In my previous article, I wrote about the 5 changes to IRS regulations that make it easier for you to repay your back taxes. Today, I’ll share 4 steps you can take to pay off your back taxes.

1. Make sure the amount you owe is correct

It doesn’t hurt to double check the amount of taxes you owe. Even the IRS makes mistakes. You may have received a tax bill calculated in error. The error may be on your part or the IRS’. So the first thing you are going to want to do is check to see if you made an error in your tax form. A deduction you left out, a checkbox left unchecked or an amount added twice could significantly increase your tax bill. If you find an error you can submit an amended form with the errors corrected.

If you cannot find any error, contact a lawyer to discuss the matter or call up the IRS and enquire about it. But remember it is often very difficult to get some clear answers or talk to the right person in the IRS.

2. Minimize your penalties and interests

Owing back taxes is bad enough but if you have to pay penalties and interests on the back taxes, it’s even worse. In order to minimize your penalties and interests, you should either ask for an abatement of penalties and interests by writing in or pay up your debts as quickly as possible. The IRS does allow abatement of penalties and interests if you write to them explaining why you have a backlog in your taxes.

Also, if you underpaid your taxes this year, but you owed significantly less last year, you generally will not be penalized for underpayment of tax if you paid at least as much as you owed last year, and you pay by the due date this year.

3. Pay by installment

This is the most common way to clear back taxes that may amount to a significant amount. You will have to file Form 9465, Installment Agreement Request, to set up installment payments with the IRS. If you request to pay by installments, the IRS will approve it if you owe $25,000 or less, you can show that you cannot pay the amount you owe now or you can pay off the tax in three years or less. But the condition is that you and your spouse must not have had an installment agreement over the last 5 years.

4. Make an offer in compromise

An offer in compromise is an offer to pay the IRS less than what you owe in back taxes up to your entire net worth as full settlement. The offer in compromise is not open to anyone, only those who genuinely cannot afford to pay their taxes. This step should only be taken as a last resort.

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If you owe the IRS back taxes, listen up because I’ve got good news. Over the last 2 year or so, the IRS has in fact made it easier for people to clear off their back taxes. A series of 5 changes were made to the lien system and collection tools that make it easier for you to repay your debt. Here are the 5 changes:

1. Increase in tax lien threshold

A tax lien is a court-ordered claim that the IRS has over your current and future property up to the amount of your tax debt. This means you cannot enter into any transaction with your property (such as sell it) without the consent of the IRS. In the past, if you owe $5,000 or more of back taxes, it would trigger the tax lien. But the tax lien threshold has now been raised to $10,000.

2. Withdrawal of tax lien

If you have a tax lien on your property, you can ask to have your tax lien withdrawn, which could remove any evidence of it from your credit report if you pay your tax debt in full or enter into a direct debit installment agreement with the IRS. Usually a tax lien is removed once the back taxes are fully paid but the record remains on the taxpayer’s credit report for seven years thereafter. But from now on, the IRS will withdraw a lien if a tax debt is paid in full and the taxpayer requests it. This won’t happen automatically; the taxpayer must request for it.

3. Direct debit agreements

It is now possible to have your lien withdrawn if you owe $25,000 or less and either enter into a direct debit installment agreement, convert a regular installment agreement into a direct-debit installment agreement or is already on a direct-debit agreement and asks for a lien withdrawal. However, the IRS will only do so after a probationary period.

4. Increase in offer in compromise income limit

An offer in compromise is an agreement whereby the IRS agrees to accept less than what you owe in back taxes in full settlement of all your debts. This only happens when the IRS is convinced it cannot collect any more from you than what you are offering in compromise. In the past, the offer in compromise income limit was $50,000 per year i.e. only those earning less than this amount need apply. Now the IRS has increased the limit to $100,000 per year. It will also be available to people who owe $50,000 or less, an increase from the previous limit of $25,000.

5. Increase in limit for small business installment agreement

The IRS will make streamlined installment agreements available to small businesses with $25,000 or less in back taxes, an increase from the current limit of $10,000. Thus, a small business owner who owes more than $25,000 could qualify by paying down the balance to $25,000 or less.

In my next article, I will share 4 steps you can take to repay your back taxes in light of the 5 measures outlined above.

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Tax refund fraud involves claiming a tax refund that rightfully belongs to someone else by assuming that person’s identity. It is a form of identity theft. Very often, identity theft arises from stealing Social Security numbers. Although the IRS constantly warns taxpayers not to carry their Social Security cards with them and not to give personal information over the phone, through the mail or on the Internet unless they have initiated the contact or are sure who they are dealing with, identity theft is still rampant.

Those who commit stolen identity refund fraud submit large numbers of fake tax returns electronically in the hopes that some of them will get through the IRS’ security screens. So rather than steal identities wallet by wallet, or computer by computer, they glean names and Social Security numbers by the hundreds or thousands, often with the help of corrupt insiders with access to personal data, including tax preparers, health care billing clerks, state employees and debt collectors.

According to Nina Olson, the National Taxpayer Advocate, “(Social Security theft fraud is) relatively inexpensive. You can get somebody to steal some names…and you can ping our system, and if it doesn’t go through, big deal.”
The Government Accountability Office states that the IRS detected 642,000 cases of identity theft in the first nine months of 2012 which was an increase from 242,000 for the whole of 2011. And that 2012 number does not include 436,000 fraudulent refund claims filed in 2012 using the Social Security numbers of Puerto Rican citizens, who don’t have to file with the IRS or pay federal taxes unless they have income from the states.

