Tax Planning

Borrowing From Your 401(k): Loans vs. Withdrawals

401(k) loan

Although it is not recommended, sometimes we find it necessary to borrow from our 401(k) savings in order to cover unexpected expenses or hardships. Doing so comes with tax penalties and it is important to understand your options before tapping into these funds. 

401(k) Loans 

A 401(k) loan allows you to borrow money from your retirement savings. Typically, the maximum amount that can be borrowed is 50% of the account balance, up to $50,000 in a 12-month period. However, since 401(k) accounts are distributed through employers, each plan can come with different rules and limitations.  

Since this option is considered a loan, the funds will need to be returned to the account, usually within 5 years. This also means that no taxes or penalties will need to be paid on the loan because the borrower is expected to return the money. Borrowers should keep in mind that this option does come at a price, as the loan will require paying interest. On a positive note, the interest paid goes back into the account.  

Some borrowers may wonder what happens if you miss a payment or even default on the loan. The good news is your credit score will not be impacted. The only exception to this is if you leave your current job. Since a 401(k) account is an employment perk, the benefits are withdrawn once you are separated from the employer. Sometimes, borrowers are required to repay the loan within a short period of time after termination, and failure to do so can result in not only a defaulted loan but taxes and penalties.  

401(k) Withdrawals 

In some cases of hardship, you may be able to qualify for a 401(k) withdrawal. Some examples of hardship that the IRS deem a 401(k) withdrawal an acceptable form of financial relief are: 

  • Medical expenses 
  • Foreclosure 
  • Tuition payments 
  • Funeral expenses 
  • Purchase or repair of primary residence 

Although borrowers are not required to pay back these funds, you will be charged a 10% early withdrawal penalty. In addition, the amount you withdraw will also be taxed as regular income.  

Tax Debt Relief for 401(k) Account Holders 

Taking a loan or withdrawal from your 401(k) should not be your first choice for immediate funds. Instead, borrowers can look into using their HSA savings for medical expenses and regular savings and emergency funds for other expenses.  

Optima Tax Relief can help with your tax debt needs. Give us a call at 800-536-0734 for a free consultation today. 

Download the Optima Tax App to analyze your IRS notice instantly. 

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Types of Loans for Small Businesses

loans

Small business loans can be helpful and sometimes necessary in order to continue or expand a business. There are several types of loans available to small businesses, each with their own sets of pros and cons. 

Term Loans 

One of the most common types of loans for small businesses, a term loan is a lump sum of funds that is paid back over a fixed term and typically via fixed monthly payments. Business owners should note that interest will be paid on top of the principal balance borrowed and sometimes at higher rates than those offered by a traditional bank. However, it is a popular loan because funding is quick and it offers opportunities for business expansion.  

Small Business Administration (SBA) Loans 

SBA loans are offered by banks and lenders but administered by the Small Business Administration, a government agency that provides support to small businesses. Some business owners will prefer this type of loan since it’s backed by the government, offers high borrowing amounts at low rates, and has long repayment terms. On the other hand, it’s harder to qualify for this type of loan and it comes with a long and tedious application process.  

Business Lines of Credit 

Like a regular credit card, a business line of credit gives business owners access to a credit line of a certain limit, which is usually determined by business revenue and credit. Interest is only paid on the money charged, allowing greater flexibility in cash flow. This type of loan may also require paying additional account maintenance fees. 

Equipment Loans 

Businesses that want to own equipment can look into obtaining an equipment loan, which allows them to pay for business equipment over a specific term. The equipment will then serve as collateral for the loan. Sometimes a down payment is required for this loan.  

Microloans 

Microloans are small loans usually offered by nonprofits or government agencies and loan business owners up to $50,000. They are popular among startups and businesses located in disadvantaged cities. Some of these loans are accompanied by mentoring or consulting from the loan provider as well. 

