Wrong Filing Status

What happens when you file your tax return under the wrong status? Well, it would certainly have broad ranging effects. For example, it can affect the tax benefits you receive, the amount of your standard deduction and the amount of taxes you pay. It may even impact whether you must file a federal income tax return in the first place. The IRS views a wrongly filed status very seriously, so you should be careful to ensure your filing status is correct.

Basically, there are 5 categories of statuses namely Single, Married filing Separately, Married filing Jointly, Head of Household or Qualifying Widow (or widower) with Dependent Child. In my experience, the one that is subject to the most abuse is Head of Household. The penalty for filing under a wrong status is one half of one percent every month that the tax is underpaid, up to a total of 25% of the additional taxes due. Interest is compounded daily and the interest rate is changed quarterly, but is generally running around 4 to 5% per year.

So how can you make sure you always file under the correct status? Here are the guidelines given by the IRS:

1. Marital Status. Should you file as Married or Single? For most people, this would be quite straightforward but to some others, it might not be. For instance, if you are separated from your spouse and have begun divorce proceedings, you may be tempted to file as a Single taxpayer but you are still legally married until your divorce is official. Generally, you determine your marital status for the entire year based on your status on the last day of the year.

2. Single Filing Status. As I mentioned above, the Single filing status would apply if you are not married, divorced or legally separated according to state law.

3. Married Filing Jointly. A married couple may file a return together using the Married Filing Jointly status. And if your spouse passed away last year, you usually may still file a joint return for that year.

4. Married Filing Separately. If you and your spouse decide to file their returns separately, each person’s filing status would be classified as Married Filing Separately.

5. Head of Household. The Head of Household status generally applies if you are not married and have paid more than half the cost of maintaining a home for yourself and a qualifying person.

6. Qualifying Widow(er) with Dependent Child. This status may apply if your spouse died during 2010 or 2011, you have a dependent child and you meet certain other conditions.

7. Finally, if more than one filing status fits you, you should choose the one that allows you to pay the lowest taxes.

 

IRS Reconsideration after Assessment

If you or your business has undergone an audit and you are dissatisfied with the result, you can make an appeal called an IRS reconsideration. This is allowed under Internal Revenue Code § 6404 (a). Furthermore, in Treasury Regulation 301.6404-1 it provides that the district director or the director of the regional IRS service center may abate any assessment, or unpaid portion thereof, if the assessment:

• is in excess of the correct tax liability
• is made subsequent to the expiration of the applicable period of limitations
• has been erroneously or illegally made

In the Internal Revenue Manual 4.13.1.4 it explains the procedures that must followed when evaluating an audit reconsideration request. According to the manual, the IRS must accept an audit reconsideration request if:

• The taxpayer has filed a tax return that shows the correct tax after the IRS had filed one for the taxpayer under Internal Revenue Code § 6020 (b)
• The taxpayer did not appear for an audit
• The taxpayer requests the abatement of an assessment based on information that was not previously considered that, if considered, would have resulted in a change to the assessment
• The taxpayer moved and did not receive the correspondence from the IRS
• The assessment remains unpaid or the IRS has reversed tax credits that the taxpayer is disputing
• The taxpayer has identified which adjustments is under dispute
• There was an IRS computational or processing error in assessing the tax

If you feel you have a valid cause to ask for reconsideration after your assessment, you should first obtain the auditor’s file (this is allowed under the Freedom of Information Act) to review how the auditor came to their decision regarding your tax debt. Next, you need to submit an audit reconsideration request in writing seeking the abatement of the excessive tax. In your request, specifically detail why you should be granted a reconsideration and appeal the original audit decision.

A reconsideration after assessment is given at the IRS’ discretion. Reconsideration requests will not be entertained if:

• the assessment was made as a result of a closing agreement under Section 7121 of the Internal Revenue Code or in which the tax liability was compromised under Section 7122 of the Internal Revenue Code;
• the assessment was made after final TEFRA administrative proceedings;
• the assessment was made as a result of the taxpayer entering into agreement on Form 870-AD, Offer of Waiver of Restrictions on Assessments and Collection of Deficiency in Tax of Acceptance of Overpayment;
• the assessment results from a final order of the United States Tax Court or other court. [IRM 5.1] 12.8 (06-17-1999)

 

Acting IRS Commissioner Steven Miller has quit his post over the IRS investigation on conservative groups after receiving an ultimatum from the Treasury Secretary Jack Lew. The scandal erupted last week after the IRS admitted to putting the tax cases of various conservative political and nonprofit organizations such as the tea party and Billy Graham Evangelistic Association and Samaritan’s Purse under extra scrutiny.

The entire affair was highlighted by the Treasury Inspector General on Tax Administration’s (TIGTA’s) report on the IRS' targeting of conservative groups. President Obama reviewed the report and found that the "misconduct" by the IRS was "inexcusable", prompting the President to say, "Americans are right to be angry about it, and I am angry about it. I will not tolerate this kind of behavior in any agency, but especially in the IRS, given the power that it has and the reach that it has into all of our lives. The IRS has to operate with absolute integrity."

