With April 15th (actually the 18th this year) bearing down on us some people don't have the cash to pay their tax. Here is what we advise.
First and most importantly, don't let your inability to pay your tax liability in full keep you from filing your tax return properly and on time. It is also important to remember that an extension of time to file your tax return doesn't also extend the time to pay your tax bill.
Even if you can't make full payment of your liabilities, timely filing your return and making the largest partial payment you can will save you substantial amounts in interest and penalties. Additionally, there are procedures for requesting payment extensions and installment payment arrangements which will keep the IRS from instituting its collection process (liens, property seizures, etc.) against you.
Overview of the most common penalties.
The “failure to file” penalty accrues at the rate of 5% per month or part of a month (to a maximum of 25%, reached after five months) on the amount of tax your return should show you owe.
The “failure to pay” penalty is gentler, accruing at the rate of only 0.5% per month or part of a month (to a maximum of 25%, reached after fifty months) on the amount actually shown as due on the return.
If both apply, the failure to file penalty drops to 4.5% per month, so the total combined penalty remains at 5%—thus, the maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months, yielding an additional 22.5%. In total, these combined penalties can reach 47.5% of your unpaid liability in less than five years.
Both of these penalties are in addition to the interest that you will be charged for your late payment. If you also missed estimated tax payments, an additional penalty is tacked on for the period running from each payment's due date until the tax return due date, normally April 15th. This penalty is computed at 3% above the fluctuating federal short-term interest rate for the period.
Borrowing money to pay taxes.
Given the rate at which the above-mentioned penalties and interest accrues, it might be a good idea to borrow money to pay the taxes. In many situations, the rate of interest that you would pay to a family member, or even to a bank, is less overall than that which you would have to pay the IRS.
Note that the interest on a loan to pay taxes is nondeductible personal interest. In contrast, if you can take out a home equity loan (if anyone still has equity left in their home) and use the proceeds to pay off your tax debts, you will probably be paying at a lower rate than with other types of loans, and the interest payments will be deductible even if the loan proceeds aren't used in connection with the house.
Credit cards.
It is relatively quick and easy to use credit cards to pay the income tax bill, whether you file your income tax return by mailing a paper copy or by computer. In addition, three companies (Official Payments Corporation at 888-872-9829, Link2Gov Corporation at 888-729-1040, and RBS WorldPay, Inc. at 888-972-9829) are authorized service providers for purposes of accepting credit card charges from both electronic and paper filers. We do not normally advise the use of credit cards because not only is there likely to be at relatively high interest rates and the interest is not deductible the service providers typically charge an additional fee based on the amount you are paying.
Installment agreement request.
If you cannot or prefer not to take out a loan, you might be able to defer your tax payments by requesting that the IRS enter into an installment payment agreement with you. This request is made on Form 9465 or by applying for a payment agreement online. There are various options for making your monthly installment agreement payments, including the direct debit and payroll deduction methods, both of which are made automatically and thus reduce the risk of default.
If you file and request a payment agreement online, there are three available payment options: (1) payment in full within 10 days (which saves on interest and penalties); (2) short-term extension of up to 120 days (for which no fee is charged, but additional penalties and interest accrue); or (3) monthly payment plan (which carries a user fee in addition to the continued accrual of penalties and interest).
You can also request an installment agreement on Form 9465, which can be filed along with either an e-filed or paper return. If the liability is under $25,000, you will not be required to submit financial statements. Even if your request to pay in installments is granted, you will be charged interest on any tax not paid by its due date. However, the late payment penalty will be half the usual rate (0.25% instead of 0.5%) if you file your return by the due date (including extensions).
The IRS charges a fee for installment agreements, which will be deducted from your first payment after your request is approved. The fee for entering into an installment agreement is regularly $105, but it is reduced to $52 when the taxpayer pays by way of a direct debit from the taxpayer's bank account. Notwithstanding the method of payment, the fee is $43 if the taxpayer is an eligible low-income taxpayer. There is a $45 fee to restructure or reinstate an established installment agreement that applies regardless of income levels or method of payment.
Note that an installment agreement request can be made after the expiration of a hardship extension period (described below). Additionally, the IRS has the authority to enter into an installment agreement calling for less than full payment of the tax liability over the term of the agreement if it determines that such an agreement will facilitate partial collection of the liability.
The installment agreement may terminate, and all your taxes become due immediately, under certain circumstances (for example, if you stop making payments).
