Important Information on the IRS Statute of Limitations on Assessments

One important thing to note about nearly every law is that they have a specific window of enforcement.  The IRS is no different, having a statute of limitations on tax assessments.

Statute of Limitations: A type of federal or state law that restricts the time within which legal proceedings may be brought.

Statue of Limitations Start Date

Knowing how long a statute of limitation is is one thing, but in order to properly calculate that, you need to know when the clock actually starts, and the answer might surprise you. If you file your taxes on time, the clock doesn’t start the date you file or the date they inform you that your file is received. Rather, it starts on April 15th.

If you file late and do not have an extension, the clock starts on the date you file. If you do have an authorized extension, your filing is considered on-time and, so long as you follow all the requirements of the extension, the clock reverts back to April 15th.

Usually, the Statute Is Three Years

In general, with an exception we’ll mention later, the statute of limitations for tax assessments is exactly three years from the start of the clock. That’s either April 15th, or when you file late without an authorized extension.

Sometimes, It’s Longer

Normally, statute of limitations laws are quite clear, but this one has a slight complication. If your filing has a “substantial understatement of income,” then the statute of limitations is extended to six years. The start date is still determined the same way. What ‘substantial understatement of income’ means exactly is not entirely clear, and is currently being determined by a civil lawsuit, but in general it refers to shorting your income by 25% or more. We, of course, recommend honesty in your tax filings.

If your filing includes fraud, the statute of limitation doesn’t just extends the limitations, but it actually removes them. The IRS thus has forever to determine wrong-doing. The IRS has filed against not just taxpayers, but also against Estates for fraudulent tax returns.

So, the Moral Is…

To summarize, if you follow the law and file on time, not only does your statue of limitations extend three years from April 15th, but you also save yourself from invasive audits later on. File early and accurately, and you have nothing to worry about regardless of the statute.

What to Do When You Forget to Pay State Taxes

You are diligent about paying your federal income taxes. Every year like clockwork you file your Form 1040, Form 1040A or Form 1040EZ on or before the deadline. You are usually conscientious about paying your state income taxes too but this year, you spaced and missed the deadline. Don’t panic. Unless you neglect to file AND pay for years, it is unlikely that you’ll wind up as an extra for Orange Is the New Black. But you’ll need to get your act together to minimize the potential damage.

Are You Sure You Have to File?

If you live and work in any of the following states, you are not required to file an income tax return or pay state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two more states, New Hampshire and Tennessee, also exempt wage earners from state income taxes, although interest and dividend income is taxed. But if you live or work in any of the other 41 states or in the District of Columbia, you may be subject to late filing fees, late payment fees or both. (PriorTax)

Your state’s official website is likely to have information available on filing state tax returns after the deadline. If you cannot find the information online, contact your state’s treasury or tax office by telephone. Be prepared to answer general questions about your income and filing status, because your answers may have a bearing whether you actually must file. For instance, many states exempt taxpayers who owe no state taxes from the requirement of filing a return. But you will forfeit any refund or tax credits you might otherwise have received if you do not file a return.

Maybe You Were Granted an Automatic Extension

Some states grant taxpayers an automatic extension of time to file if they filed an extension request with the IRS on or before the tax deadline. Other states require a separate extension request even if you filed a federal request. Again, consult your state’s official website or place a telephone call to the appropriate agency to obtain the information that you need.

Check Out Possible Amnesty Programs

Like the IRS, many states have adopted a cooperative attitude toward taxpayers who make honest mistakes. Some states have amnesty programs or otherwise eliminate or minimize penalties for taxpayers in arrears who voluntarily come forward. If you just straight up forgot to file, or didn’t file because you didn’t have the money, come clean with the proper authorities. Often, the state will work with you to develop a payment schedule that you can live with to bring you back into compliance.

File Your Return ASAP

If you forget to file your return until a few weeks or even a few months after the deadline, don’t panic. There is only the slimmest chance that you will ever face criminal charges. But that doesn’t mean that you should dawdle. Tax penalties imposed by the state can often rival those of the IRS, including liens and levies against your paycheck and assets or even possible jail time. The sooner you file, the quicker you can stop the clock on penalties and interest charges.

If you are missing Form W-2 or other tax records that you need to file a return, you can often obtain the information you need immediately through the IRS website. In some cases, you may need to make a request by telephone or regular mail, which will require extra processing time. Inquire with your secretary of state’s office or tax office if you need blank tax forms. Don’t just assume that you can file the same form as you would have if you had filed your return on time.

Don’t Assume You’re in the Clear

Honest taxpayers act as quickly as possible to file their returns after they have realized that they somehow forgot to do so. But some may decide that since they have managed to get away with not filing a return or paying taxes that they will continue to flout the law. Don’t make that mistake. If your state income tax authority concludes that you intentionally evaded paying taxes, you could have the book thrown at you – including time behind bars.

