IRS Tax Collection Problems

IRS Tax Collection ProblemsEveryone has heard the old cliché, “There are two things in life we all must do – pay taxes and die.” Not paying taxes can have dire consequences. Just look what happened to the notorious gangster, Al Capone. He was prosecuted for filing false income tax returns and spent the rest of his life in federal prison – not for all of his crimes, but for failure to pay income tax.

Not all underpayment of taxes leads to prison. Sometimes, people just make honest mistakes. Whether underpayment of taxes is intentional or a mistake, the individual is more than likely going to hear from that dreaded federal agency, the Internal Revenue Service (IRS).

The IRS is the most powerful bill collector in the US. That’s why, when people receive a letter in the mail from the IRS, most, if not all, go into panic mode. Although this is a natural reaction, the IRS is not as bad as people fear. Yes, they do have extraordinary collection powers – but let’s analyze these powers. They can:

1. File federal tax liens against you, which ties up your property if you try to dispose of it either by sale or otherwise. It also makes it difficult to borrow money.

2. Levy and seize your assets, cars, boats, bank accounts, etc. Unlike other creditors, they can even seize and sell your homestead. State homestead exemptions do not apply to the IRS because federal law is superior to state law.

3. Garnish your wages, social security and other sources of income.

Even though the IRS has all of these powers, there are remedies that attorneys, as your tax representative, can utilize to help you resolve your tax problem. When contacted by the IRS, YOU SHOULD NOT IGNORE THEM! That only leads to them exercising the powers enumerated above. If you have a federal tax problem, you should contact Bailey & Galyen immediately.

When you owe the IRS and they attempt to collect, there are three things Bailey & Galyen can do to help you resolve the problem:

1. Obviously, you can pay the amount of taxes, interest and penalties they say you owe, and they will go away.

2. Your attorney can negotiate with the IRS to obtain an “installment agreement”. This is an agreement between you and the IRS whereby you agree to pay, and they agree to accept, a certain amount of money per month until the amount owed is paid off or the statute of limitations bars them from further collection. How much you pay per month depends on your financial condition. The advantage of this agreement is that as long as you make your payments on time, they will not do any further collection activity.

3. Alternatively, your attorney can try to negotiate an “offer in compromise”. This is a situation where the amount of taxes you owe are so high, and your income and assets are so low, that you will never be able to pay off the amount of taxes you owe. An offer in compromise is much more difficult to obtain than an installment agreement because it is an agreement to allow you to pay less than you actually owe. Like the installment agreement, if an offer in compromise is accepted by the IRS, no further collection activity will take place.

Both the offer in compromise and the installment agreement require you to remain current on all taxes in the future. If not, then the agreement or offer will be voided, and the IRS will be free to begin collection activity again.

Bailey & Galyen can help you avoid the concerns you have in dealing with the IRS. We have been dealing with IRS tax issues for over 48 years. We know how it works and how to obtain the maximum benefits for our clients. Please contact us, and we will be happy to assist you.

Understanding IRS Penalties

Tax LawApril 15 is the deadline to file your 2018 federal income tax returns or request an extension to file. As that date rapidly approaches, you might be asking, “What can the IRS do to me if I do not file my return or request an extension?” Or “What happens if I do file but don’t have the money to pay the tax due?”

Not everyone is required to file a return. Your earnings must exceed a certain amount before a return is required. For example, a single individual under the age of 65 must earn at least $10,400 before a return is required. A single individual 65 or older must earn at least $11,950. There are other statuses, such as “married, filing jointly,” “separately,” or “head of household.” If your earnings exceed the applicable threshold, then you must file a return.

What happens if you don’t file a required return? The willful failure to file a federal income tax return is a criminal offence prosecutable by the U.S. Department of Justice. In addition to the potential criminal penalty, there is a civil penalty assessed each month in the amount of 5% of the unpaid taxes. The penalty begins accruing the day after the return is due and can reach a maximum of 25% of the unpaid taxes.

