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 on Tax Crimes

Tax evasion and fraud is not just a problem for white-collar crime masterminds. 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 what the difference is 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 and 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.

What’s the 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.

Tax Crime Statistics

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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Common Errors Taxpayers should Avoid when Filing their Taxes

Filing a tax return electronically can help reduce mistakes since tax software notifies a taxpayer if there are any math issues, flags common errors, and prompts taxpayers for missing information. Using a tax software can also help a taxpayer claim valuable credits and deductions.

Using a reputable tax preparer, certified public accountants, enrolled agents, or other knowledgeable tax professionals can help an individual prevent making avoidable errors.

The IRS recommends that taxpayers file electronically and opt for the direct deposit to get their refund much faster and avoid any pandemic-related paper delays.

Here are some common errors taxpayers should avoid when preparing their tax return:

  • Missing or inaccurate Social Security numbers (SSN). Each SSN on a tax return should appear exactly as printed on the Social Security card.
  • Misspelled names. A name listed on a tax return should match the name on that person’s Social Security card.
  • Math errors. Math errors are one of the most common errors taxpayers make on their return. Taxpayers should always take the time to double-check the math on their return before submitting it over to the IRS.
  • Credits or deductions. Taxpayers should look into credits to see if they are eligible to place them on their tax return. Some of the most common credits are the earned income tax credit, child and dependent care credit, and recovery rebate credit. Individuals eligible for the recovery rebate credit and did not receive their payment, can claim the recovery rebate credit when they file their taxes.
  • Incorrect bank account. Taxpayers who are due a refund should choose direct deposit. This is the fastest way for a taxpayer to get their money. However, taxpayers need to make sure they use the correct routing and account numbers on their tax return.
  • Unsigned forms. An unsigned tax return is considered invalid and will not be accepted by the IRS. In most cases, both spouses must sign a joint return. Exceptions may apply for members of the armed forces or other taxpayers who have a valid power of attorney. Taxpayers can avoid this error by filing their return electronically and digitally signing it before sending it to the IRS.

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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How Taxpayers can end up in the 0% Tax Bracket

A majority of individuals have a portion of their income go to taxes when they file. Those who are looking for a way to legally decrease or eliminate their tax bill altogether, should take advantage of certain tax perks when filing their tax return.

Look into deductions

Tax deductions are a great way for taxpayers to have more money in their pocket and reduce their total tax bill. Individuals who qualify for tax deductions, should take advantage by including them on their tax return. Utilizing tax deductions will reduce the total amount of income that was earned throughout the year which could reduce your tax bill or even get you a refund.

Hold onto winning investments

If you invest in stocks, it is important to understand how it can affect you when you file your taxes. If you are looking to reduce the total amount of taxes you may have to pay when filing your taxes, you my want to consider holding your stocks even if the price shoots up. If you hold your investments for over a year, you will be eligible for the long-term capital gains tax rates of 0%, 15%, or 20%.

Earn more qualified dividends

For those who are not ready to sell their stocks, there is another way to get the same rates you would get for long-term capital gains.

Qualified dividends allow individuals to bypass the higher tax rates that are associated with ordinary dividends. Qualified dividends also give individuals exclusive access to the 0%, 15%, and 20% tax brackets if they qualify for the following:

  1. The dividend must have been paid by a U.S. corporation or a qualifying foreign company.
  2. The dividends must be deemed as qualified in the eyes of the IRS and cannot be listed as a non-qualified dividend.
  3. You have held the stock paying the dividend for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Look into credits

Taxpayers who know they will owe a tax liability should look into tax credits they may qualify for. The Earned Income Tax Credit could help individuals receive a tax refund after filing their return. For those who contribute to a qualified retirement savings account, you may also be eligible for a tax credit that could potentially wipe out your entire tax bill.

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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Unemployment Fraud could affect Individuals this Tax Season

With millions of Americans out of a job due to the ongoing pandemic throughout 2020, many received unemployment benefits issued out by state agencies.

 As taxpayers begin to file their taxes, they need to be aware of scammers who are seeking to exploit people out their money by filing for fraudulent unemployment benefits by using stolen identities.

Taxpayers should also be aware that the benefits they do receive from their state agency will be viewed as taxable income and will also be issued a 1099-G that should be kept with other important tax documents and used when filing your taxes.

If you feel you are a victim of fraud because you received a Form 1099-G for 2020 unemployment compensation that you did not get, you should take the following steps:

  • Contact issuing state agency to report fraud. The U.S. Department of Labor maintains a list of state contact information to report unemployment compensation fraud.
  • Ask state agency to issue a corrected 1099-G. The state will need time to investigate the fraud complaint and make any correction.
  • File an accurate federal tax return reporting only income received, even if a corrected 1099-G has not yet been received.
  • Follow Federal Trade Commission recommendations for identity theft:
    • Review free credit reports for signs of additional fraud from the credit bureaus.
    • Consider a credit freeze or credit fraud alert through the credit bureaus.
  • File an identity theft complaint with the U.S. Department of Justice’s National Center for Disaster Fraud (NCDF) by completing an NCDF Complaint Form online, or by calling 866-720-5721.

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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