Back to School: Tax Credits and Deductions for Education

Although the sun still shines brightly and the temps are still warm, September signals back to school time. Whether you’re sending your son or daughter to college for freshman year or returning to school yourself, there are books to buy, tuition to pay and other expenses galore. Uncle Sam also has your back, with back to school tax credits and deductions designed to lighten the financial burden of education.

Related article: Kid-Friendly Tax Breaks

American Opportunity Tax Credit

Thanks to the American Taxpayer Relief Act of 2012, commonly known as the “fiscal cliff” deal, the American Opportunity Tax Credit (AOTC) was extended through December 31, 2017. Students may claim the AOTC for the first four years of higher education. The AOTC covers tuition, books, required fees and educational equipment. The AOTC reduces the tax burden of eligible taxpayers on a dollar for dollar basis, with a maximum credit of $2,500 per year. If there are funds left over from the credit after eligible expenses are covered, taxpayers can receive up to $1,000 as tax refunds. Form 8863, available from the IRS website, is required to claim the AOTC.

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) can be used for undergraduate, graduate and professional coursework, as well as coursework designed to improve job-related skills. The LLC is worth 20 percent of the first $10,000 of eligible educational expenses, reducing taxpayers’ tax burden dollar for dollar, up to a maximum of $2,000 per year. Form 8863 is used to claim the LLC, which is not refundable.

Tax-Exempt Scholarships and Fellowships

Scholarships and fellowships that are used exclusively for eligible educational expenses are tax-exempt. After deducting the tax-exempt portion of the scholarship or fellowship, students must declare the remainder of the scholarship or fellowship as income. (Finaid)

Tuition and Fees Deduction

As a substitute for claiming either the AOTC or the LLC, eligible taxpayers may claim a tax credit of up to $4,000 annually for tuition, fees and other eligible educational expenses paid out-of-pocket. Funds from a student loan that are used to pay tuition and fees are also eligible for claiming the deduction. The deduction offsets federal tax obligations dollar for dollar; taxpayers are not required to itemize to claim the deduction.

Business Deduction for Work-Related Education

Unlike the tuition and fees deduction, the business deduction for work-related education can also be applied to educational expenses such as seminars and workshops that are not conducted in colleges and universities. Taxpayers who claim the deduction must be working and the instruction must fit within one of the three following categories listed on the IRS website.

  • Education required by employers or the law maintain present salary, status or position
  • Education that serves a bona fide business purpose for taxpayers’ present employers
  • Education that maintains or improves skills for taxpayers’ present line of work.

Education required to meet minimum standards for a position or which qualifies individuals for a new line of work is not eligible for the deduction. Wage-earners must itemize deductions on Schedule A along with Form 1040. The business deduction for work-related education applies only to expenditures that exceed 2 percent of adjusted gross income (AGI). Self-employed individuals need not itemize to claim the deduction, and list eligible expenses for the business deduction for work-related education on Schedule C, Schedule C-EZ or Schedule F along with Form 1040.

Student Loan Interest Deduction

Uncle Sam has not forgotten taxpayers who are paying off student loans. Taxpayers may deduct the interest paid on student loans up to a maximum of $2,500 annually. Students must have been enrolled at least half-time at a qualifying educational institution when loans were taken. The student loan interest deduction reduces taxable income dollar for dollar; taxpayers need not itemize deductions to claim the deduction.

529 Savings Plans and Coverdell Education Savings Accounts

Coverdell Education Savings Accounts (ESA) are established by third parties on behalf of a beneficiary, who must be under age 18 or a special needs individual when the fund is established. Contributions from all sources may not exceed $2,000 per year, and contributions are not tax deductible for donors.

However, beneficiaries may withdraw funds from Coverdell ESAs tax-free to cover eligible education-related expenses, including tuition, fees and books, along with room and board. Students may claim the AOTC or the LLC along with withdrawing funds from a Coverdell ESA, as long as the funds are applied to different qualified expenses. Withdrawals in excess of eligible expenses may be taxable, and all funds from a Coverdell ESA must be distributed by the beneficiary’s 30th birthday.

State or school-sponsored 529 savings plans allow taxpayers to contribute funds toward students’ eligible educational expenses for schools within a state or at a particular educational institution. There are no income or contribution limits for 529 plans. Deductions used for education-related expenses, including room and board for students enrolled at least half-time, are tax free.

IRA Withdrawals for Education

Ordinarily, deductions from Individual Retirement Accounts (IRAs) taken before the account holder reaches age 59 ½ are subject to a 10 percent penalty in addition to any taxes due. The IRS makes an exception for withdrawals used to cover educational expenses for adult students or eligible family members (usually children). The withdrawal may still be taxable unless the amount is less than the qualified educational expenses of the qualifying student.