If a return is filed more than 60 days after it’s due, it is subject to a minimum late filing penalty that is the lesser of 100% of the unpaid tax due on the return or a specific dollar amount adjusted for inflation. If you don’t have the money to pay your taxes when they’re due, file your return anyway in order to avoid these penalties.

If you file a return, but don’t pay the tax due, you will incur a “failure to pay penalty.” This penalty is ½ of 1% (.50%) of the unpaid taxes for each month, or part of a month, the tax remains unpaid after it’s due. The penalty cannot exceed 25% of the unpaid tax due. The IRS will waive this penalty if you can show reasonable cause for not paying the tax timely. Lack of money is not reasonable cause.

“What happens to these penalties if I file an extension?” A standard extension moves the filing deadline from April 15 to October 15. Requesting an extension will allow you to avoid the “failure to file penalty” for the period of the extension, i.e, April 15 to October 15. However, the “failure to pay” penalty will not be avoided unless you pay, or have paid, at least 90% of the actual tax owed by April 15, and you then pay the balance when you file the extended return.

The penalties discussed above are the main penalties applicable to most individual taxpayers. There are other penalties that could apply, but which are not discussed here, such as “the civil fraud penalty,” the “failure to pay proper estimated taxes penalty,” and “the penalty for failure to take required minimum distributions from retirement accounts when you reach age 70 ½.”

The bottom line — be sure you either file your tax return by April 15, or file for an extension to move your deadline to October 15. If you cannot pay the tax due, file the return anyway so that you avoid the “failure to file” penalty. If you do not pay the tax shown on the return, you will incur a “failure to pay” penalty; however, as explained in an earlier article, many times you can negotiate an “Installment Agreement” with the IRS after the return is filed.

If you have any questions, or if you are having difficulties dealing with the IRS, please contact Bailey & Galyen.

Understanding IRS Penalties

Tax LawApril 15 is the deadline to file your 2018 federal income tax returns or request an extension to file. As that date rapidly approaches, you might be asking, “What can the IRS do to me if I do not file my return or request an extension?” Or “What happens if I do file but don’t have the money to pay the tax due?”

Not everyone is required to file a return. Your earnings must exceed a certain amount before a return is required. For example, a single individual under the age of 65 must earn at least $10,400 before a return is required. A single individual 65 or older must earn at least $11,950. There are other statuses, such as “married, filing jointly,” “separately,” or “head of household.” If your earnings exceed the applicable threshold, then you must file a return.

What happens if you don’t file a required return? The willful failure to file a federal income tax return is a criminal offence prosecutable by the U.S. Department of Justice. In addition to the potential criminal penalty, there is a civil penalty assessed each month in the amount of 5% of the unpaid taxes. The penalty begins accruing the day after the return is due and can reach a maximum of 25% of the unpaid taxes.

If a return is filed more than 60 days after it’s due, it is subject to a minimum late filing penalty that is the lesser of 100% of the unpaid tax due on the return or a specific dollar amount adjusted for inflation. If you don’t have the money to pay your taxes when they’re due, file your return anyway in order to avoid these penalties.

If you file a return, but don’t pay the tax due, you will incur a “failure to pay penalty.” This penalty is ½ of 1% (.50%) of the unpaid taxes for each month, or part of a month, the tax remains unpaid after it’s due. The penalty cannot exceed 25% of the unpaid tax due. The IRS will waive this penalty if you can show reasonable cause for not paying the tax timely. Lack of money is not reasonable cause.

“What happens to these penalties if I file an extension?” A standard extension moves the filing deadline from April 15 to October 15. Requesting an extension will allow you to avoid the “failure to file penalty” for the period of the extension, i.e, April 15 to October 15. However, the “failure to pay” penalty will not be avoided unless you pay, or have paid, at least 90% of the actual tax owed by April 15, and you then pay the balance when you file the extended return.

