In addition to the somewhat misleading television and radio commercials claiming to settle IRS tax debts for pennies on the dollar (click here for more), there is a new wave of information regarding “Currently Not Collectible” status or “CNC”. The commercials inform the listener that if they cannot afford to pay the IRS anything they can obtain CNC status and the IRS immediately has to cease all collection activity. This is true, but there is more to it than simply telling the IRS to back off because you don’t have any money.
In order to gain CNC status you have to provide the IRS a personal financial statement. The financial statement will review income and expenses, all of which you may be asked to document. Also, for some expenses, such as food, clothing, housing, vehicle, the IRS has standard amounts which they allow. If you are above these amounts the IRS will not consider this added expense and will instead ask that you change your lifestyle to be more in line with the set standards. Furthermore, the IRS likely will not consider expenses they do not deem necessary such as credit card payments or personal hobbies and activities. Assuming you get to the point where you and the IRS agree on a personal financial statement and that you cannot make payments, it is still not over. CNC status is considered temporary and the IRS will very likely ask you to update your situation in the future to prove you still cannot afford to pay. If your job status changes, you inherit money or you have an expense that is no longer required, it is possible your financial statement could look much different than before. If so, you may now have to pay on a debt that has been accumulating interest during the period you were in CNC status. This is one more detail often lost in the fine print, interest continues to accumulate while you are in CNC status – the debt does not pause or go away, it continues to sit there and grow waiting for you. The only possible conclusion that might get you out of the debt is if you are able to prove CNC status for long enough that the IRS’s collection period of 10 years expires. In reality, generally the closer it gets to this date the more the IRS will scrutinize your personal financial statement and look for assets you have to pay them back. This is why in practice CNC status should be looked at more as a bandage than a cure.
If you owe money to the IRS and have questions regarding your options contact us today at Hone Maxwell LLP. We can give you a complete overview of your case including the risks, benefits, and also the possible long term consequences of the decisions you make today. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
According to multiple reports, Manny Pacquiao is currently in a battle with Filipino Tax Authorities regarding his taxes. The boxer claims that under provisions of a tax treaty with the United States, because he properly paid taxes to the IRS he was not subject to double taxation in his home country. However, the Filipino Bureau of Internal Revenue has taken the position that even if this were true, Pacquiao has not properly disclosed this information. The case is now making it’s way through the court system as it appears Pacquiao and his attorneys would rather fight it out in court than work with the Bureau of Internal Revenue.
This situation is also illustrative of similar requirements in the United States. A taxpayer cannot always rely on a treaty provision which lowers the tax rate or excepts the taxpayer from filing a return without properly disclosing this position to the IRS. Furthermore, other tax benefits to limit double taxation by a foreign country, such as the foreign earned income exclusion and foreign tax credits, also have to be disclosed on the tax return. For foreign corporations it can even go one step further where the corporation can file a protective tax return. A protective corporate tax return is a return filed by a foreign corporation stating that although the corporation does not believe they have any U.S. filing requirement, the corporation reserves the right to claim deductions and other tax benefits if U.S. income is later found or deemed earned causing them to have topay tax. Overall, foreign tax reporting is becoming one of the IRS’s most reviewed areas and not properly reporting a valid position can cause many problems including severe penalties even if no additional tax is due.
Navigating international tax laws is difficult enough, but even when a valid conclusion is reached it is still imperative that it is properly reported. If you have questions about tax treaties, mitigating double taxation, or your foreign reporting requirements, contact us at Hone Maxwell LLP today for a complete analysis of your case. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
It is common for organizations asking for donations to tout the tax benefits. However, over the years the abuse of this deduction has caused the IRS to increase the requirements to get the deduction on some items. Also, not every person benefits from a tax deduction for charitable contributions.
When it comes to cash donations determining the deduction is much simpler. The value of the deduction is the cash given less any benefit. If there is a benefit received the person accepting the donation should make this clear on the ticket, item purchased, or related literature. On a straight cash donation with nothing in return there is no benefit. The situation is more complex when it comes to donating items. There are many different ways to value the item – original purchase price, current value if sold, current value to donor, etc. From a practical perspective, on smaller donations of clothes and household goods a reasonable estimate might be enough. If the value of these donations is over $500 there is a special form that needs to be filed and it could be scrutinized more by the IRS. Furthermore, the rules related to deducting a donation of a vehicle have gone through changes. Vehicles can have a lot of different methods for determining value, which leaves it open to abuse. As such, the IRS now requires more specific valuation procedures that may even require obtaining a tax form from the charitable organization to prove the car value. When donating a vehicle you should be sure to either consult with a tax professional, or donate to a reputable organization that has proper processes in place to meet IRS requirements.