Qualifying for Education Tax Breaks

Taxpayers are not usually allowed to “double dip” to claim multiple education-related tax credits and deductions during a single tax year, although there are exceptions. For instance, the AOTC and the LLC may not both be claimed for the same student during the same year, although families with multiple students may claim one credit for one student and a different credit for another student.

Several education-related tax credits and deduction, such as the AOTC and the LLC, have maximum income limits that vary according to the filing status and income of taxpayers claiming the tax breaks. Also, room and board are generally not considered eligible educational expenses, except for 529 plans, Coverdell ESAs and student loan interest deductions. A student loan counselor or an Optima Tax Relief specialist can sort out any questions concerning eligibility for education-related tax credits and deductions.

House Approves Making Depreciation Tax Break Permanent – Bill Headed to Senate

The bonus depreciation tax break allows businesses to deduct up to 50% of the cost of capital purchases upfront, resulting in big tax savings for business owners. In May 2014, the Ways and Means Committee of the Republican-controlled House of Representatives voted 23-11 – along party lines – to renew and make permanent the tax break designed to encourage corporate business investment.

A Tax Break with a Deficit

But making the depreciation tax break permanent would add nearly $300 billion to the deficit over the next ten years, according to the Wall Street Journal. A measure to make corporate research credits permanent would increase the deficit by another $300 billion. Enacting all the corporate-friendly tax measures proposed or passed by the House would extract approximately $1 trillion from the economy. Despite these added costs to the budget, the sentiment in the House is that business owners need certainty about future tax regulations in order to feel confident about making capital investments.

Related Article: Should We Abolish Corporate Income Taxes?

A Fate Less Certain

The permanent extension of the corporate capital deductions bill is scheduled for a vote by the full House, where it is expected to pass, most likely along party lines as well. But the ultimate fate of the corporate depreciation tax credit is somewhat less certain. A version of the corporate depreciation tax credit bill under consideration in the Democratic-majority Senate limits the extension of the credit to two years. Scheduling a Senate vote for its version of the bill is also being weighed down by partisan battles concerning a number of related and unrelated issues.

The differences between the bills means that the two would have to be reconciled before they could be sent to President Obama’s desk for his signature or veto. It is not known whether President Obama would sign the measure if it passed Congress, although he did sign a similar measure in 2010 that allowed businesses to apply an accelerated rate to deductions for capital expenses on their 2010 federal income tax returns.

Renewing Expired Tax Breaks

In a typical year, Congress passes numerous pieces of legislation designed to renew or extend temporary tax measures that have expired recently. Even in the hyper-partisan atmosphere of the present Congress, many expired tax measures are expected to be renewed eventually. This includes the corporate depreciation deduction. But given that 2014 is an election year, some observers believe that no significant legislation will be passed until after November, when a lame-duck Congress will be at least temporarily freed from the pressures of campaigning.

Related article: 9 Tax Breaks That Could Expire in 2014

10 Tips To Avoid A Tax Levy

The Treasury Department has a well-earned reputation for being serious about collecting its due. The mere mention of its taxation arm – the IRS, is sufficient to invoke fear into the most honest of taxpayers. One reason for the trepidation generated by the IRS is that it has a potent arsenal of weapons at its disposal to pursue taxpayers who are in arrears, including tax liens and tax levies.

Many people confuse tax liens and tax levies. While neither is desirable, a tax lien poses much less financial danger to taxpayers than a tax levy does. A tax lien represents an initial attempt by the IRS to collect revenues from taxpayers who have failed to either pay their taxes in full or to contact the agency to discuss viable repayment options. By contrast, by the time the IRS gets around to filing a Final Notice of Intent to Levy and Notice of Your Right to A Hearing, otherwise known as a tax levy, taxpayers are in imminent danger of losing valuable assets such as cars or homes to seizure.

It goes without saying that avoiding the dire consequences of a tax levy is desirable whenever possible. Fortunately, taxpayers who take expedient measures can frequently avoid the hammer of the IRS tax levy. Depending on the personal circumstances involved, it may be possible to dodge a tax levy long enough to contact the IRS with alternative arrangements – or even long term.

1. Request a 120-Day Extension

One of the few absolutely guaranteed ways to avoid a tax levy is to repay what you owe to the IRS in full. If you have a reasonable expectation of being able to repay your tax arrears within 120 days, request an extension from the IRS. Once you have made payment, the lien should be released within 30 days, which will automatically cancel the tax levy.

2. Negotiate an Installment Agreement

Back in the day, the IRS was much less flexible about allowing taxpayers to extend payments over time. In recent years, however, the IRS has changed its stance and actively encourages collaboration between agents and taxpayers. So, if you can pay what you owe within a reasonable time frame, generally six years or less, depending on your total balance in arrears, you may be able to avoid a tax levy by negotiating an installment agreement. If so, act quickly to prevent the actual levy from going through.

