IRS Collections

Tax Tips: IRS penalty and interest rates

Nobody likes paying taxes. But most people file their tax returns and pay the taxes they owe before the due date. For people who fail to meet those deadlines, the IRS imposes penalties in addition to the taxes that are owed. Penalties are percentages of the unpaid taxes that are applied to the total, just like interest is applied to the principle of a loan.

The penalties and the interest rates charged for the penalties can vary widely.

Failure to File Penalty

The IRS makes it easy to file your return on time. If you cannot meet the regular filing date of April 15, you can request an automatic six-month extension to October 15. But if you fail to file either a return or a request for an extension, the penalty can be steep. The penalty is 5 percent of the unpaid taxes owed, charged each month, with a maximum penalty of 25 percent of the unpaid taxes due. But if you file your return more than 60 days after the due date, the minimum penalty is $135 or 100 percent of the unpaid tax, whichever is smaller.

Failure to Pay Penalty

Many people fail to file tax returns because they cannot afford to pay the taxes they owe. This is a mistake. The penalty for paying taxes late is much lower than the penalty for filing a late return. The IRS charges .05 percent each month in penalties on unpaid taxes. If you file an extension by the due date and pay at least 90 percent of the taxes you owe with your extension request, the IRS does not impose a late payment penalty.

Combined Penalties

If the IRS slaps you with penalties for failure to file and for late payment, the charges could potentially add up. But the IRS gives you a break by only charging the 5 percent penalty on the portion of unpaid taxes from a tax return filed late. But the penalties for the portion of taxes owed only for a failure to pay will still be imposed separately. (IRS.gov)

Make Your Case

If you can show reasonable cause for why you filed a late return or paid your taxes late, the IRS may waive the penalties on your unpaid taxes – but the taxes must still be paid. The IRS has also initiated a special penalty relief program for some taxpayers who file extension requests for their 2012 federal returns. Also for victims of severe storms in the Midwest and the South, and for victims of the Boston bombing attacks. Consult with a tax professional like those from Optima Tax Relief to determine if you can have some or all of the penalties from your unpaid taxes waived.

Additional Tax Topics:

The IRS Criminal Investigation Process
What to do during an IRS Audit

What Are The Common IRS Audit Triggers?

Two words that strike anxiety into even the most honest taxpayer? Tax audit. In reality, the odds of being audited by the IRS are slim. While the IRS is diligent about collecting the revenues which it is owed, the old days of the IRS driving honest taxpayers and their families to financial ruin are largely a thing of the past.

Related article: 5 Steps to Surviving an IRS Audit

Nonetheless, many taxpayers wish to eliminate even the remote chance that they will face an IRS audit. While there is no absolute guarantee that you will avoid an audit, steering clear of these dozen common IRS audit triggers will place the odds firmly in your favor.

Too Much Income

Just like old time bank robbers, the IRS is more likely to target high-income taxpayers because they are more likely to have financial resources that can be collected. But this doesn’t mean that you should make less money to avoid an audit. It does mean that if you are a high net worth individual, you should be extra diligent about record keeping.

Too Little Income

Low-wage workers are necessarily targets for tax audits by the IRS. But taxpayers who report incomes far below what others in their profession earn might raise flags. For instance, physicians who report less than high five-figure incomes may raise suspicion, unless they work in areas of extreme poverty.

Unreported Income

This is a no-brainer. The IRS receives notification of income for wage earners from Form W-2. Non-wage income is reported on form 1099. It really isn’t very smart to underreport your income. Of course, if you have legitimate deductions and tax credits that reduce your adjusted gross income, that’s fine. Just be prepared to verify the tax breaks that you claim in case the IRS inquires.

Rounded Numbers

Did you really make exactly $50,000 last year? If so, be ready to prove it to the IRS. Otherwise, don’t round or average numbers, because doing so sends a signal to the IRS that the rest of your return might be less than accurate.

Discrepancies between State and Federal Returns

Get this one wrong and you may wind up with double trouble: inquiries from Uncle Sam and from your state. Plain and simple, the income that you report to the IRS must match the income that you report to the state. Of course, deductions can and often do differ between the federal government and the state, so differences there are fine.

Unexplained Variations in Income

Your income jumps after you graduate from college and get a great job. Or you lose your job and spend a year searching for a new job. Those kinds of variations don’t generally raise red flags with the IRS. Likewise, self-employed workers need not lie awake nights worrying that their fluctuating income might trigger an audit. But regular wage workers who stay on the job with a single employer tend to have fairly steady wages. Reporting otherwise without supporting documentation may well trigger an audit.

Related article: 10 Tax Preparation Tips For The Self Employed

Unusually Large Losses

If your house burned down last year, by all means, claim the full amount of your losses. Likewise, if your retirement fund was severely affected by a dip in the stock market or by other factors, go ahead and report the decline. But have documentation ready to back up your claim.