Once it is clear you have a tax deduction for the charitable contribution the next issue is if this is actually beneficial. Charitable contributions are deducted as an itemized deduction on Schedule A. This means, for people who take the standard deduction and do not itemize there is no tax benefit of a charitable contribution. Additionally, even for people who itemize there can be other limitations on the amount that is deductible. Overall, again you should speak with your tax professional to find out how much you will benefit from a charitable contribution. We should all do our part to give to these organizations but if you are making an additional contribution for year end tax planning or are donating more than you should because you are considering the tax savings you want to make sure it will actually be beneficial.
If you have any questions about your tax return and ability to deduct charitable contributions, or if you are in an audit trying to defend your deductions contact us at Hone Maxwell LLP today for assistance. We can review your case and work with you to determine your options or work towards resolution. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
Recently we posted that although the Offshore Voluntary Disclosure Program did not yet have an end date, it may be the time for taxpayers with offshore accounts to come forward as the U.S. continues to negotiate agreements with other countries to share information. Today was another big step towards this end as the U.S. and France agreed to an Intergovernmental Agreement to share information on taxpayers attempting to evade tax using offshore accounts. France becomes the tenth country with such an agreement joining Denmark, Germany, Ireland, Mexico, Norway, Spain, the United Kingdom, Japan and Switzerland. For taxpayers that did not properly report their foreign bank accounts the clock may be ticking on their opportunity to enter the Offshore Voluntary Disclosure Program, especially for taxpayers in France. Once the IRS discovers the account it is too late to come forward and avoid criminal prosecution under the program.
All tax professionals should make sure their clients are aware of these developments, and taxpayers should also ensure they have properly reported their foreign bank accounts. If you have questions regarding your options or foreign bank account reporting contact us at Hone Maxwell LLP today for a complete analysis of your case including options and risks. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
According to the Wall Street Journal, there has been a recent increase in the number of taxpayers with offshore accounts who are coming forward to take advantage of the IRS amnesty program. The reason is likely because Swiss banks are putting pressure on U.S. taxpayers warning them that it is possible that their information could soon be disclosed. Under the terms of the offshore voluntary disclosure program, if taxpayers are audited or the accounts are discovered prior to entry into the program, the taxpayers are no longer eligible. By entering the program taxpayers pay a penalty based on the balance of the account, but avoid criminal prosecution.
Furthermore, as the IRS continues with programs such as the Foreign Account Tax Compliance Act (FATCA) and information sharing agreements with other countries, taxpayers should be aware that if they want to enter the offshore voluntary disclosure program the sooner the better. If you have foreign bank accounts or investments and want to know all of your options, contact us at Hone Maxwell LLP today for a complete analysis of your case. We will discuss the benefits and risks of all potential options. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
Today the IRS issued a warning about a new sophisticated scam targeting taxpayers, especially immigrants. The victims receive a phone call and are told they owe money to the IRS and that it must be paid immediately with a wire transfer, credit card, or pre-loaded debit card. If the victim does not comply they are threatened with being arrested, having a driver’s or business license suspended, or for immigrants they can be threatened that it will affect their immigration status. The callers can be very persuasive by doing things such as reciting fake name and badge numbers, verifying the last four digits of the victim’s social security number, spoofing the IRS toll free number on caller ID, and even sending email verifications. Additionally, some victims have been targeted with emails using the same methods, which can demand personal information and payments.
Here is what taxpayers should know:
- The IRS never initiates contact with taxpayers through an email
- The IRS never requests personal information through email or text
- The IRS never demands immediate payment over the phone
If you receive one of these calls you can notify the IRS at (800) 366-4484 or you can forward fraudulent emails to firstname.lastname@example.org. Also, if you want to verify your current tax status, check if you owe taxes, or even find out if the IRS is taking an action against you for taxes you know you owe, you can contact us at Hone Maxwell LLP today. We can call the IRS and get a complete picture of your tax situation and either confirm you are in good standing or discuss your options if there is an issue. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
Due to the government shutdown the IRS has announced there will be a delay of 1-2 weeks in the 2014 tax filing season. However, this is a delay for the start time of the IRS to process returns, not the filing deadline. The IRS was supposed to begin processing returns on January 21st, with the delay this date will now be pushed back until sometime between January 28th and February 4th. Taxpayers should be aware that even with this change the filing deadline for individual tax returns remains April 15th.