3. Extend an Offer in Compromise

An Offer in Compromise is a formal arrangement that allows taxpayers to settle their tax obligations by paying less than the full amount due. The Offer in Compromise process requires taxpayers to demonstrate that attempts to collect the full amount owed would present an undue financial burden or would otherwise be unjust. As might be expected, the standard for qualifying for an Offer in Compromise are strict, and taxpayers would be well advised to seek professional advice before pursuing this path.

4. Demonstrate Non-collectible Status

If paying your back taxes – or the execution of a tax levy – would create severe financial hardship, you can seek what the IRS categorizes as “non-collectible status.” Once your tax debt has been designated as non-collectible, all attempts to process tax levies cease. But the tax lien remains on your record, and you must re-apply for “noncollectable status” on an annual basis.

5. File Chapter 7 or 13 Bankruptcy

Under most circumstances, filing either Chapter 7 or Chapter 13 bankruptcy places an immediate halt on all creditor collection actions, including tax levies. But filing a bankruptcy petition only stops a tax levy for as long as the petition is active. And especially if you file Chapter 7 bankruptcy, you may be required to relinquish personal assets anyway to obtain a discharge.

6. Petition for Innocent Spouse Relief

If you filed a joint tax return with your spouse, you are generally jointly liable for any and all tax obligations. But under limited circumstances, it may be possible to escape a tax levy if you can demonstrate that your spouse is individually responsible for being in arrears with the IRS. Qualifying for Innocent Spouse Relief is tough, with strict requirements in place. If you believe you qualify, you would be well advised to seek the services of a professional in preparing your petition.

7. Appeal the Notice of Levy

If you legitimately believe that the IRS has mistakenly imposed a tax levy against you, it is imperative to contact the agency by phone immediately to request an appeal. You must also follow up the phone call with a written petition to appeal the tax levy. It is your legal right to appeal a tax levy, and doing so will stop the process while your appeal is being processed.

8. Allow the Statute of Limitations to Run

The IRS is limited by statute on the amount of time that a tax lien is allowed to stand. If the statute of limitations expires before the IRS imposes a tax levy, you are officially off the hook. But this is a very risky strategy, especially since the IRS may simply impose a new tax lien against your account. On the other hand, if you can demonstrate that the statute of limitations has ALREADY expired, your odds of escaping a tax levy improve significantly. Do not attempt this approach without expert legal advice.

9. Claim IRS Procedural Error

In most cases, taxpayers receive multiple warnings before the IRS executes a tax levy. But sometimes mistakes are made. If you can demonstrate that you did not receive sufficient notice of a tax levy, or that the IRS committed some other procedural error in assessing your account, you can request a Collection Due Process hearing, which will halt a tax levy for 30 days after the date of the hearing.

10. File a Request through the Collection Appeals Program

If you are not satisfied by the results of an appeal or a Collection Due Process hearing, you may file a petition for under the Collection Appeals Program before a tax levy has been executed. You may also file a petition to recover assets such as bank accounts or wages that were wrongfully seized by tax liens under the Collection Appeals Program. But if seized assets such as a home or a car have already been sold, you are pretty much out of luck.

First time tax filer? Here’s everything you need to know.

Whether the first-time tax filer is a teen reporting earnings from yard work or babysitting or an adult filing an income tax return to claim the Earned Income Tax Credit (EITC), the process can seem intimidating. Fortunately, many first-time tax filers have very simple tax circumstances, which make the process of filing tax returns much less complicated than filing a return for an executive earning six or seven figures. Even better, nearly all first-time tax filers should be able to file their returns for free.

Key Terms for First-Time Tax Filers

If you have never filed a tax return before, terms like W-2 form, standard deduction, itemized deductions, tax credits, tax deductions and exemptions can seem scary and strange. However, the following list spells out essential income tax terms in plain English

  • Filing StatusThere are five filing statuses: single, married filing jointly, married filing separately, head of household (adult filer claiming one or more dependents), and qualifying widow(er) claiming one or more dependents. Your exemptions and certain tax credits depend on your filing status.
  • W-2 Form: If you have a job, your employer will give or mail you a W-2 form that lists your wages and any taxes that were deducted during the previous year. You must file a copy of the W-2 Form with your income tax returns.
  • Standard Deduction: A set amount that each taxpayer is allowed to deduct from his or her reported income regardless of personal circumstances
  • Itemized Deductions: Specific deductions that certain taxpayers are allowed to deduct from their reported income, such as catastrophic medical expenses. You cannot claim the standard deduction if you claim itemized deductions.
  • Tax Credits: Cash payments made to taxpayers (like the EITC). You may be eligible to receive tax credits even if you owe no income tax.
  • Tax Deductions: Amounts that can be subtracted from your reported income. Deductions can reduce or eliminate the tax that you owe (so that you owe zero taxes), but you cannot receive tax deductions as cash.
  • Exemptions: Each nondependent taxpayer is entitled to one exemption. The amount is set by the IRS each year. Parents can claim one exemption for each dependent child in addition to their own. Dependents cannot claim exemptions.
  • Form 1040: The income tax return that you file. Depending on your circumstances, you may file Form 1040-EZ, the Form 1040-A (the “short form”) or Form 1040 (the “long form”) Most first-time tax filers will be eligible to file either Form 1040-EZ or 1040-A, both of which are simpler than Form 1040.
  • Schedules: Supplemental forms filed with your federal income tax returns. Common schedules include Schedule A (for itemized deductions) or Schedule C (for reporting self employment income and deductions)
  • Form 1099: A form to report non-wage earnings such as interest which have been reported to the IRS. You must report earnings from Form 1099, but you do not include a copy of Form 1099 with your return.
  • Line XX: Indicates the place on your income tax return or schedules where information (such as total wages from your W2 forms) should be entered. The line number will also be indicated on your income tax return or schedules.