Invoice Factoring  

This service allows businesses to sell their unpaid invoices to lenders to collect on. In return, the business will receive a percentage of the invoice value. This can benefit businesses that are awaiting payment from customers but need cash immediately.  

Invoice Financing 

Similar to invoice factoring, invoice financing allows businesses to sell their unpaid invoices as collateral in order to receive a cash advance. In this case, the business is still responsible for collecting payments from their customers in order to repay the amount financed.  

Tax Debt Relief for Small Businesses 

There are several loan options available to small businesses, whether they are a startup in need of fast cash, or an established business looking to expand. It is essential for small businesses to ensure that they are compliant with all tax laws in order to keep their business going. If you need tax help, give us a call at 800-536-0734 for a free consultation today. 

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Tax Fraud: How Do You Protect Yourself From Something You Don’t Know Exists?

You’ve always filed your income tax returns electronically in the past. Your returns were less vulnerable to calculation errors and you received your tax refund much quicker than you did filing paper returns. But this year, when you attempted to e-file your federal income tax return, the IRS rejected your submission, issuing a statement that a previously filed return using your Social Security number was already on file. How could such a thing happen?

Welcome to the world of identity theft, tax fraud style. Scammers filing falsified returns reap millions for their fraudulent efforts, spending the money from their ill-gotten gains long before the IRS – or their victims – become privy to the fact that a crime has even been committed. Many victims only learn that they’ve been targeted after receiving an audit notice from the IRS. In the meantime, fines, fees, penalties and interest from tax return fraud have accumulated, – and it’s largely up to victims to straighten out the mess.

How tax fraud victims are targeted

Phone and Email Scams

The most obvious way to protect yourself against scammers is to never give out your personal information to someone you don’t know, especially over the phone. If someone from the “IRS” is attempting to contact you over the phone or by email and asks for your social security or card information, don’t give it to them. The IRS almost never contacts via phone, instead preferring to send notices via mail.  Even if you do receive a call from the IRS, they won’t ask for your social security number – they already have that information.  If you feel uncomfortable about the validity of a call, hang up and call the IRS yourself – that way you know if what they’re telling you is true.

Accountant fraud

Be wary of scammers who will pose as a tax preparer and then rip off customers through refund fraud or identity theft. These phony accountants will tell you that they can get you a large tax refund and typically prey on low-income and non-English speaking taxpayers. 

Even if you go to a legitimate tax preparer, your information can still be exposed if there is a data breach. To avoid this happening – and being left vulnerable – ask your tax preparer what more you can do to protect your information in case of a breach.

Identity theft

Make sure to protect your social security number at all costs. Identity thieves will attempt to steal this information in order to steal not only your identity but your tax refund too. As long as you notify the IRS that your information has been compromised and your refund has been stolen, the IRS will work with you to provide your refund. However, it will take extensive time and paperwork to prove that your information was stolen.

Protecting Yourself from Tax Return Fraud

The best way to protect yourself from tax return fraud is by limiting access to your Social Security number. A bit of vigilance will protect you from many fraudulent attempts to obtain your Social Security number. Don’t carry your Social Security card unless you need to provide a copy for a job application or a similar purpose. Protect sensitive information on your computer by maintaining up-to-date antivirus and antispyware software and firewalls.

Think twice before responding to unsolicited “pre-approved credit” offers received online or in the mail. Never supply sensitive personal or financial information unless you have initiated the transaction or conversation – or unless you are 110 percent sure that the person on the phone or the website you’re dealing with is the real deal. If you receive questionable communication requesting (or demanding) sensitive financial or personal information from a company you’ve done business with, contact the company directly to verify that it is indeed them requesting the information.

If you receive unsolicited email, social media or text messages claiming to be from the IRS, there is a 100 percent probability that they’re fake. The IRS only initiates communications with taxpayers by regular mail or by telephone – period. Do not respond directly to such communications in any way. Instead, report suspicious IRS-related communications to phishing@irs.gov or call 1-800-366-4484.