If you have any questions about your filing deadlines please contact us at Hone Maxwell LLP today. Also, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news
Due to California’s high income tax rate, sometimes there is a temptation to try to form a business through Nevada, which does not have an income tax. However, this is not a valid strategy for several reasons.
First of all, even if the business is legitimately in Nevada and satisfies the rules to be a non-resident California business, if the business is an S Corporation, Partnership, or pass-through LLC, the taxable income passes to the owner. If the owner is a resident of California he/she would have to pay taxes on all of the business income regardless of the state the business is located in because California taxes all income of its residents. Therefore, the income tax to the owner would be very similar whether the business was in Nevada or California. This scenario would provide some small relief from mandatory fees but the benefit would be small compared to the burden of actually becoming a resident of Nevada.
Additionally, even a C Corporation would have potential problems. With a C Corporation the owners do not pay income tax on the taxable income until they actually receive a dividend or some other form of compensation. As such, a Nevada C Corporation would not have to pay any California tax. This is where the problem lies. If the C Corporation is managed or controlled from within California, it is considered to be a resident of California, regardless if it is incorporated in Nevada. The standard to avoid being a California Corporation is very high. To avoid California making this classification and imposing tax, at a minimum the Corporation would likely need corporate offices in Nevada, meetings in Nevada, business decisions made in Nevada, and basically all business activity directed from Nevada. If the very high standard cannot be met, the corporation will be considered a resident of California and California will tax all of its income.
As you can see simply incorporating or forming a business in Nevada does not provide much if any benefit with respect to California taxes. Taxpayers should be sure they are making decisions based on what is best for the business and that these decisions have the intended effect. If you have questions regarding your business’ tax obligations contact us at Hone Maxwell LLP today. Also, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.
There can be multiple tax benefits to claiming children on a tax return. These include possible head of household status, exemptions, and child care deductions among other things. However, if the parents are married but filing separately, no longer married, or never were married, only one of the parents is allowed to claim each of these benefits on his/her tax return. In order to claim these benefits for a child you must list the child’s social security number. This makes it very easy for the IRS to verify if one child is being claimed for the same benefit on two different tax returns. Therefore, if both you and the other parent claim the same child tax benefit on each of your respective tax returns it can be an audit trigger and cause both of your tax returns to be reviewed.
The determination for the proper parent to claim the child tax benefits can be done through a marital settlement agreement or by following the IRS rules. In either situation, the key factor is to make sure that the parents agree on the outcome. Even if one parent uses the marital settlement agreement or IRS rules to correctly claim a child tax benefit, if the other parent also claims this benefit it could cause both parents to get audited. Despite the fact that the correct parent would not have an issue with claiming the child tax benefit when audited, there could be other items on that parent’s tax return that come under review as part of a general audit.
When going through a divorce or defending the proper claiming of a child tax benefit, it is very important to understand the rules and proper presentation. If you have questions on this topic or need assistance defending claiming a child tax benefit on a tax return, contact us at Hone Maxwell LLP today. Also, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.
The extended deadline for filing individual tax returns is approaching. Although, the proper method of filing your return is to pay your tax at the same time, it does not mean that both have to be done at the same time. Even if you owe money on your return and cannot afford to pay it, you should still file the tax return on time for several reasons. First, you can avoid failure to file penalties that can be imposed on a late tax return. Also, if you need to setup an installment agreement to pay the debt the IRS will not work with you until your return is filed. By filing the return you are being compliant and also the amount due is determined. If your return is not filed, you cannot setup any arrangement to pay your tax. Lastly, if you fail to file your tax return the IRS may file a return for you using a “substitute for return.” This is a process where the IRS will take all information reported to them, mainly income items only, and prepare a return for you. Since the IRS does not have deduction information or other details, these returns are usually very unfavorable to the taxpayer. The substitute for return can be updated with an actual return but it is a longer process than simply filing the return on time.
On the other side, another common misconception is that if the tax return shows a refund or no tax due the filing date is not important. For the same reasons as above this is not true. Even if you file a return showing a refund, if it is after the due date you can still be assessed failure to file penalties. Also, due to the process discussed for a substitute for a return, just because you show a refund on your tax return does not mean the IRS will also show a refund if they prepare a substitute for return.
Overall, filing tax returns and paying tax is a process that can quickly get out of hand if you fall behind, causing you stress, penalties, and unnecessary headaches. When dealing with the IRS it is almost always better to do as much as you can even if it is not everything. You need a starting point for resolving a tax issue. The longer you avoid the entire situation the fewer options you have, the more exposure to penalties you have and the situation could get out of control before you know it. If you have questions about late filing, penalties or other tax issues contact us at Hone Maxwell LLP today. Also, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.