One main contributing factor to the scourge of identity theft is the fact that the IRS does not process the W-2s and 1099s it gets for taxpayers until after it pays out refunds. Therefore, if an identity thief has a valid name and Social Security number, he or she can create bogus W-2s and apply for a refund of any amount of withholding, or for a refundable credit, such as the earned income tax credit, worth thousands of dollars.

Another main source of personal particulars for identity thieves is the Social Security Death Index—a government maintained database – which is freely available on genealogy research sites and includes the full name, Social Security number, date of birth and death and the last address on record. This is the reason the IRS had inadvertently refunded money to dead people in the past. But nowadays, the IRS obtains more regular updates from the Social Security Administration which allows it to block refund requests under names of deceased persons. The Social Security Administration themselves have also begun to limit the information it puts out in the Social Security Death Index.

But the identity thieves also use names of the living, in particular taxpayers who are not taxable such as the disabled, welfare recipients, even prisoners.

The best way to avoid having your tax refund stolen by identity thieves is to file your tax returns early. If you beat the crook to it, he or she cannot use your social security number anymore.

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In 2009, the IRS took UBS Bank of Switzerland to court over the charge that the bank helped wealthy American taxpayers hide their taxable income in UBS bank accounts. The bank was found guilty and had to pay a fine of $780 million to the IRS. In addition, the US and Swiss governments agreed that UBS AG was to turn over details on 4,450 accounts of American clients suspected of holding undeclared assets from the IRS.

This arrangement is part of an agreement signed between the US and Swiss governments in which Swiss banks will disclose information about US account holders. The treaty is the latest in a series between the United States and other countries designed to comply with the Foreign Account Tax Compliance Act (FATCA) that was enacted in 2010. FATCA regulations state that foreign financial institutions must divulge information on US citizens’ offshore accounts worth more than $50,000 in any one year. Under this agreement Swiss banks will disclose directly to the IRS all activity relating to US taxpayers holding assets in Swiss accounts.

If Switzerland fails to keep its end of the deal, Swiss banks will be barred from doing business in the United States. However, the treaty does not require Swiss banks to automatically surrender to the IRS account holder information if the US client refuses to cooperate. But the IRS can get around this by obtaining the information via Swiss government authorities. In addition, the agreement is not reciprocal in that the IRS does not have to provide the Swiss government with information about Swiss citizens' accounts in US financial institutions.

At home, the IRS has long had a policy that tax evaders who come forward before they are contacted by the agency will be subject to the full amount of the tax, penalties and interest but will not be prosecuted for criminal activity. This voluntary amnesty program is part of a larger effort by federal authorities to crack down on international tax evaders. But once the IRS obtains information about international tax dodgers, they will be ineligible for the amnesty program.

Interestingly, in a telephone poll of 1,500 taxpayers conducted by the IRS, an overwhelming majority of respondents do not believe it is ever okay to cheat on their income taxes, with most citing personal integrity as a reason to be truthful. When asked how much, if any, is an acceptable amount to cheat on your income taxes, 87% of respondents said, “not at all” while only 11% said, "a little here and there" or "as much as possible."

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If you don’t know what a domestic partnership is, it refers to a gay couple.  As you can imagine, there are some tax issues that pertain to a homosexual couple.  For example, what’s their marital status?  Not all states recognize a gay marriage.  In some states (like California), you can’t marry but you can be registered as domestic partners.  The Federal government does not view gay couples as married.  So would you choose “single”, “married” or “single parent” when filling up your tax return form?  The Internal Revenue Service has ruled that the federal Defense of Marriage Act 1996, disallows same-sex couples from filing jointly – or as married filing separately – on federal returns.  Thus, domestic partners can either choose a tax authority to defy or file state tax returns that are completely different from their federal returns.

For example, under California law, domestic partners could combine their income and then file jointly or split the combined income and deductions and file two nearly identical "married filing separately" returns.  But under federal law, each partner would list his or her own income and deductions.  If the partners have children, they must decide who would claim the children as dependents.

Insofar as declaring taxable income is concerned, the task of filling up federal and state tax forms may pose a problem depending on which state you’re in.  For example, if you’re in California, your state tax returns (Form 540) must bear the same income as stated in your federal tax return forms.  Therefore, if you chose to file jointly under California law, your joint income would not be applicable for federal return forms because you would have to file as separate individuals since the federal government does not recognize same sex couples as married.
Another tax issue arises when one of the partners passes away.  Under current federal estate tax laws, if you’re a married couple you are completely exempted from estate taxes when one spouse dies.  So when the husband dies, his assets go to his wife and the wife is not subject to estate tax.  But after she dies, then estate tax becomes payable.  However, with domestic partners there's no such exemption from estate taxes.

Also, in a community-property state (like California), there's a question about ownership of the assets.  This is because community-property laws assume that married couples (including domestic partners) are equal owners of most assets like a house.  But because the federal government doesn't recognize domestic partnerships, it assumes that the house is owned by only the person whose name is on the title deed.

Hence, if a domestic couple say in California owns a $1 million house and one partner dies, is the entire $1 million subject to estate duty tax or only $500,000?

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