Do I Need to File a Federal Income Tax Return?

This question can be perplexing, especially if you don’t think you earned enough to need to file. But the IRS has established clear (and very strict) rules concerning who must file income tax returns. In fact, many people are surprised to learn that they (or even their children) are obligated to file income tax returns.

The IRS has established especially stringent rules concerning dependent children for requiring income tax returns. Generally, if a child is unmarried, under the age of 19 (or under age 24 and a full-time student) or disabled (at any age) AND receives more than 50 percent of his or her financial support from a parent or other adult guardian, he or she can be claimed as a dependent for federal income tax purposes. If you have doubts about whether you or your child must file a tax return, the guidelines below spell out whether the IRS expects to receive a return from your child concerning his or her earnings for the previous year. Rules for your state may vary.

  • A child with unearned income (e.g. from interest) over $1,000
  • A child with income from wages (like a part time job) over $6,550
  • A child with gross income over either of the two previous figures plus $350
  • A child with net self employment earnings (after deductions) of $400 or more

In most cases, the child must file a separate income tax return regardless of his or her age. However, if the child is a dependent with only unearned income to report, parents may include the child’s income on their tax returns. Obtain advice from a tax professional (accountant or attorney) before following this strategy.

The IRS also has established guidelines for whether adults must file income tax returns. Generally, if ALL of the circumstances listed below pertain to you, you do not have to file an income tax return. Though, if any of the conditions listed below do NOT apply to you, chances are you must (or should) file a federal income tax return. You may or may not also be required to file a state income tax return.

  • Single
  • Under age 65
  • No dependents
  • Cannot be claimed as a dependent
  • No taxes withheld from earnings
  • Do not qualify for the EITC or other positive income tax credit
  • Gross income of less than $10,000
  • Self employment income of less than $400

Recovering Deductions or Claiming the Earned Income Tax Credit

Even if you (or your child) do not actually owe federal income taxes, it may be desirable to file a federal income tax return anyways. Filing an income tax return is the only way to recover income taxes that were deducted from your paycheck that you do not actually owe. Further, the EITC (which can add up to hundreds or thousands of dollars) can only be claimed by filing a federal income tax return.

How to File Your First Tax Return

Many first time filers ring up their parents to help them file the first few times. But if you’re on your own or don’t want to bug them, the process is still pretty painless.

  1. Gather your paperwork, including W2 Forms, Form 1099s, receipts and bank statements and put them in a big envelope or folder. You’ll want everything in one place for this tax season, and to have as a reference next year.
  2. Download and print out copies of Form 1040, 1040-A, 1040-EZ, Schedule A and Schedule C along with instructions for each of the forms from the IRS website. Here’s a page to help you determine which form you need to file.
  3. Then, go through the tax forms that you need step by step, making notes where you have questions. Take your completed or annotated paper forms and notes to an accountant, a tax attorney or another trained professional and have him or her explain any sections that have caused you confusion. If you don’t have any questions and anticipate an easy filing, you may still want to have an experienced filer look over your forms just in case.
  4. Now it’s time to actually file your tax return. In most cases, you’ll be able to file online using a free tax return program like TurboTax or Freefile. You may also be able to file from your phone, with one of these mobile tax apps.

When Can I Start Filing My Taxes?

Filing your actual return electronically gives you a chance to go through the entire tax filing process step by step, with explanations provided for each step. Filing electronically also reduces the risk of making a mistake or having your return get lost in the mail. As a bonus, you will also receive any refunds to which you are entitled much faster than you would have by filing a paper return.

You’re Done!

Chances are, actually filing your income tax return will be much less intimidating than you imagined it would be. Once you have that first income tax return under your belt, filing next year should be less scary. And if you are entitled to a refund, that check or direct deposit in your bank account will serve as a reward for getting the job done.