The penalties discussed above are the main penalties applicable to most individual taxpayers. There are other penalties that could apply, but which are not discussed here, such as “the civil fraud penalty,” the “failure to pay proper estimated taxes penalty,” and “the penalty for failure to take required minimum distributions from retirement accounts when you reach age 70 ½.”

The bottom line — be sure you either file your tax return by April 15, or file for an extension to move your deadline to October 15. If you cannot pay the tax due, file the return anyway so that you avoid the “failure to file” penalty. If you do not pay the tax shown on the return, you will incur a “failure to pay” penalty; however, as explained in an earlier article, many times you can negotiate an “Installment Agreement” with the IRS after the return is filed.

If you have any questions, or if you are having difficulties dealing with the IRS, please contact Bailey & Galyen.

The 2018 Federal Tax Law Changes You Need to Know

couple calculating taxes

Last year, President Trump signed a new tax-reform bill into law. This new law can have a substantial impact on individual taxpayers starting with the tax year 2018, for which returns are due to be filed by April 15, 2019. Some of the provisions that impact individuals are the following:

  1. The 2018 tax brackets, for the most part, reduce tax rates. For example, the tax rate for a married couple in 2018 will range from 10% on income of $0 to $1,950 to 37% on income over $600,000. This is a reduction from 2017, when the tax rate ranged from 10% for married couples earning $0 to $19,050 to 39.6% on income over $480,050.
  2. The standard deduction is almost doubled for all taxpayers. For example, the standard deduction for a single individual, or a married individual filing separately, has gone from $6,500 for tax year 2017 to $12,000 for tax year 2018. For a married couple filing jointly, the deduction has gone from $13,000 in 2017 to $24,000 in 2018.
  3. Although the standard deduction has increased dramatically, the personal exemption has been eliminated.
  4. The capital gains tax, which generally applies to sales of stocks and other appreciated assets, has not changed.
  5. The mortgage interest deduction now applies only to mortgage debt of up to $750,000. This is down from the $1,000,000 figure previously allowed. NOTE: This reduction only applies to mortgages taken after December 15, 2017. Mortgages that existed prior to that date are not affected.
  6. Charitable contributions changes are as follows:
    • Taxpayers can deduct donations up to 60% of their income. Under prior law, they could deduct only up to 50% of their income.
    • Donations to colleges in exchange for the right to purchase athletic tickets are no longer deductible.
  7. The medical expense deduction has been reduced from 10% of adjusted gross income to 7.5% of adjusted gross income. This change is retroactive to the 2017 tax year, which may require eligible taxpayers to file amended returns for 2017.
  8. Under the new law, state and local tax deductions, which include income, sales and property taxes, are limited to $10,000. This provision is controversial for its effects in high-tax states such as California and New York.
  9. Affordable Care Act penalties are repealed. Thus, individuals who don’t buy health insurance will no longer pay a tax penalty.
  10. There are big changes in the treatment of pass-through deductions. Under the new law, pass-through businesses such as partnerships, sole-proprietorships, and S corporations can deduct 20% of their pass-through income before ordinary income tax rates are applied. Certain limits apply to “professional services businesses” such as lawyers, doctors, consultants, and business owners who file joint returns.
  11. The Alternative Minimum Tax (AMT) provision has been changed in two ways:
    • The new law permanently adjusts the AMT exemption amount for
      inflation. For example, the AMT exemption amount for a married couple filing jointly in 2017 was $84,500. Under the new law, the amount for 2018 is $109,400.
    • The income threshold amount at which the exemption begins to phase out has significantly increased from $160,000 for joint filers and $120,700 for individuals, to $1,000,000 and $500,000, respectively.
  12. The new law doubles the estate tax exemption from $5.59 million per individual to $11.18 million. For married couples, the exemption has gone from $11.18 million to $22.4 million.
  13. Several deductions are eliminated under the new law:
    • Casualty and theft losses (except those from federally-declared disasters)
    • Unreimbursed employee expenses
    • Tax preparation expenses
    • Other deductions previously subject to the 20% Adjusted Gross Income cap
    • Moving expenses
    • Employer’s subsidized parking and transportation reimbursement.