Larger-than-Average Deductions

Charitable deductions that are out of proportion with your income are a red flag for the IRS. Likewise, self-employed workers who earn much more from their clients or customers than they report in income on Schedule C should brace themselves. If you really are giving away a large proportion of your net worth, keep meticulous records of your gifts and their net worth. Entrepreneurs who record large capital investments in a single year should maintain invoices and other documentation to explain where so much of their income went.

Home Office Deductions

Beginning with the 2013 tax year, the IRS has instituted a much simpler means of claiming the home office deduction. What has not happened is a reduction in the requirement that a home office must be a separate area of your home that’s only devoted to business. A legitimate home office may be a small as a converted closet, but your bedroom or den is unlikely to qualify unless there is an office space used for business only. (IRS.gov)

Sloppy or Incomplete Returns

The IRS makes it really easy to e-file your income tax returns, and for the majority of taxpayers, e-filing is free. You should take advantage of this convenience. E-filing features double-checking capabilities that minimize common mistakes. Placing entries on the wrong line or skipping important entries altogether is rare when e-filed. You also receive a timely alert when the IRS accepts your return, and receive any refunds that you are due in days or weeks, rather than months.

Adoption Tax Credit

The IRS provides a generous credit for adoption. For 2013 the credit is up to $12,970 per child, for up to 3 children. But according to an October 2011 report issued by the US Government Accountability Office, an astonishing 68 percent of the 200,000 federal returns claiming the Adoption Tax Credit that year were flagged for a correspondence audit. But the news was not totally grim. USA Today reported that the vast majority of those audits resulted in no additional tax liabilities.

Straight Up Tax Scams

You should not refrain from claiming any of the tax credits or deductions listed above out of fear of being audited. There is no reason not to claim every tax break to which you are legitimately entitled. But frivolous claims such as paying income tax is voluntary or that federal income taxes are unconstitutional are a fast track to an IRS audit. Likewise, unscrupulous tax preparers that jack up your refund with questionable tax credits and deductions should raise major red flags for you, not to mention the IRS.

Learn more about IRS Audits on our FAQ page.

What Does the IRS Do with Form 8300?

As the collection arm of the Treasury Department, the IRS collects funds that are due and payable to the US government. To that end, taxpayers are required to report their taxable income and pay taxes on that income. This system is known as voluntary compliance.

Voluntary Compliance: Trust, but Verify

Uncle Sam doesn’t just take taxpayers’ word on the reporting of taxable income. Form W-2 records income earned as wages while various versions of Form 1099 provide the IRS with records of non-wage income. Information from these forms helps to ensure that the Treasury Department has an accurate record of payments and revenues received by taxpayers.

But many businesses deal in transactions that involve large sums of cash. Car and boat dealerships, art galleries, antique and collectibles merchants are just a few examples. Nonprofit institutions such as hospitals and colleges also deal with large cash transactions such as tuition payments.

Form 8300 is designed to provide the Treasury Department about information pertaining to these large cash transactions. In 2011, nearly 200,000 paper submissions of Form 8300 were filed with the Treasury department. Since 2012, the IRS has made e-filing available for Form 8300 free of charge.

Form 8300: Report of Cash Payments Over $10,000 Received in a Trade or Business

Federal law requires individuals or businesses receiving more than $10,000 in a single cash transaction or in two or more related transactions within a 12-month period to file Form 8300 within 15 days of receipt. Transactions must be received in the course of business from a single payer or agent. Businesses and individuals may also voluntarily file Form 8300 concerning suspicious transactions of any amount. (IRS.gov)

Information from Form 8300 is added to the Financial Crimes Enforcement Network (FinCEN) database. The information is then cross-referenced with other FinCEN information such as Suspicious Activity Reports and Currency Transaction. The Treasury Department uses information from these cross-reference reports to create traceable money trails that expose criminal activities. (FinCEN)

Form 8300 provides the IRS and FinCEN with a tangible record of large cash transactions. FinCEN has its own ideas about what constitutes cash and what does not – and how individual or related transactions are determined.

What Is and Is Not Cash?

On its face, the definition of cash is obvious: currency, either domestic or foreign. But wire transfers, which are readily accessed as cash, do not count as cash and don’t need to be reported on Form 8300. On the other hand, for the purposes of Form 8300 any of the following DO count as cash and transactions for more than $10,000 in any of these forms must be reported.

  • Travelers’ Checks
  • Cashier’s Checks
  • Bank Drafts
  • Money Orders

What Counts as a Transaction?

Some exchanges, such as sale or rental of tangible goods or intangible property that exceed $10,000, are obvious forms of transactions. Cash exchanges, contributions to trust or escrow funds, loan repayments and conversions from cash to checks or bonds that exceed $10,000 also count. The IRS also considers transactions that take place within a single 24-hour period to be related transactions for the purposes of filing Form 8300.

Tax-exempt charitable organizations need not report cash donations or sales proceeds that are related to their tax-exempt status of more than $10,000, but cash in excess of $10,000 received from business transactions does. An example would be a college receiving a large donation to its endowment or a hospital that receives funds to construct a children’s ward. But the same college would have to report receiving more than $10,000 in cash for tuition. The hospital would likewise be required to report receiving more than $10,000 in cash for providing emergency room care on Form 8300.