The IRS is required to enter into an installment agreement at your request (a “guaranteed installment agreement”) if the following apply:
• the tax liability is $10,000 or less (not counting interest and penalties);
• within the prior 5 years you have not (i) failed to file returns or pay taxes, or (ii) entered into a previous installment agreement;
• the IRS determines the tax liability cannot be paid in full;
• the installment agreement provides for full payment within 3 years; and
• you agree to comply with the tax laws during the agreement period.
As a matter of policy, the IRS often grants guaranteed installment agreements even if taxpayers are able to fully pay their accounts.
Undue hardship extensions.
You may also qualify for an extension of time to pay if you can show that payment would cause “undue hardship.” An undue hardship extension is applied for with Form 1127, to which you must attach a statement of assets and liabilities as well as an itemized list of receipts and disbursements for the 3 months preceding the tax due date.
If you qualify for an undue hardship extension, you will be given an extra six months to pay the tax shown as due on your tax return. You will avoid the failure to pay penalty, but you will still be charged interest. If the IRS determines a “deficiency” (i.e., that you owe taxes in excess of the amount shown on your return), the undue hardship extension can be as long as 18 months and, in exceptional cases, another 12 months can be tacked on. However, no extension will be granted if the deficiency was the result of negligence, intentional disregard of the tax rules, or fraud.
To establish undue hardship, it is not enough to show that it would just be inconvenient to pay your tax when due. For example, if you would have to sell property at a “sacrifice” price, you may qualify for an undue hardship extension. However, if a market exists, having to sell property at the current market price is not viewed as resulting in an undue hardship.
To qualify for an extension, you would have to: (i) show that you do not have enough cash and assets convertible into cash in excess of current working capital to meet your tax obligations; (ii) show you cannot borrow the amount needed except on terms that would inflict serious loss and hardship; and (iii) provide security for the tax debt. The determination of the kind of security—such as a bond, filing a notice of lien, mortgage, pledge, deed of trust, personal surety, or other form of security—will depend on the particular circumstances involved. However, no collateral is required if you have no assets.
Avoiding more serious consequences.
Many taxpayers ignore their tax liabilities when they run into financial difficulties—for example, by failing to file their tax returns. However, tax liabilities do not go away if left unaddressed, and failing to deal with the problem often exacerbates it. It is very important that you timely file a properly prepared return, even if full payment cannot be made. Include as large a partial payment as you can with the return, and start working with the IRS on one (or more) of the options discussed above as soon as possible. Otherwise, you may face escalating penalties, the risk of having liens assessed against your assets and income, or even seizure and sale of your property. In many cases, these tax nightmares can be avoided by taking advantage of the arrangements offered by the IRS.
Larry Kopsa CPA
Sunday, April 3, 2011
Tips About Rental Income and Expenses
Do you rent property to others? If so, you’ll want to read the following tips about rental income and expenses.
You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use of or occupation of property. Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them. The IRS Publication 527, Residential Rental Property, includes information on the expenses you can deduct if you rent property.
1. When to report income. You generally must report rental income on your tax return in the year that you actually receive it.
2. Advance rent. Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it, regardless of the period covered.
3. Security deposits. Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.
4. Property or services in lieu of rent. If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.
5. Expenses paid by tenant. If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses.
6. Rental expenses. Generally, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Don't forget your mileage and supplies.
You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use of or occupation of property. Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them. The IRS Publication 527, Residential Rental Property, includes information on the expenses you can deduct if you rent property.
1. When to report income. You generally must report rental income on your tax return in the year that you actually receive it.
2. Advance rent. Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it, regardless of the period covered.
3. Security deposits. Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.
4. Property or services in lieu of rent. If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.
5. Expenses paid by tenant. If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses.
6. Rental expenses. Generally, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Don't forget your mileage and supplies.
Thursday, March 24, 2011
WHERE IS MY REFUND
I have had several people email me asking how to check the status of their tax refund. In case you are wondering, here is information from the IRS website. Take note, "the IRS has an ap for that."
Larry Kopsa CPA
Checking the Status of Your Refund
If you already filed your federal tax return and are due a refund, you have several options to check on your refund. Here are eight things the IRS wants you to know about checking the status of your refund:
1. Online Access to Refund Information Where’s My Refund? are interactive tools on http://www.irs.gov and are the fastest, easiest way to get information about your federal income tax refund. Where’s My Refund? give you online access to your refund information, 24 hours a day, 7 days a week. It’s quick, easy and secure.
2. When to Check Refund Status. If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. If you file a paper return, refund information will generally be available three to four weeks after mailing your return.