Most of the tax changes listed above are temporary and under current law, are set to expire after the tax year 2025.

If you have questions, or if you are having difficulties dealing with the IRS, please contact the tax law attorneys at Bailey & Galyen.

The 2018 Federal Tax Law Changes You Need to Know

couple calculating taxes

Last year, President Trump signed a new tax-reform bill into law. This new law can have a substantial impact on individual taxpayers starting with the tax year 2018, for which returns are due to be filed by April 15, 2019. Some of the provisions that impact individuals are the following:

  1. The 2018 tax brackets, for the most part, reduce tax rates. For example, the tax rate for a married couple in 2018 will range from 10% on income of $0 to $1,950 to 37% on income over $600,000. This is a reduction from 2017, when the tax rate ranged from 10% for married couples earning $0 to $19,050 to 39.6% on income over $480,050.
  2. The standard deduction is almost doubled for all taxpayers. For example, the standard deduction for a single individual, or a married individual filing separately, has gone from $6,500 for tax year 2017 to $12,000 for tax year 2018. For a married couple filing jointly, the deduction has gone from $13,000 in 2017 to $24,000 in 2018.
  3. Although the standard deduction has increased dramatically, the personal exemption has been eliminated.
  4. The capital gains tax, which generally applies to sales of stocks and other appreciated assets, has not changed.
  5. The mortgage interest deduction now applies only to mortgage debt of up to $750,000. This is down from the $1,000,000 figure previously allowed. NOTE: This reduction only applies to mortgages taken after December 15, 2017. Mortgages that existed prior to that date are not affected.
  6. Charitable contributions changes are as follows:
    • Taxpayers can deduct donations up to 60% of their income. Under prior law, they could deduct only up to 50% of their income.
    • Donations to colleges in exchange for the right to purchase athletic tickets are no longer deductible.
  7. The medical expense deduction has been reduced from 10% of adjusted gross income to 7.5% of adjusted gross income. This change is retroactive to the 2017 tax year, which may require eligible taxpayers to file amended returns for 2017.
  8. Under the new law, state and local tax deductions, which include income, sales and property taxes, are limited to $10,000. This provision is controversial for its effects in high-tax states such as California and New York.
  9. Affordable Care Act penalties are repealed. Thus, individuals who don’t buy health insurance will no longer pay a tax penalty.
  10. There are big changes in the treatment of pass-through deductions. Under the new law, pass-through businesses such as partnerships, sole-proprietorships, and S corporations can deduct 20% of their pass-through income before ordinary income tax rates are applied. Certain limits apply to “professional services businesses” such as lawyers, doctors, consultants, and business owners who file joint returns.
  11. The Alternative Minimum Tax (AMT) provision has been changed in two ways:
    • The new law permanently adjusts the AMT exemption amount for
      inflation. For example, the AMT exemption amount for a married couple filing jointly in 2017 was $84,500. Under the new law, the amount for 2018 is $109,400.
    • The income threshold amount at which the exemption begins to phase out has significantly increased from $160,000 for joint filers and $120,700 for individuals, to $1,000,000 and $500,000, respectively.
  12. The new law doubles the estate tax exemption from $5.59 million per individual to $11.18 million. For married couples, the exemption has gone from $11.18 million to $22.4 million.
  13. Several deductions are eliminated under the new law:
    • Casualty and theft losses (except those from federally-declared disasters)
    • Unreimbursed employee expenses
    • Tax preparation expenses
    • Other deductions previously subject to the 20% Adjusted Gross Income cap
    • Moving expenses
    • Employer’s subsidized parking and transportation reimbursement.