Penalties for Failure to File Form 830e0

The penalty for failure to file Form 8300 in a timely fashion is $100 per occurrence. For businesses with annual gross receipts of $5 million or less, the annual aggregate limitation is $500,000. If the deficiency is corrected within 30 days, the annual aggregate limitation for businesses with annual gross receipts of $5 million or less is reduced to $75,000. The total annual limit for businesses with annual gross receipts of more than $5 million is $1.5 million.

Deliberately failing to file the form carries a much higher financial cost. The IRS imposes a penalty of $25,000 or the actual amount of the transaction up to $100,000 for each occurrence, whichever is greater. There is no annual limit for intentionally failing to file form 8300.

Failure to Furnish Full Information

The IRS requires taxpayers to include the names and Taxpayer Identification Numbers (TIN) for each person involved in cash transactions over $10,000 on Form 8300. If individuals refuse to provide their TIN, taxpayers should file Form 8300, along with a statement detailing attempts to obtain the required information. Taxpayers should also retain records that verify when and how attempts to get the required information were made, and be prepared to provide copies of those records to the IRS.

Failure to furnish the names of individuals who are required to be included on Form 8300 carries penalties of $100 per violation. Annual aggregate limit for penalties are $500,000 for businesses with annual gross receipts of $5 million or less. Penalties for businesses with more than $5 million in annual gross receipts have an aggregate annual limit of $1.5 million.

If the deficiency is corrected within 40 days, the penalty is decreased to $30 per incident. Annual aggregate limits for penalties imposed on businesses with $5 million or less in annual gross receipts that correct deficiencies within 30 days is reduced to $200,000. The annual aggregate limit for penalties imposed on larger businesses that correct deficiencies within 30 days is $250,000.

As with deliberate failure to file Form 8300, the IRS imposes harsher penalties on taxpayers who deliberately omit information. The penalty for intentional failure to furnish required information is $250 per incident or 10 percent of the aggregate annual limit of items that should have been reported, whichever is greater. There is no annual aggregate limitation on penalties.

Top 10 Ways to Avoid a Tax Audit

Just hearing the word “audit” is enough to send chills down the spines of even honest taxpayers. Although only about 1 percent of all federal income tax returns are audited, even those odds are too great for many taxpayers. While there is no iron clad guidelines that guarantee that you will avoid a tax audit by the IRS, there are several strategies that you can take that allow you to fly under the audit radar.

1. Triple Check Your Forms

Computational errors. Entries placed on the wrong line of a return. Forgetting to sign the return – all trivial mistakes. But trivial mistakes may result in erroneous credits or deductions, and all of a sudden those “little” mistakes aren’t so little anymore. You should also avoid rounding figures, even if it’s easier to calculate that way. The IRS looks at rounded numbers as estimates or possible fabrications. Estimates = audit red flag.

2. E-File Your Return

E-filing allows you to receive your refund faster and receive nearly instant confirmation that the IRS has received your return. Online or computer-based tax preparation programs also reduce the likelihood of math errors and misplaced entries on your return. Best of all, for the majority of taxpayers, e-filing is free.

3. Report All of Your Income

Sure, if you are entitled to a credit or deduction that reduces your adjustable gross income or decreases the amount of tax that you owe, go for it. No one is saying you should pay excess tax. But attempting to evade taxes by “forgetting” to report significant chunks of your income is just asking for an audit. Even if you dodge the audit bullet this year, the IRS statute of limitations is no less than 3 years. If you’re audited in year 3, after you’ve placed your records in deep storage, you’ll be hard pressed to make it through the audit without incurring stiff penalties. You’ve been warned.

4. Don’t Boast On Social Media

If you’re crying “poor” to the IRS to reduce your federal income tax bite, but bragging on Google+ and LinkedIn about how your enterprise is thriving, odds are someone at the IRS will note the disconnect. This doesn’t mean that you’re not allowed to use social media to promote your business. It does mean that you should remember that social media is essentially public, not private space – and conduct yourself accordingly. Don’t believe that the IRS is on social media? So did the so-called “Queen of tax fraud.”

5. Make Sure Your Business is a Business, Not a Hobby

Former NFL linebacker Bill Romanowski and his wife learned a $4.75 million lesson the hard way when the IRS ruled that their deductions for horse-breeding expenses were disallowed because the IRS viewed the venture as a hobby rather than a business. If you claim business deductions but declare little or no business income, the IRS may decide you’re not serious about making a profit from your enterprise.

6. Don’t Be Too Charitable

Charity is truly a virtue. But if your virtue outpaces your apparent disposable income, the IRS may conclude that your generosity is a cover for a tax dodge. If you really are giving away large segments of your worldly goods, be prepared to back up your claims with receipts and other documentation. The bigger the claim, the more detailed the receipt should be. A text message or notation on your bill confirming a $10 donation to the Red Cross from your cell phone is totally fine. But if you’re claiming a deduction for donating Aunt Gertrude’s Ming Dynasty vase, you’ll not only need a receipt, but also an appraisal of its value from a certified professional.