If You’ve Been Victimized by Tax Return Fraudtax_fraud

The first indication that you’ve been victimized by tax return fraud often comes in the form of an inquiry from the IRS about discrepancies in your return. You may be questioned about returns issued in your name which you never received or wages earned for companies you’ve never even heard of. You may also be assessed additional taxes or tax return offsets for years that you didn’t file a tax return at all. Another telltale sign is a notice from the IRS that multiple returns have been filed during a single year using your Social Security number.

Once you become aware that you’ve been targeted by tax return fraud, you must act quickly to limit the damage. File a complaint with the Federal Trade Commission and a police report with your local law enforcement agency. Contact one or more of the three major credit reporting bureaus (TransUnion, Equifax or Experian) to have a fraud alert placed on your credit report. Close any credit card or other accounts that have been compromised or opened without your knowledge. Also, check your earnings report annually with the Social Security Administration to endure that there is no fraudulent activity.

If your federal tax refund has been stolen or you have other unresolved tax-fraud related issues, contact the IRS Identity Protection Specialized Unit at (800)908-4490. You can protect yourself from further tax return fraud attempts by filing “Form 14039 – Identity Theft Affidavit” with the IRS. It’s likely that you’ll be required to file a paper return for the present tax year and it may take months to resolve your case, as well as restore any refunds to which you’re rightfully entitled.

However, the IRS will issue you a unique IP PIN that will replace your Social Security number and which will allow you to e-file future federal income tax returns safely. Do not use this IP PIN for any other reason – including state income tax returns.

What You Should Know About Unemployment Taxes

Unemployment benefits saved a lot of American households this past year. Furloughs and lay-offs were at an all-time high due to the pandemic, leaving many without a lot of options.

However, unemployment comes with taxes that few people understand, or know about. Whether you’re considering applying for unemployment, or have already started utilizing these benefits, you should know how this affects your taxes.

Unemployment Taxes

Social Security and Medicare taxes are not something you have to pay for while receiving unemployment benefits. The taxes that are required for you to pay are federal and state taxes (depending on the jurisdiction). Some states wave income taxes for unemployment—states such as California and New Jersey for example. If your state’s benefits program is not tax-exempt like Florida and Nevada, you should opt to withhold taxes from each check.

Withholding Unemployment Taxes

Withholding is presented as an option when completing weekly or bi-weekly check-ins for your unemployment benefits. By withholding, you’re paying taxes upfront, rather than letting them accumulate throughout the year. If you choose not to withhold, then you’ll be expected to pay back the IRS when you file your return.

The flat rate for federal tax withheld is 10% of the benefits. This amount certainly adds up to a sizeable sum by the end of the year if it’s not paid weekly. If the taxes go unpaid, you could be at risk of liability.

To avoid a liability, you can send quarterly estimated tax payments to the IRS, fill out a W-4V with your unemployment office, or if you started working again you may qualify for EITC— Earned Income Tax Credit. Your EITC amount could reduce or cover the amount you owe in unemployment taxes.

What to do if you have a liability

If you’re expecting to owe more than you can pay at the time that you file your return, there are options available to you. You can contact the IRS to set up an installment plan, which allows you to make monthly payments until the balance is paid in full.

You can also contact Optima today for a free consultation, should you find yourself owing a large sum to the IRS. Give us a call at 800-536-0734 to speak with one of our tax associates now!

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Tips on how to manage your Small Business

When it comes to filing a business-related tax, small business owners know that it can be extremely time-consuming and very complicated.  It can be especially difficult for owners who do not have a strong understanding of the federal, state, and local taxes required to file as well as knowing what type of taxes you will need to include on your return such as income, employment, excise, and sales.

It is critical for business owners to file their taxes in order to run their business and remain compliant with the IRS. Here are few ways a small business owner can manage their taxes.