Don’t Fear IRS Form 1099-C Cancellation of Debt

The most feared and least understood document ever published by the IRS – quite the accomplishment considering the competition– is Form 1099-C Cancellation of Debt.

This form is sent to people who were so deep in debt, even their creditors agreed to give them a break and either reduce or cancel their debt altogether. Think foreclosures, short sales, credit card debt settlements and similar debt consolidation methods.

Only that in the eyes of the IRS the cancelled debt has not disappeared. Instead, it has transformed into a new source of taxable income: debt income — the ultimate oxymoron. Who said tax collectors don’t have a sense of humor?

Why Do You Have to Pay Taxes on Cancelled Debt?

If you have received a IRS Form 1099-C, your first reaction was probably disbelief. It does seem counterintuitive to have to pay taxes on cancelled debt.

The IRS’ response is that when you borrowed that money you did not have to pay taxes on it because you were bound by contract to pay it back. If you had repaid the debt, it would have been as if you had never really owned the money. However, when a creditor releases you of debt, you are in effect receiving a payment you did not return, which is the very definition of income.

On the question of why the IRS thinks you will be able to pay taxes on a debt you could not afford to settle in the first place, I have no comeback.

1099-C Disputes

Creditors who cancel a debt of $600 or more are required by law to report the debt discharge to the IRS by filling in a 1099-C and sending a copy to the debtor.

This is worth repeating. Creditors, not the IRS, send 1099-Cs. They can write whatever they want on that form. Therefore, if you do not agree with the amount listed on the form, you need to contact the creditor.

Maybe the debt was discharged long ago during a bankruptcy; or the debt amount is correct but the fair market value of the debt’s security is way off. It could be you have no record or recollection of a debt cancellation. Whatever the issue is, you need to contact the creditors and try to resolve the discrepancy.

The address and telephone number of the creditor should be on the top left box of the form. If it turns out the creditor made a mistake, they can issue a new 1099-C with the correct information.

Discrepancies and Tax Audits

It is worth highlighting that the IRS also receives a copy of the information on your 1099-C. If you fail to declare taxable debt income, you may have to pay an additional negligence penalty as well as interest on your taxes, as well as other sanctions.

If you do not agree with the debt income amount and you cannot resolve the issue with the creditor, things get tricky. You can make a note in your tax return. However, a word to the wise, discrepancies between your tax return and 1099-C forms, even when accompanied by explanatory notes, are tax audit magnets. Don’t be shocked if the IRS wants a closer look at your accounts.

Thank Goodness for Exceptions and Exclusions

Not all types of unpaid debt are taxable, and you may qualify for exclusions that could either reduce or even cancel your tax liability.

IRS Form 4681 discusses the subject of debt income exceptions and exclusions in detail.  If you qualify for any of these exceptions, you need to fill in ad attach IRS Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness to your tax return.

Exceptions and Exclusions

  • Gifts. Debts canceled as a gift, a bequest or as part of an inheritance are generally not considered income.
  • Student loans. Student cancelled in exchange for working for certain employers. For instance, the Nurse Corps Loan Repayment Program that pays up to 60% of the student loans of nurses willing to serve in hospitals and clinics in some of America’s neediest communities.
  • Bankruptcy. Debts canceled during a title 11 bankruptcy are excluded from gross income. To prove debt income reported in a 1099-C was discharged as part of a bankruptcy, complete and attach Form 982 to your tax return and make sure you check the box on line 1a.
  • Insolvency. If your debts were cancelled due to insolvency – because your debts were greater than your total assets – some or even all of your cancelled debt may not be taxable. For instance, if your total assets amounted to $10,000 and your total debt was $15,000, you may not have to pay taxes on debt income of $5,000 or less. If you were insolvent when your debt was forgiven, check box 1b in Part 1 of Form 982 and attach it to your tax return. Form 982 includes an insolvency worksheet you can use to determine how much of the debt you can exclude from your debt income.
  • Principal Residence. If the cancelled debt was on your principal residence, you can exclude up to $2 million of the debt, or $1 million if married filing separately. Mind you, this does not apply to investment or vacation homes.

Don’t Panic, You May Be Exempt

If you receive a 1099-C Form, try not to panic. You may be exempt from paying taxes on the debt income, and if not, you probably can exclude a big chunk of it.

However, negotiating debt income matters with creditors and the IRS is a complex matter and hiring a tax professional with experience in debt income cases may save you a lot of cash, time and grey hairs in the end. Consider hiring a qualified tax advisor with experience in debt income matters. She can determine whether your cancelled debt is taxable; help you calculate how much you can exclude; and manage negotiations with creditors.


Are You Leaving Unclaimed Tax Money on the Table?

We could all use a few extra bucks now and then, and at times face incredible hardships just to make ends meet. But few of us realize just how much unclaimed tax money that may very well have our name on it.