Related article: Claiming Tax Deductions for Charitable Donations

7. Keep Your Business and Personal Lives Separate

As an entrepreneur, you use your car for business trips and for the family vacation. Your computer does double duty for updating your personal Facebook profile and your company’s Facebook page. That’s fine, but it’s a good idea to maintain a detailed log outlining when you use the computer or car for business-related purposes to keep your business-related claims honest. And if at all possible, establish and maintain separate bank accounts for your personal and business lives.

8. Don’t Claim Odd Deductions and Credits

The Discriminant Inventory Function System, or DIF for short, is a top secret algorithm used by the IRS to flag outliers among federal income tax returns. The point here is to not stand out. Your ordinary return swimming among a sea of ordinary returns truly does make your chances of an audit slim to none. But if you call attention to yourself with odd deductions or unverified credits, don’t be surprised when the IRS takes notice – and contacts you for further  info.

9. Don’t Stiff Your State Taxes

You know how you can deduct taxes paid to the state on your federal income tax return? Think about how that is possible, and then consider whether it’s really a good idea to trim your tax bill by stiffing your state income taxes. If your state decides to dig deeper into your tax returns, the odds increase that the IRS will get in on the fun, too.

10. Choose the Right Tax Preparer

If you are among the 60 percent of Americans who outsource their federal income tax returns, take care to choose the right preparer. Check out his or her qualifications and reputation in the industry. Ensure that you have a way to reach him or her if needed to respond to your questions – or questions from the IRS. Shady paid tax preparers who offer huge returns without asking for or obtaining any specific information about you should trigger red flags. Likewise, you should leave skid marks getting away from any paid preparer who instructs you to sign a blank or incomplete tax return.

If you’re at risk of an audit, or going through the audit process, Optima Tax Relief can help you with consultation, preparation, and representation,

Now Get Fast Access To Your Tax Accounts

You look at the envelope, and your heart sinks as you see the “IRS” insignia. Unless you’re expecting a tax refund check, communication from the collection arm of the Treasury Department almost never represents good news. But in some cases, the request for additional information is relatively simple, or at least would be simple if you could remember where you stashed those W-2 forms from the job you had before your last job or the tax return you filed two years ago.

In previous years, retrieving that information might have required hiring a tax attorney or a Certified Public Accountant and granting him or her power of attorney to make inquiries with the IRS on your behalf. Only then would they have the appropriate records in order to respond to the request. In the case of a full-blown audit, though, having a tax professional on your side is still your best means of defense.

But if the information the IRS is seeking is merely clarification of straightforward information, you can now fetch the records you need online – no power of attorney or third party required.

How To Access Your Tax Accounts

Surf to the IRS.gov website. In the middle of the page, look for the orange tab labeled “Tools” and then scroll to the link labeled “Get Transcript of Your Tax Records.” You will land on a page where you are presented with the option of obtaining a PDF copy of your tax information immediately, having a hard copy sent to the address on file with the IRS within 5 to 10 calendar days, or both. You can opt to receive any or all of the following documents:

  • Tax Return Transcript: Line items from Form 1040, 1040A or 1040EZ with accompanying forms and schedules, as originally filed (available online and by mail)
  • Tax Account Transcript: Adjustments made after filing original tax form. Includes marital status, type of return, adjusted gross income and taxable income (available online and by mail.
  • Record of Account: Combine information from tax return and tax account transcripts. (only available online)
  • Wage and Income Transcript: Data from W-2, 1099s and 1098s that has been reported to the IRS. (only available online)
  • Verification of Nonfiling Letter: Proof from the IRS that you did not file a return. Letters for the present year are not available until after June 15. No indication is made about whether a return should have been filed (only available online)

When you make your request, you will be asked for your full name, the address that is listed with the IRS, date of birth and filing status. You will also need to answer screening questions to verify your identity. If you cannot verify your identity online, you will need to make a request for documents to be sent to you by mail 

If you are using a public computer, you can make a request as “guest,” making sure that you clear the browser cache and close the browser completely to protect your sensitive information. But if you are using your own computer, you may wish to create a registration profile so that you only have to enter your information once. After you register, you will be sent a confirmation code by email. 

Once you register or verify your identity as a guest, obtaining the information you need should be simple. The IRS will accept print-out copies of these documents as valid government-issued documents for filing revised tax returns or responses to inquires. So if the IRS only wants to verify how much money you made from that temp job you held last summer except you can’t even find an old pay stub, let alone the W-2, no worries. If it turns out that you need or feel more comfortable calling us at Optima Tax Relief, you can contact us via this page.

Breaking Down the New Taxpayer Bill of Rights

Back in the day the idea that taxpayers had any rights where the IRS was concerned would have been laughable. But in recent years, the collection arm of the Treasury Department has developed a new attitude of cooperation and willingness to work with taxpayers rather than intimidating them into compliance. The recent issuing of a Taxpayers’ Bill of Rights by the IRS is designed to provide legal assurances to taxpayers as they navigate the complexities of the US Tax Code.

