax debt; or the taxpayer wishes to claim an innocent spouse defense.
If removal of a federal tax lien cannot be accomplished, at times the government will agree to a lien subordination which could allow you to get a second mortgage or refinance your real property in order to pay your outstanding tax bill. When the outstanding tax bill is paid in full, the government will remove the federal tax lien. There is no standard form available for an application for a Certificate of Subordination of Federal tax lien. A taxpayer must prepare the request in the form of a typed letter and included supporting documentation. Information on this process is found in IRS publication 784. Not all lenders will consider a mortgage that includes lien subordination and the process is complicated, consulting a qualified tax professional to help remove a federal tax lien is recommended.