Hire an Accountant

For the most part, small business owners will hire an accountant to make sure all of their tax filing is accurate and to also pay and keep track of all of their tax payments. Hiring an accountant can help reduce the amount of time a business owner spends on taxes and bookkeeping. An accountant’s services can range from making estimated tax payments, filing taxes and asset depreciation. Owners should specifically search out small business accountants who are well seasoned in their role and have had success working with current or previous small businesses.

Understand how much taxes you will owe and how to pay them

One of the first conversations you have with your accountant should be about your tax liability and how to determine how much you will owe. One thing that needs to be considered is the type of business structure an owner has; this will determine the type of federal income tax that a business will be required to file. Owners will also need to understand that the number of assets such as stocks, equipment, or property will also impact their businesse’s overall tax liability.

Avoid common mistakes

Businesses should take preventative measures in order to avoid common mistakes that many small business owners run into. For example, owners should always keep track of when their estimated taxes are due to avoid missing a payment and having to pay additional penalties to the IRS. Small business owners should also keep detailed and accurate records to help make their tax filing process much more seamless. Finally, business owners need to be prepared for the unexpected costs that come with having a business. Owners should keep extra money on the side just in case they have to cover any unexpected costs. 

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Tax Evasion, Fraud & the Statute of Limitations

Tax Evasion, Fraud & the Statute of Limitations on Tax Crimes

Tax evasion and tax fraud are not just problems for white-collar crime criminals. Filing your taxes, particularly if you have considerable assets or run your own business, can be terribly complex. This means that the line between an aggressive – but legal – tax planning strategy and fraud is thinner than you might think.

Perfectly innocent mistakes may be interpreted by an IRS investigator as suspect. Therefore, even if you are a law-abiding taxpayer it pays to know the difference between tax evasion and tax fraud, the penalties, and what the IRS’ statute of limitations is when prosecuting tax crimes.

Tax Evasion vs. Tax Fraud

Although often used interchangeably, there are important differences between tax evasion and tax fraud. Tax evasion refers to the use of illegal means to avoid paying your taxes. This includes felonies, such as refusing to pay your taxes once they have been assessed, and misdemeanors, such as failing to file a return. Tax fraud, on the other hand, refers to lying on your tax return and falsifying tax documents, which is always a felony charge.

Take for example celebrity convict Wesley Snipes, who was charged with three counts of failing to file a return. Snipes was convicted for three misdemeanor charges and received the maximum one-year sentence for each count. If he had been found guilty of a felony evasion charge or of tax fraud, he could have received up to five years for each count.

Statute of Limitations for Tax Evasion or Tax Fraud

The statute of limitations of a crime is the amount of time a prosecutor or a plaintiff has to file charges. In the case of taxes, it represents how long you should be looking over your shoulder after – willfully or otherwise – lying on your tax return.

The general rule of thumb is that the IRS has three years to audit your tax returns. If an investigation of your tax return reveals you concealed over 25% of your income, the IRS gets twice the time, six years, to file charges. However, this time period can be extended for a variety of reasons.

For instance, if you are not in the United States or you become a fugitive, the statute of limitations may be “tolled” – or stop running – until you are found or return home. Another matter to consider is when the 6-year period starts. The IRS could prosecute a series of fraudulent tax returns as a single charge and only start counting the six-year period from your last act of tax evasion or fraud.

It gets worse. Although the IRS is limited to how far back it can look when filing charges in criminal court, there is no statute of limitations for civil tax fraud. This means the IRS can look back as far as it wants when suing for civil fraud. In practice the IRS rarely goes back more than six years because it has a high enough burden of proof to meet in fraud cases without having to deal with the added difficulties of proving older charges.