1. The Right to Be Informed

It is the responsibility of taxpayers to conform to tax laws, but it is their right to have as clear an understanding as possible of those laws. Taxpayers are also entitled to timely information about general changers in the law. The IRS also has a duty to a clear explanation of any actions taken concerning individual taxpayers.

2. The Right to Quality Service

The bad old days of IRS harassment are long gone. Today’s IRS recognizes its responsibility to treat taxpayers with courtesy and respect. Taxpayers also have the right to file a complaint with a supervisor if the IRS fails in meeting this duty.

3. The Right to Pay No More than the Correct Amount of Tax

Taxpayers have the right to employ any and all legitimate means at their disposal to reduce their tax burdens, including credits and deductions. The IRS also has a duty to apply tax payments, credits and deductions properly.

4. The Right to Challenge the IRS’s Position and Be Heard

Taxpayers have the right to raise legitimate disputes and to present documentation to support their positions. The IRS has an obligation to consider documentation from taxpayers in a timely manner, and to provide reasonable explanations for decisions.

5. The Right to Appeal an IRS Decision in an Independent Forum

Taxpayers have the right to file disputes of IRS decisions including penalties, as well as the right to receive written responses to their appeals from the Office of Appeals. Taxpayers also have the right to take their cases to open court if they disagree with decisions made by the Office of Appeals.

6. The Right to Finality

Even though it may seem as though an audit will go on forever, taxpayers have the right to know when an audit is over.  They also have the right to know how much time they have to challenge decisions made by the IRS.

7. The Right to Privacy

The right against unreasonable search and seizure does not end when the IRS enters the scene. The IRS must comply with due process in its inquiries, enforcement and examinations. Taxpayers are also entitled to due process hearings about collection actions.

8. The Right to Confidentiality

Taxpayers have the right to reassurance that information collected by the IRS will be disclosed only to authorized agents of the IRS unless they give their consent for disclosure, which is required by law. The IRS has a duty to take proper action against employees and agents of the IRS such as tax preparers who improperly disclose taxpayer information.

9. The Right to Representation

When dealing with the IRS, taxpayers have the right to have a tax professional of their choice provide representation. Further, taxpayers who cannot afford representation have the right to request the services of the Low Income Taxpayer Clinic.

10. The Right to a Fair and Just Tax System

 Taxpayers have the right to expect the IRS to consider circumstances and information that have a bearing on their financial obligations as well as the ability of taxpayers to pay what they owe. Taxpayers also have the right to request the services of the Taxpayer Advocate to resolve financial problems or to settle disputes that are not resolved through normal IRS procedures.

The Taxpayers’ Bill of Rights serves as one of the best indicators that the bad old days of the IRS a strictly a vestige of the past. The statement of these rights illustrates the IRS’s present-day emphasis on accountability and transparency. Paying taxes may not be fun, but the process should no longer be torturous – at least for honest taxpayers. For more information about the new IRS Taxpayers Bill of Rights, visit the IRS.gov.

June 16 Tax Filing Deadline Nears for Americans Living Abroad

You may live in Paris, Sydney or Tokyo, but as long as you carry an American passport or a Green Card, the United States is your tax home. And just like all American citizens and legal residents, you must file a federal tax return and pay federal income taxes. It’s the law.

Tax Day is June 15, Not April 15

Unlike citizens who live within the borders of the US, nonresident citizens and legal residents are automatically granted a two-month extension to file. The extension also applies to military personnel stationed overseas but not serving in a combat zone. (Longer extensions are granted to military personnel in combat zones.)

Related Post: How to Escape the Alternative Minimum Tax

The extension also grants eligible taxpayers an extra two months to pay any tax obligations without penalty, and without the need to file for an extension. That two month extension is set to end on Sunday June 15, 2014. Because the 15th falls over a weekend this year, nonresident American citizens and legal residents are allowed an extra day to file federal income tax returns and pay taxes. This makes the deadline June 16th.

American citizens and Green Card holders with 2013 annual adjusted gross income of $58,000 or less can use commercial software to complete and file their returns for free through the IRS Free File website. Taxpayers with higher incomes may also file their returns through the Free File website, but must use IRS Free File forms. If you lack access to a secure Internet connection for submitting your return electronically, download the tax forms from the IRS website and submit them by mail.

A (Second) Automatic Extension of Time to File

If you live abroad, you may have somewhat complex tax circumstances. For instance, you may work for a foreign employer that deducts Value Added Taxes from your paycheck. Or your accountant may be located in the States and is difficult to get in touch with. In either case, don’t panic. You may request an additional six-month extension until October 15 to file your tax return by submitting Form 4868, available on the IRS website. If you submit a paper return or application for automatic extension of time to file, submit your completed paperwork to the address below.

Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
USA

Unlike the automatic extension that applies to citizens and legal residents living overseas, Filing Form 4868 does not provide an extension for paying any taxes that you owe. Any payments not made by the June 15 deadline will be subject to interest charges as well as late payment penalties. For 2013 returns, the penalty is set at ½ of 1 percent of tax obligation, up to a maximum of 25 percent of your total tax obligation.

Foreign Tax Credit and Foreign Tax Exclusions

You may be able to claim either a foreign tax credit or a foreign tax exclusion on at least some of your income to reduce your tax burden to the IRS. Depending on your circumstances, you may claim a foreign tax credit or a foreign tax deduction for income taxes that are deducted from your wages or which you must pay to a foreign government. Tax credits reduce your tax liability while deductions reduce your total taxable income. You may also qualify for a foreign housing exclusion or a foreign housing deduction. None of these deductions, credits or exclusions apply if you work for the federal government (including military personnel or civil employees of the US government).

If You Need Help, Contact Optima

If you have questions concerning the filing of your tax return, don’t hesitate to contact Optima Tax Relief. Our tax professionals can help explain the details concerning foreign tax credits and exclusions to which you may be entitled.

IRS Made $13B in Improper EITC Refunds

The Earned Income Tax Credit (EITC) provides a much-needed income boost to thousands, if not millions of hard-working men and women who earn low to moderate incomes. The payment amount for which taxpayers can qualify through the EITC  increases with family size.

For instance, a married couple with three or more children can qualify for the EITC with a combined gross annual income of as much as $52,427. A married couple with two children can qualify for the EITC with a combined gross annual income of up to $49,186. The credit is also generous; in 2013 the maximum credit was $6,143 for a family with three children and $5,460 for a family with two children.

In addition to lowering the federal income tax burden for those who qualify, the EITC is payable as a refund from the Internal Revenue Service to taxpayers who qualify for more in credits than they owe in federal income taxes. Since 2009, “census data indicate that the EITC credits and payments lifted 6.6 million individuals out of poverty in 2009, including more than 3 million children,” according to a report issued by the Center on Budget and Policy Priorities.

So it’s all good, right? Not quite. 

Extensive Overpayments Made

In spite of being one of the most effective federal programs designed to lift children out of poverty, the EITC has also been a particularly attractive target for attempted fraud. According to a recent report issued by the Treasury Inspector General for Tax Administration, the IRS overpaid approximately $11.6 billion to $13.6 billion in EITC credits during the 2012 fiscal year. This figure represents an astonishing 21 to 25 percent of all EITC payments made during that period.

Even more outrageous is the fact that the 2012 EITC overpayment figure represents one of the lowest proportions of overpayments recorded during the past decade. For instance, in 2003, overpayments accounted for as much as 30 percent of all EITC payments, costing the federal government $11.5 billion. In total, the IRS has overpaid as much as $132.6 billion in EITC distributions since 2003. Even more incredible – the figure could have been even higher. Inspector General J. Russell George estimated that the IRS successfully blocked more than $50 billion in fraudulent EITC refund claims on more than 15 million suspicious federal income tax returns just since 2011.

The 2010 Improper Payments Elimination and Recovery Act, designed to reduce unjustified payments, mandates that the IRS must reduce improper payments below a 10 percent threshold. The IRS has not yet established annual goals to meet this threshold, which is a violation of the Act. But there is little danger that the EITC will fall victim to partisan attempts to cut or eliminate the program, because it is widely acknowledged as a success on both sides of the aisle.

The Role of Shifting Demographics

Fraud (or attempted fraud) is not always the culprit behind EITC overpayments. The payment structure of the credit strongly favors married couples with children who live in the same household, which also accounts for many honest mistakes made by taxpayers, many of whom live in nontraditional families. Many errors occur in families where parents are divorced or separated, or when children are being raised by family figures or guardians other than their parents. 

In its report, the Treasury’s oversight office acknowledged that the IRS “faces significant and unique challenges” in preventing EITC overpayments. The combination of a rapidly changing demographic makeup to the population of families and individuals claiming the EITC and processing time limits for federal income tax returns make it nearly impossible for the IRS to verify every EITC claim before making payments. 

Reducing Future Overpayments

The report advises the establishment of “incremental reduction targets that can be used to evaluate the benefit of the IRS’s compliance and outreach efforts” as a first step to reducing overpayments made through the EITC program. Providing clearer explanations of the administration of the complex EITC to taxpayers from nontraditional families and to paid tax preparers could also significantly reduce the number of overpayments made due to honest errors.

Should You Lawyer Up When Dealing With the IRS?

Yes, absolutely. But hey, this is a blog for a tax relief company with a small army of tax lawyers, so that’s what we’re paid to say, right? Well, yes, but it doesn’t make it any less true.

Maybe these two true life stories will help:

In January, 2014, Beanie Beans founder Ty Werner was convicted of evading $5.5 million dollartaxs in taxes owed on the $27 million in interest accrued from millions of dollars stashed away in a Swiss bank account. The sentence? Two years on probation and some hefty fines, which were small change for a billionaire like Werner.