Unclaimed Tax Money Total = $60 billion

According to a 2013 article on CNN Money, there is currently close to $60 billion in unclaimed cash and benefits out there waiting to be collected. The Federal government is sitting on a total of $18 billion that belongs to its citizens, while State and Local governments hold close to $42 billion. This astonishing figure is comprised of a collection of many different types of forgotten funds including abandoned bank accounts, retirement funds that go unclaimed, un-cashed paychecks, unclaimed tax refunds, insurance payouts, and many others.

One of the largest amounts of unclaimed money being held by the US treasury is from people not cashing in their savings bonds, currently close to $16 billion worth. Additionally, the IRS recently estimated the amount of tax refunds that have not been collected by hard working Americans at $917 million for the 2009 tax year alone.

Get Your Billion Back

We all know that the IRS can be relentless when it comes to collecting tax money that is owed, but they are considerably less assertive when it comes to trying to reach people who have unclaimed tax refunds. The majority of this unclaimed tax refund money comes from people who don’t think they need to file a tax return because they did not earn much, or from people overlooking some of the many tax credits that are now in effect.

But you had better act fast if you think some of this money might belong to you, because the government has imposed a law stating that the IRS only has to have a 3 year waiting period to hold these unclaimed funds. If you do not file a tax return to try to collect within those 3 years, your refund officially becomes property of the US Treasury.

“We’re not talking about free money here,” said Peter Sepp, Executive VP of the National Taxpayers’ Union. “This was money that an individual or a family earned and gave too much of to the federal government. They should get it back.” This sentiment has been echoed by many and has even prompted H&R Block to launch their newest campaign, urging Americans to “Get your billion back”. They have aired numerous commercials as well as other marketing for this campaign, offering assistance in retrieving some of this lost cash and putting it back in the pockets of the hard working citizens that it belongs to.

Unclaimed Property Recovery Programs

According to The National Association of Unclaimed Property Administrators (NAUPA), unclaimed property laws have been around since the 1930’s, but have only recently become broader and stricter in enforcement. Property becomes “unclaimed” when an organization loses contact with the owner of the property for a period of one year or longer. At that point, these organizations are required to turn over these funds to a State Official who is responsible for trying to find the rightful owner.

These State Officials have developed many programs to try to reunite the owner with their lost money, including developing a national database This program alone is responsible for getting nearly $2 billion a year back to its rightful owners.

While there are numerous companies out there that offer services to help you reclaim some of your potential missing cash, beware of those that offer this service after paying a fee. There are plenty of organizations that offer this assistance free of charge, such as the website which is managed by the NAUPA. From their site you can find links to begin your search of any of the 50 states unclaimed property databases to see if you have money out there waiting to be claimed.

Savings Bonds, Pensions, and Forgotten Funds

The Treasury Department has a website where you can search to see if you have any matured yet unredeemed savings bonds. All you will need to perform a simple search is your social security number (or the SS# of the person who gave you the savings bond as a gift). Additionally, the FDIC has a website available to search for unclaimed funds from closed banks at, where you can search by name and state for any money that might be waiting with your name on it.

The Pension Benefit Guaranty Corporation is the US Government Agency that is responsible for paying benefits on failed pension plans. You can search their website to see if you have any unclaimed pension or retirement funds. The United States Department of Labor can also help with locating lost or forgotten retirement funds.

Claim Your Money–It’s Yours

Searching for lost or unclaimed money in your name isn’t difficult and doesn’t take long. The results can be considerably beneficial to those who find forgotten funds. Just think of all the wonderful things you could do if you had some extra money in your pocket right now. After all, you won’t have anything to lose once you search to find what you’ve already forgotten!

The Top 500 Delinquent Taxpayers in California

When you’re more than $132 billion in the red, you have to get creative with your revenue. The California Tax Franchise Board certainly has. In 2007 it started compiling a list of individuals and corporations who owe at least $100,000 in California state taxes. The list started as a top-250 list but in April of 2012 expanded to 500.

The Top 500 Delinquent Taxpayers in California

Last year, the list received much more attention. Probably because it included celebrities such as actress and model Pamela Anderson, film director Nick Cassavetes, and Halsey Minor, the co-founder of CNET, who topped the list with nearly $11 million in back taxes.

This year the list lacks any big showbiz names. Instead it is dominated by lawyers, contractors, realtors, doctors and dentists, which isn’t going to sell many tabloids. As of December 2013, California’s top tax delinquents are Mon B. and Mimi Hom of Los Angeles, who owe a whopping $6.3 million in personal state income tax. The Corporation with the largest tax debt is Sharon A. Bogerty, M.D., Inc of San Jose, which owes nearly $3.4 million in corporate income taxes.

By law, the Franchise Tax Board is required to include the names and status of any professional licenses held by tax evaders on the list. In the case of corporations, the FTB must include the names and titles of the officers of the businesses on the list.