Chances of Being Investigated for Tax Fraud

Let’s end with the good news. Although the law grants extensive powers to the IRS, the chances of you being charged — never mind convicted — of tax fraud are minimal. According to IRS statistics, of the approximately 240.2 million tax returns filed, less than 2,000 people were investigated for fraud in 2020. Of those who were investigated, only half were actually charged with a criminal offense. However, once the IRS charges a taxpayer, the conviction rate is high: around 93%. Tax prosecutors have a high burden of proof to meet and their resources are limited, so they tend to focus their efforts on clear-cut cases.

Another positive tidbit is that the IRS rarely brings up an original return in audits or criminal prosecutions if you came forward and tried to correct mistakes through an amended return. This means that if you avoid blatant abuses and correct filing errors when they come up in an audit, your chances of staying on the right side of a prison cell are excellent.

University students and staff should be aware of IRS Impersonation Email Scams

With the start of another school year just around the corner, the IRS has started warning individuals to be on the lookout for IRS-impersonation scams that primarily target educational institutions, students and staff who have a “.edu” email address. The IRS has recently been notified via their phishing@irs.gov email about impersonation scams from people with the “.edu” email.

The phishing emails seem to be targeting universities and college students from public, private, profit and non-profit institutions. These fraudulent emails typically display the IRS logo and will use a variety of subject lines such as “Tax Refund Payment” or “Recalculation of your tax refund payment.” These emails will attempt to persuade people to click a link and submit a form in order to claim their refund.

Taxpayers can protect themselves against scammers by recognizing the signs of what a phishing email typically contains:

  • Social Security number
  • First Name
  • Last Name
  • Date of Birth
  • Prior Year Annual Gross Income (AGI)
  • Driver’s License Number
  • Current Address
  • City
  • State/U.S. Territory
  • ZIP Code/Postal Code
  • Electronic Filing PIN

Should an individual receive a scam email, they should avoid clicking on the link in the email and immediately report it to the IRS. For security reasons, individuals should save the email and send the attachment to phishing@irs.gov.

Taxpayers who believe they provided their personal information over to identity thieves should consider obtaining an Identity Protection PIN. Taxpayers have the option to opt into the program and will be provided an IP PIN that will contain a six-digit number that will help prevent identity thieves from filing fraudulent tax returns in the victim’s name.

Taxpayers who attempt to e-file their tax return and find it rejected because a return with their SSN already has been filed should file a Form 14039, Identity Theft Affidavit PDF, to report themselves as a possible identity theft victim.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Military members and their families Qualify for Special Tax Benefits

Members of the military could qualify for special tax benefits. For example, they do not have to pay certain types of taxes and special rules may even lower the taxes they owe or allow them additional time to file and pay their federal taxes.

Here are the special tax benefits military members have:

  • Combat pay exclusion: Individuals serving in a combat zone may have a part or all of their pay tax-free. This will also apply to people that work in an area outside a combat zone when the Department of Defense certifies that area is in direct support of military operations in a combat zone. Military members need to be aware that there are limits to this exclusion for commissioned officers.
  • Additional nontaxable benefits: Members are provided an allowance for housing. Food and uniform allowances are several government paid items that are excluded from gross income, meaning they will not be taxed.
  • Moving expenses: Certain non-reimbursed moving expenses may be tax deductible. In order to deduct these types of expenses, a taxpayer must be a member of the Armed Forces on active duty and the move in question must be due to a military order or result of a permanent change of station.
  • Deadline extensions: Members of the military that work overseas have the option to postpone most tax deadlines. Those who qualify have the ability to get an automatic extension of time to file and pay back their taxes.
  • Earned income tax credit: Certain special rules allow military member that receive nontaxable combat pay to choose to include it in their taxable income. Individuals who qualify for the credit could owe less taxes and potentially even get a refund.
  • Joint return signatures: If a military member is unable to sign their return, their spouse may be able to sign for the other or get a power of attorney.
  • Reserve and National Guard travel: Members of a reserve component of the Armed Forces may have the option to deduct their unreimbursed travel expenses on their return. In order to qualify, members must travel more than 100 miles away from home in connection with their performance of services as a member of the reserves.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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What to expect when dealing with the IRS

Individuals who do not pay their tax bill after filing their tax return will receive a bill for the amount they owe. Once the IRS sends a bill to a taxpayer, the collection process will begin and will continue until the account has been paid in full or the IRS is no longer able to legally collect on the tax debt; for example, the time or period for collections expires.