Unrelated, and a couple of months earlier, Daniel Thody, a defense contractor was found guilty to five counts of tax evasion for failing to report $15,000 and $50,000 in taxes from $1.8 million earned as a contractor for the Department of Defense. He faces up to 25 years in prison, 5 years for each count. 

Which one do you think hired a lawyer and which one thought representing himself would be the smarter option? The old adage that he who represents himself has a fool for a client may be a cliché, but that doesn’t make it any less true either.

We’ve already shared the 10 benefits of working with a tax relief firm, but here are a few good reasons you should lawyer up when dealing with the IRS.

Taxpayers with Legal Counsel are Treated Better

It’s unfair, even illegal, but it’s also human nature. IRS agents are flesh and blood and if they can get away with bullying someone into their interpretation of the law, they probably will. A tax lawyer can ensure the IRS is playing by the rules and treating you fairly. IRS investigators are much more careful about asking inappropriate questions or wasting your time with unnecessary requirements, if they know they are dealing with a tax attorney. 

That was the finding of an investigation into nine groups in Ohio and Kentucky that sought nonprofit status. Organizations that didn’t have legal representation were more likely to have their applications stalled and receive inappropriate or unnecessary questions from the IRS.

You don’t have to worry about an IRS agent getting upset with you for hiring a tax attorney either. The good ones prefer dealing with tax professionals because they don’t have to waste their time and patience explaining you the ABCs of a tax audit or the basic IRS guidelines for a criminal investigation. In fact, hiring an experienced tax attorney is generally seen as a sign of good faith to resolve your tax issues.

A few bad eggs may resent you hiring a lawyer and try to dissuade from doing so, but that’s when you really need a lawyer in your corner. The IRS’s own Declaration of Taxpayer Rights clearly states that “If you are in an interview and ask to consult such a person [a lawyer, agent or accountant], then we must stop and reschedule the interview in most cases.” Be suspicious if an IRS agent prefers not to deal with a tax professional. 

The IRS Has Serious Muscle

The IRS is a behemoth of an agency, one of the most powerful organizations on the planet. From 2008 through to 2014, over 50 bankers from Switzerland, India, Israel and other countries have been indicted for helping rich Americans squirrel billions of dollars into offshore accounts. 

If you think this is just posturing, you may want to talk to former banker Raoul Weil. In October 2013, he was picked up in Italy while on vacation with his wife and extradited to the United States. He is now on trial for conspiring to help thousands of Americans hide $20 billion in numbered accounts at UBS.

In 2013, the IRS also cracked the code of silence of Swiss financial institutions and got UBS, the largest Swiss Bank, to divulge confidential information on American tax evaders, and pay a $780 million penalty. 

Even The IRS Thinks You Need a Lawyer

The Taxpayer Advocate Service is an independent organization within the IRS which has the job of ensuring that you are treated fairly and helping you resolve problems with the IRS. Although it’s unlikely a Taxpayer Advocate Service lawyer will protect your interests quite as aggressively as a regular tax attorney, they are better than nothing, if you can’t afford to pay one. 

If money is an issue, there is another option: Low Income Taxpayer Clinics. Although these clinics are partially funded by the IRS, they are completely independent and are operated by nonprofit organizations and academic institutions. 

Only a Tax Attorney Can Represent You in a Criminal Investigation

Certified Public Accountants are great. When it comes to tax planning, business budgeting and asset management, a CPA is – all things being equal – more useful than a tax attorney is. But when you have a dispute with the IRS, especially if you’re accused of tax fraud or tax evasion, a tax lawyer is the only intelligent choice. Tax attorneys are the only ones who can represent you in a court of law and provide you the legal advice and analysis you need.

If that is not reason enough, I have two and a half words for you: attorney-client privilege. Unlike CPAs and accountants, attorneys cannot be subpoenaed to testify against a client in a criminal procedure.

If You Think You Need A Lawyer You Probably Do

Does this mean you need a tax lawyer every time you get a letter from the IRS. No, of course not. You can probably deal with small mistakes and omissions by yourself or by giving your tax preparer a quick call. However, if there is any chance your case could go sour, you need to call a qualified and experienced tax attorney, and pronto. A good rule of thumb is that if you’re asking yourself whether it’s serious enough to merit calling a lawyer, it probably is. 

A quick consultation call with a tax lawyer can save you thousands of dollars in unnecessary legal fees you could have avoided by not procrastinating. Tax lawyers know how IRS attorney think, jeez, many tax attorneys worked as IRS attorneys before hanging their own shingle. So they know what to say, what not to say, and what buttons to push when negotiating your case.

Hiring a lawyer sends the IRS a clear and powerful message. You’re taking the investigation seriously; you’re not going to let IRS agents push you around; and you want to work with the IRS to avoid criminal charges

The bottom line is that the IRS is scary enough when you have a first-rate lawyer at your side. So hire one already

What To Do When the IRS Garnishes Your Wages

Fail to pay a regular debt, an your run-of-the-mill creditors will have to obtain a court order from a judge to collect their money directly from your wages, which could take months and cost hundreds if not thousands of dollars in legal fees. Not so with the IRS. The IRS is a super creditor, and one of its superpowers is that it doesn’t have to bother with court orders to garnish your wages.