Most of the tax changes listed above are temporary and under current law, are set to expire after the tax year 2025.

If you have questions, or if you are having difficulties dealing with the IRS, please contact the tax law attorneys at Bailey & Galyen.

Partial Government Shutdown as it Affects IRS

US tax forms The recent partial government shutdown has affected 800,000 government employees. As we enter the tax filing season, many wonder if the IRS is affected and if so, how?

The short answer is: The IRS & taxpayers are both affected. The most obvious impact on the IRS is the fact that most of the employees have been furloughed and have gone 35+ days without a paycheck.

Even though the government has reopened until February 15th and employees are now being paid, the following impacts will continue for the foreseeable future:

  1. This is the busiest time of the year for the IRS and having employees furloughed for as long as they have been will put a strain on their ability to process mail. This may cause a delay in taxpayers receiving refunds. How long this delay may be, we will have to see.
  2. There will be delays in audits of tax returns, not only new audits but also
    ongoing audits.
  3. Collection activity will be delayed. This delay should be a plus for taxpayers as it will allow them more time to gather information the IRS is asking for and to prepare their strategy for trying to resolve their tax controversy.
  4. Even though IRS employees were furloughed during the partial government shut-down, IRS computers that generate notices were not shutdown. As a result, there could be incorrect notices being sent to taxpayers.
  5. For example, if you responded to an earlier notice and submitted the information requested without an employee to enter that information into the computer, the computer will not know you responded and thus continue sending incorrect notices.

  6. One thing that is very important to remember is that the temporary government shutdown DID NOT change or delay the requirement for timely filing of all required federal tax returns. Therefore, be sure that you timely file and pay all taxes due by their normal due dates.
  7. Don’t be surprised if employees’ tempers are a little on edge. Remember, they have gone 35+ days without a paycheck and are uncertain of their future after February 15th, which would put a strain on most people.

If you have any questions, please contact Bailey & Galyen.

Death and Taxes

by J.C. Bailey

The month of April has taken more than its share of bad publicity over the years. The Lincoln assassination and sinking of the Titanic come to mind. Currently April has become synonymous with the joy of filing our federal income tax returns. Even if you file for the six-month automatic extension of time to file, you still have to do most of the work to estimate whether you owe additional taxes or not. If you owe additional taxes there is no extension of time to pay them without interest and penalties. As much as most of us hate to pay taxes, there are some valuable lessons to be found in our tax returns.

Most of us who pay income tax receive income. It may not be as much as we’d like or as much as we think we deserve, but most of us have some income. This presents us with the opportunity to make choices with regard to how we spend and invest it. If I owe more than $1,000 in taxes or am receiving more than $1,000 as a refund, I need to look at my withholding. Coming up with that much money to pay additional taxes may be difficult or impossible. Giving the government an interest-free loan for several months doesn’t make much sense either. If your income is steady, you should be able to set your withholding to come out about even come tax time. Talk to your payroll department or service.

Plan ahead and keep more money for yourself and your future. The tax code encourages both saving and investing for retirement. Make sure you know what benefits your employer offers. Human resources or payroll departments should be able to educate you on opportunities to save for the future and pay less in taxes. People who don’t have access to that information should talk to their accountant or financial planner. If your employer matches contributions to certain plans, you need to think hard before walking away from that money. In many instances, you won’t miss the money you are investing for your future and it will actually lower your tax bill. The earlier in your working life that you invest, the more impactful the results will be.

Most of us have discovered the truth that it is more of a blessing to give than to receive. Charitable contributions to qualified organizations are tax deductible. Americans are some of the most generous people in the world and our tax code encourages that generosity. Think about what is important to you and your family. Finding a cure, disaster relief assistance, faith-based initiatives and environmental causes can all use your help. Think about including those less fortunate or a cause that is close to your heart in your annual giving and include it in your estate planning. Times are tough, but a little planning can go a long way in helping you make the most of what you have.