Taxpayers will receive a letter from the IRS that will explain the balance due and details on how to pay their balance in full to remain compliant with the IRS. The letter will also include the amount of tax, plus any penalties and interest accrued on an unpaid balance from the date the tax was due.

Any unpaid balance is subject to interest that compounds daily in addition to a monthly late payment penalty. The IRS recommends taxpayers pay their tax liability in full as soon as they can in order to minimize both the penalties and interest. Taxpayers also have the option to consider other financial avenues with the IRS such as obtaining a cash advance on their credit card or getting a bank loan. The rate and any applicable fees your credit card company or bank charges may be lower than the combination of interest and penalties imposed by the Internal Revenue Code. If you cannot pay in full, you should send in as much as you can with the notice and explore other payment arrangements.

Individuals who are unable to pay their tax balance in full right away, may qualify for a payment plan with the IRS. One option is a short-term payment plan of up to 180 days, available to individuals who owe up to $100,000. Taxpayers who cannot pay their tax liability in full within the 180 days, may qualify to pay monthly through an installment agreement.

When setting up an installment agreement, taxpayers should be aware that there is a user fee that they will need to pay before the agreement is actually set up. For low-income taxpayers, the user fee could potentially be reduced or waived altogether if certain conditions apply. Taxpayers should be aware that interest and late payment penalties will continue to accrue while they make installment payments.

Taxpayers who cannot afford to make monthly installment agreement payments can apply for an Offer in Compromise (OIC). An OIC is an agreement between a taxpayer and the IRS that resolves a taxpayer’s tax liability by payment of an agreed upon reduced amount. Before an offer can be considered, you must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Should you Electronically File your Taxes?

Taxpayers have two options when it comes to submitting their tax return to the IRS: electronically or by mail. Before filing your taxes, a taxpayer should review the pros and cons of both methods. For example, e-filing is known to be safer, faster, and much more convenient than filing a paper tax return. Choosing to mail a paper return to the IRS is cheaper but takes much longer to process and for you to receive your tax refund.

E-filing a tax return

As of 2020, approximately 90% of taxpayers chose to e-file their tax returns. One of the biggest benefits of going with electronic filing is that taxpayers received an immediate confirmation from the IRS that their tax return has been received.

If the IRS finds any errors on an individual’s tax return, the IRS will mail out a rejection notice, typically within 24 hours of attempting to process and file the return. The IRS notice sent to taxpayers will indicate what triggered it to be sent out and how they can fix their error.

E-filing your tax return means your tax return will be processed much quicker and that you will receive your tax refund faster.

Although there are many pros to e-filing your tax return, taxpayers should be aware that there are also some disadvantages. Tax filers should be aware that outages or glitches may occur when using the internet to file your tax return.

E-filing supports most tax situations, however, there are certain scenarios it does not support. For example, you cannot:

  • File a return for someone who has passed away.
  • Attach images or PDFs to your return.
  • File before the IRS opens e-filing for the year.

Paper filing your tax return

There are some benefits when it comes to filing a paper tax return. For example, if an individual needs to file a tax return for someone who passed away, the IRS will require you to file a paper return. Paper filing also allows you to print and submit images or PDFs to supplement your tax return.

Taxpayers should be aware of the disadvantages that comes with mailing a tax return to the IRS. Data transcribers at the IRS are required to manually input taxpayer information for every paper return they receive. This could result in errors that may require you to file an amended return.

Paper filers may not realize that they have to manually sign the paper return or the IRS will not accept it. Novice paper filers often forget this fact, leading to even longer delays than what is normal with a paper return.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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