When you owe taxes, the IRS sends a bill. Fail to pay it and they’ll send another bill, which will include any penalties and interest accrued since the previous bill. Insist in not paying and the IRS will start collection actions. These actions include garnishing tax refunds (another superpower only the IRS has), levying bank accounts, seizing houses, and/or garnishing wages. If you have to stiff a creditor, you may want to avoid doing it to the IRS.

So what should you do if the IRS garnishes your wages?

You Can Lawyer Up

If you don’t agree with the amount, collect any evidence that supports your claim, such as tax returns, cancelled checks, or other documents that show why the amount on the bill is wrong or has already been paid. Hire a lawyer. Those who can’t afford a lawyer should contact  the IRS Taxpayer Advocate Service or call your local Low Income Taxpayer Clinic.

Or Just Pay Up

If you agree with the amount the IRS claims you owe but can’t afford to pay it, pay as much as you can. Consider getting a loan, a cash advance or using a credit card to pay it in full. The combination of penalties and interest charged by the IRS can be much higher than the cost of a regular loan.

The first step is to contact the IRS and check whether you actually owe the tax.

Audit Reconsideration
For instance, it is possible you forgot or failed to respond to a previous IRS notice and the IRS may have assessed your tax liability based on incorrect assumptions. If so, request the IRS to reconsider the assessment.

Innocent Spouse Relief
The IRS may be charging you for taxes owed on your spouse’s income. Generally, spouses are responsible for the full amount owed on a joint tax return, but you may qualify for innocent spouse relief if the taxes are based on “mistakes” or “omissions” on your spouse’s income.

Identity Theft

If the deduction from your paycheck was the first you heard about your tax debt, call the IRS immediately. You could be the victim of identity theft. Call the number on the wage garnishment notice or 1-800-973-0424.

Collection Alternatives

If you agree with the amount owed but the wage garnishment will impose too much of a hardship, call the IRS and ask for a levy release. This won’t get rid of the debt, but it will give you some breathing time while the IRS assesses alternative payment methods.

The IRS offers three main alternatives to a wage garnishment:

Enter into a monthly installment agreementTaxpayers who owe $50,000 or less in taxes, can apply online to set up a payment agreement. How much you pay every month will depend on your income and living expenses. Paying a monthly installment through an employer comes with a one-time $120 fee; while using a direct debit agreement has a $52 fee.

Request an Offer in CompromiseThis is the most attractive option because it means you only pay cents on the dollar of your tax debt. However, the IRS only agrees to an offer in compromise in cases when a taxpayer is unlikely to be able to pay the full amount in a reasonable period. You have to be in pretty bad financial shape to qualify.

Qualify as “Currently not Collectible.” This option sounds better than it actually is. The IRS will temporarily ause the collection process on taxpayers who are currently unable to pay their debt but who the IRS considers are likely to be able to pay it in the future. Unfortunately, penalties and interest will continue to accrue on the debt, so this method is not a long-term solution.

Bankruptcy and Wage Garnishment

When it comes to getting rid of debt, bankruptcy is the nuclear option. In many cases bankruptcy wipes out debt and permanently stops the garnishments it triggered. Unfortunately, bankruptcy also has a terrible effect on your credit. In the case of back taxes though, bankruptcy only offers a temporary stay. Once the bankruptcy case is over, you will still owe the taxes. This is another of the IRS’s superpowers.

Another Garnishment Could Cost You Your Job

Besides the obvious financial hardship, an IRS wage garnishment could also jeopardize your job. Some employers consider a wage garnishment as a stain on their workers character and may rethink their eligibility for a position, particularly if they have oversight over money or other valuables. Executing wage garnishments also creates additional work and expense for employers.

The Consumer Credit Protection Act prohibits an employer from firing you because of wage garnishments on a single debt. If an employer does fire you because of a wage garnishment, she may have to pay a $1,000 fine, face up to one year of incarceration, or both.

However, the Act does not protect workers who have wage garnishments on two or more debts. So if you already have a wage garnishment with the IRS and you get hit with another wage garnishment, it could cost you your job.

Stop Garnishment – Talk to the IRS

Wage garnishments are usually reserved for taxpayers who have ignored a couple of overdue tax bills and the IRS’s Final Notice of Intent to Levy. In other words, you can usually stop a wage garnishment just by talking to the IRS and arranging for an alternative method of payment. Although you can deal with the IRS directly, you should talk to tax lawyer, CPA or enrolled agent whenever you have problems with the IRS. IRS procedures are purposefully complex, so contact Optima Tax Relief to work through the jargon for you.

The IRS doesn’t have your best interests at heart. Its purpose is to collect as much revenue as fast as it’s legally possible. That may be great for the nation as a whole but not so great for your bank account.