3. What You Need to Check Refund Status. When checking the status of your refund, have your federal tax return handy. To get your personalized refund information you must enter:
• Your Social Security Number or Individual Taxpayer Identification Number
• Your filing status which will be Single, Married Filing Joint Return, Married.
• Filing Separate Return, Head of Household, or Qualifying Widow(er).
• Exact whole dollar refund amount shown on your tax return.
4. What the Online Tool Will Tell You. Once you enter your personal information, you could get several responses, including:
• Acknowledgement that your return was received and is in processing.
• The mailing date or direct deposit date of your refund.
• Notice that the IRS could not deliver your refund due to an incorrect address. In this instance, you may be able to change or correct your address online using Where’s My Refund?
5. Customized Information Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you may be able to start a refund trace.
6. Toll-free Number. If you do not have internet access, you can check the status of your refund in English or Spanish by calling the IRS Refund Hotline at 800-829-1954 or the IRS TeleTax System at 800-829-4477. When calling, you must provide your or your spouse’s Social Security number, filing status and the exact whole dollar refund amount shown on your return.
7. IRS2Go. This is the IRS’ first smartphone application that lets taxpayers check on the status of their tax refund. Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.
Larry Kopsa CPA
Checking the Status of Your Refund
If you already filed your federal tax return and are due a refund, you have several options to check on your refund. Here are eight things the IRS wants you to know about checking the status of your refund:
1. Online Access to Refund Information Where’s My Refund? are interactive tools on http://www.irs.gov and are the fastest, easiest way to get information about your federal income tax refund. Where’s My Refund? give you online access to your refund information, 24 hours a day, 7 days a week. It’s quick, easy and secure.
2. When to Check Refund Status. If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. If you file a paper return, refund information will generally be available three to four weeks after mailing your return.
3. What You Need to Check Refund Status. When checking the status of your refund, have your federal tax return handy. To get your personalized refund information you must enter:
• Your Social Security Number or Individual Taxpayer Identification Number
• Your filing status which will be Single, Married Filing Joint Return, Married.
• Filing Separate Return, Head of Household, or Qualifying Widow(er).
• Exact whole dollar refund amount shown on your tax return.
4. What the Online Tool Will Tell You. Once you enter your personal information, you could get several responses, including:
• Acknowledgement that your return was received and is in processing.
• The mailing date or direct deposit date of your refund.
• Notice that the IRS could not deliver your refund due to an incorrect address. In this instance, you may be able to change or correct your address online using Where’s My Refund?
5. Customized Information Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you may be able to start a refund trace.
6. Toll-free Number. If you do not have internet access, you can check the status of your refund in English or Spanish by calling the IRS Refund Hotline at 800-829-1954 or the IRS TeleTax System at 800-829-4477. When calling, you must provide your or your spouse’s Social Security number, filing status and the exact whole dollar refund amount shown on your return.
7. IRS2Go. This is the IRS’ first smartphone application that lets taxpayers check on the status of their tax refund. Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.
Wednesday, March 23, 2011
ENERGY CREDIT ON NEW HOUSE
Q. My wife and I built a new home in 2010. We moved in on March 24 so we lived in the house for over a year, if that makes any difference. Can we take the residential energy credit for insulation, windows, & doors on our 2010 tax return?
A. I am afraid that we do not have good news. The nonbusiness energy credit is normally claimed on form 5695 however, the type of costs described are restricted to existing homes only. The credit is designed to help offset the cost of retrofitting an existing home with energy saving devices.
However, you put in any of the following devices these devices qualify for a credit for both new and existing houses:
• Qualified solar electric
• Qualified solar water heating
• Qualified small wind power
• Qualified geothermal heat pump
• Qualified fuel cells
Enjoy your new home.
Larry Kopsa CPA
A. I am afraid that we do not have good news. The nonbusiness energy credit is normally claimed on form 5695 however, the type of costs described are restricted to existing homes only. The credit is designed to help offset the cost of retrofitting an existing home with energy saving devices.
However, you put in any of the following devices these devices qualify for a credit for both new and existing houses:
• Qualified solar electric
• Qualified solar water heating
• Qualified small wind power
• Qualified geothermal heat pump
• Qualified fuel cells
Enjoy your new home.
Larry Kopsa CPA
Friday, March 18, 2011
DON'T BE SCAMMED BY FAKE IRS COMMUNICATIONS
These fake scams are out there. I have even received a supposed communication from the IRS. They are good. The communication looks real. Be careful, don't let this happen to you.