As a result, the Treasury secretary asked Miller to step down, to which he duly complied. President Obama commented, “It's important to institute new leadership that can help restore confidence going forward". At the same time, the President gave his assurance that the Treasury will adopt new measures to "make sure this kind of behavior cannot happen again" and that the IRS would begin implementing the TIGTA's recommendations immediately.

The investigations on the conservative groups began last year when the then IRS Commissioner Doug Shulman was still in charge of the agency and Miller was the Deputy Commissioner in charge of the division responsible.

In his report, the TIGTA said that the fault in this matter lied on "ineffective management" in the IRS. The report concluded that IRS managers had followed "inappropriate criteria" in dealing with tax cases resulting in "substantial delays" in processing applications for tax-exempt status, and made requests for "unnecessary information" such as lists of donors.

The “ineffective management” also includes following the criteria used by the IRS Determinations Unit to flag cases for audit. The TIGTA said the criteria were having words like "Tea Party", "Patriots" and "9/12" in their names or manifestos that focused on the government's fiscal policy and educating the public to "make America a better place to live" or criticized how the country was being run.

The IRS denied that the action to scrutinize conservative groups was influenced by any third party individual or group outside the IRS.

 

Amidst the recent furor surrounding the IRS’ admission of heightened targeting of the Tea Party comes another accusation against the agency, this time from the nonprofit Billy Graham Evangelistic Association (BGEA). Its President, Franklin Graham said this today in his letter to President Barak Obama. In addition, Graham also believes the IRS action threatens to involve of nonprofit organizations.

An excerpt of the letter said, “Mr. President, the IRS has already publicly acknowledged it operated in a less than neutral and non-partisan way. We also now know that the target of their improper actions was much wider than political or Tea Party organizations. Will you take some immediate action to reassure Americans we are not in a new chapter of American history – repressive government rule?”

Graham’s letter claimed that the IRS also targeted the BGEA’s related international humanitarian organization, Samaritan’s Purse. According to Graham, the IRS notified both organizations in September last year that it was conducting a “review” of their activities for tax year 2010. Graham believes the review was part of an Obama administration effort of “targeting and attempting to intimidate us.”

Graham wrote in his letter, “While these audits not only wasted taxpayer money, they wasted money contributed by donors for ministry purposes as we had to spend precious resources servicing the IRS agents in our offices. I believe that someone in the administration was targeting and attempting to intimidate us. This is morally wrong and unethical – indeed some would call it ‘un-American.” In view of the IRS admission that it targeted Tea Party groups for added investigation, Graham said, “I do not believe that the IRS audit of our two organizations last year is a coincidence – or justifiable.”

The letter by Graham accuses the IRS of investigating the BGEA and Samaritan’s Purse because The Billy Graham Evangelistic Association urged voters to back “candidates who base their decisions on biblical principles and support the nation of Israel” during last year’s presidential race. The result of the audit was that the Graham organizations could keep their federal income tax exemptions but they were only informed of this after the November election last year.

The IRS review involving an IRS agent visiting the two agencies last October, came after the Billy Graham Evangelistic Association published newspaper ads in North Carolina backing a state constitutional amendment banning same-sex marriage. The amendment was passed in May.

If you have an offshore account containing money you have not declared to the IRS as income, the IRS is giving you a break in the form of 2 programs. The first is the Offshore Voluntary Disclosure Program (OVDP). The second is a less-known guideline called FAQ 17.

The OVDP is well-known by now. The IRS has conducted a few OVDPs that give taxpayers with offshore taxable assets the opportunity to step forward and declare their income and avoid criminal prosecution. So this program is for those who have neglected declaring any of their offshore assets over the years. But not everyone with offshore taxable income is supposed to participate in the OVDP. You should evaluate whether you would owe any more US tax than you already paid. If not, the OVDP may not be for you. Why might you not owe more?

Suppose you failed to report earnings on a foreign account but also paid tax there and didn’t claim a foreign tax credit. This is how you may not owe any more taxes than what you have already paid. So by making both corrections on an amended tax return, you may be current in your tax obligations. In other words, your tax returns are wrong, but even if they were right you wouldn’t owe additional taxes.

Now if you have been reporting your income from offshore sources, you do not have to participate in the OVDP but you may still need to comply with the guidelines of FAQ 17. This is because FAQ 17 concerns another requirement besides submission of tax returns namely submission of Report of Foreign Bank and Financial Accounts (FBARs).

If you failed to file FBARs but reported all your income from foreign accounts, then you would need to take advantage of the second break from the IRS namely FAQ 17. According to the guidelines in FAQ 17, the IRS stipulates that if you just file 6 FBARs with a letter explaining that you didn’t know about FBARs and don’t owe any taxes, you won’t be penalized.

In any case it is advisable to consult a qualified and experienced tax attorney to draft your letter to the IRS explaining your ignorance of the FBAR requirement and any other document necessary. Call us if you need legal advice in this or any other matter. You can reach us at (813) 229 7100 for a free consultation.