Additional Incentives

Naming and shaming is not the only method the Tax Franchise Board has to motivate delinquent taxpayers. New legislation passed last fall, the Delinquent Taxpayer Accountability Act, gives the Tax Franchise Board new powers, which give it the ability to inflict some serious pain.

These powers allow the Tax Franchise Board to suspend the occupational, professional and even driver’s licenses of delinquent taxpayers that make it on the list. This means you could lose your CPA license, medical license, or even your driver’s license if you don’t pay your taxes. Top 500 delinquent taxpayers are also banned from entering into contracts for providing services and goods to state agencies.

State Reciprocal Agreements

The Delinquent Taxpayer Accountability Act also grants the California Tax Franchise Board with the authority to enter into reciprocal agreements with its counterparts in other states. These agreements allow California to collect from taxpayers who live in other states by using their tax refunds in other states to offset the tax debts in California.

As of December 2013, the only state California has such an agreement with is New York. However there are plans to expand this to other states, such as Illinois. These “I’ll scratch your back if you scratch mine” deals allow states to target state income tax evaders who jump state after accruing large tax debts.

Naming and Shaming Works

Naming and shaming has reaped significant results. According to the Tax Franchise Board, more than $166 million have been recovered since 2007 through the Top 500 program. Further evidence of the program’s success is that celebrities who appeared in the 2012 list have since put their affairs in order with the taxman.

The Delinquent Taxpayer Accountability Act requires the California Tax Franchise Board to notify candidates they have 30 days to resolve their accounts to avoid appearing on the list. Many delinquent taxpayers provide the Tax Franchise Board with proof of hardship, set up an installment payment agreement or pay their debt in full, and their names are not published. This is why if you ever visit the TFB’s Top 500 list you won’t see 500 names.

If your name is on the list, Optima Tax Relief can help you make arrangements to resolve the issue or correct any mistakes. Contact us today at 1+800-965-3192.

Photo: BlueRobot

Boxer Fights Tax Wars on Two Shores

Manny Pacquiao battles BIR and IRS

Filipino boxing phenom Manny Pacquiao is hard to beat in the ring. Named the “fighter of the decade” in 2010 he’s a force to be reckoned with. Now, he can’t seem to catch a break. He’s in the ring with two formidable foes, the Bureau of Internal Revenue (BIR)in the Philippines as well as the IRS. The BIR says he owes 2.2 billion pesos (equivalent to $50.2 million) for income earned in 2008 and 2009.

Paquiao says that money was earned in bouts that occurred in the United States, and maintains he paid the taxes he owed on those amounts, to the IRS, as required. Thanks to a tax agreement between the two countries, taxpayers are not subject to double taxation, which is Pacquiao’s defense.

Tax commissioner Kim Henares, however, says that in two years, the boxer has provided no documentation, proving that he made U.S. payments. She told ABS-CBN television news, “2.2 billion (pesos) is what Pacquiao owes now because of surcharges and interest.” She added, even if he did pay the taxes due in the United States, he would owe more to the Philippines because their tax rate was higher at the time.

While he works to clear up the mess, his accounts in the Philippines have been frozen and a lien has been placed on his property worth millions, leaving him unable to pay his staff. If he does not pay the taxes owed, said Henares, the authorities could take the payments by stripping away his assets.

Now to the IRS

Pacquiao’s promoter, Bob Arum and his attorney, Tranquil Salvador maintain the U.S. taxes was paid and that proof is on the way. But in recent days, the IRS states he failed to pay income tax on his earnings from 11 fights in 2006 to 2010, leaving a tax debt of $18,313,668.79.

Pacquiao’s representatives say certified documents are on the way, which prove his U.S. tax liabilities were paid (at least for 2008 and 2009, the years in question by Filipino authorities). But they say they will not give the proof to the BIR, preferring to fight the charges in court.

To fight back against the tax authorities he went on a public campaign on all of the major TV networks in the Philippines, accusing the BIR of harassment. “I’m not a criminal or a thief. I am not hiding anything. I will face my problems as they come.”

Avoiding the U.S.?

As Pacquiao fights this battle on two fronts, the only thing that is clear is that he needs serious legal help to untangle the tax mess. Meanwhile, Arum has told reporters his client may never fight in the U.S. again because the tax burden is too heavy. Whatever he earns in the United States, 39.6 percent comes off the top. And depending on the state where the fight is held, another tax bite might be taken.

“Manny can go back to Las Vegas and make $25 million, but how much of it will he end up with — $15 million?” His client can fight in China for a smaller purse, $20 million, and keep all of it.” Arum added, “He’d have to be a lunatic” to fight in the United States and let his winnings disappear that way.

Tax matters can be complex even for those without foreign income issues. Toss in foreign tax agreements and the issues grow sticky pretty fast. Individuals with who have foreign income issues are advised to seek tax representation from professionals with vast experience untangling the tax web.