The IRS receives thousands of reports each year from taxpayers who receive suspicious emails, phone calls, faxes or notices claiming to be from the Internal Revenue Service. Many of these scams fraudulently use the Internal Revenue Service name or logo as a lure to make the communication more authentic and enticing. The goal of these scams – known as phishing – is to trick you into revealing personal and financial information. The scammers can then use that information – like your Social Security number, bank account or credit card numbers – to commit identity theft or steal your money.
Here are five things you need to know about phishing scams:
1. The IRS doesn’t ask for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.
2. The IRS does not initiate taxpayer communications through e-mail and won’t send a message about your tax account. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site:
• Do not reply to the message.
• Do not open any attachments. Attachments may contain malicious code that will infect your computer.
• Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, visit the IRS website and enter the search term 'identity theft' for more information and resources to help.
3. The address of the official IRS website is http://www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site and report it to the IRS.
4. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence.
5. You can help shut down these schemes and prevent others from being victimized. Details on how to report specific types of scams and what to do if you’ve been victimized are available at http://www.irs.gov, keyword “phishing.”
The IRS receives thousands of reports each year from taxpayers who receive suspicious emails, phone calls, faxes or notices claiming to be from the Internal Revenue Service. Many of these scams fraudulently use the Internal Revenue Service name or logo as a lure to make the communication more authentic and enticing. The goal of these scams – known as phishing – is to trick you into revealing personal and financial information. The scammers can then use that information – like your Social Security number, bank account or credit card numbers – to commit identity theft or steal your money.
Here are five things you need to know about phishing scams:
1. The IRS doesn’t ask for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.
2. The IRS does not initiate taxpayer communications through e-mail and won’t send a message about your tax account. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site:
• Do not reply to the message.
• Do not open any attachments. Attachments may contain malicious code that will infect your computer.
• Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, visit the IRS website and enter the search term 'identity theft' for more information and resources to help.
3. The address of the official IRS website is http://www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site and report it to the IRS.
4. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence.
5. You can help shut down these schemes and prevent others from being victimized. Details on how to report specific types of scams and what to do if you’ve been victimized are available at http://www.irs.gov, keyword “phishing.”
Thursday, March 17, 2011
HOW LONG DO I NEED TO KEEP THESE RECORDS?
One of the questions I get asked a lot this time of year is "how long do I need to keep these records?" Below is a link to our Record Retention Guide. I hope that this is helpful.
I can guarantee that if the IRS comes around you will be glad that you kept good records. We have an audit going on right now where the IRS is asking for some information back to 1993. If the client had used our guide we would have the records. As it is we are having to depend on the mercy of the auditor. That is a scary thought.
Using our record retention guide will help "audit proof" your return.
http://www.kopsaotte.com/tax/files/file/Record%20Retention.pdf
I can guarantee that if the IRS comes around you will be glad that you kept good records. We have an audit going on right now where the IRS is asking for some information back to 1993. If the client had used our guide we would have the records. As it is we are having to depend on the mercy of the auditor. That is a scary thought.
Using our record retention guide will help "audit proof" your return.
http://www.kopsaotte.com/tax/files/file/Record%20Retention.pdf
Monday, March 14, 2011
TODAY IN HISTORY: PRESIDENT PAYS TAX FOR FIRST TIME
Today marks the anniversary of the first U.S. President filing an income tax return. On March 14, 1923, President Warren G. Harding filed his income tax return for the 1922 year, paying about $17,000 in tax on his presidential salary of $75,000, although further details were not released.
The income tax had been enacted in 1913, but then-President Woodrow Wilson was protected by Article II, Section 1 of the Constitution, which states that the President's salary "shall neither be increased nor diminished during the Period for which he shall have been elected." From the 1860s until 1939, it was held that a new tax or tax increase diminished salary, and thus could not go into effect for presidents and federal judges (judges have a similar provision protecting them).
The New York Times of February 15, 1921 reports that then-President-elect Harding spoke against a proposed bill that would make the President permanently immune from the income tax, effectively killing it. (Interestingly, many European and international organizations have such an exemption.)
The income tax had been enacted in 1913, but then-President Woodrow Wilson was protected by Article II, Section 1 of the Constitution, which states that the President's salary "shall neither be increased nor diminished during the Period for which he shall have been elected." From the 1860s until 1939, it was held that a new tax or tax increase diminished salary, and thus could not go into effect for presidents and federal judges (judges have a similar provision protecting them).
The New York Times of February 15, 1921 reports that then-President-elect Harding spoke against a proposed bill that would make the President permanently immune from the income tax, effectively killing it. (Interestingly, many European and international organizations have such an exemption.)
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