Tax

Payment Alternatives When You Owe the IRS

If you cannot pay the full amount of taxes you owe, don’t panic. You should file your 2014 tax return on time and pay as much as possible. This will help reduce the penalties and interest that may result from a late tax payment. If you can’t afford to pay what you owe in full, there are available alternatives.

IRSPayment Plans

A payment plan may be an option. You can request a short-term payment plan up to 120-days. There is no user fee for a short-payment plan.

You can also request a longer term monthly payment agreement. A one-time $120 user fee applies to monthly payment plans; the fee is reduced to $52 if you make your payments by direct debit.

Individual taxpayers who owe more than $50,000 and businesses that owe more than $25,000 are required to submit a financial statement with their request for a payment plan.

Offer in Compromisetaxes

An Offer in Compromise is an agreement between you and the IRS to settle your tax debt for less than the full amount you owe. The offer program provides eligible taxpayers with a path toward paying off their tax debt and getting a “fresh start.” Not everyone will qualify for an offer. Use the IRS Offer in Compromise Pre-Qualifier Tool to see if the Offer program is right for you.

Other Options

If you do not find an option that works for you, other alternatives, including a temporary suspension of IRS collection efforts, may be available. Contact the IRS immediately to discuss these other options.

IRS-Tax-DebtRegardless of which option you choose, it is important to know that the IRS has a minimum of 10 years to collect your taxes from the date they were assessed. Many people don’t know that there are ways this time period can be suspended. For example, by law, the time to collect may be suspended while the IRS is considering your request for an Installment Agreement or Offer in Compromise. If your request is rejected, they will suspend collection for another 30 days, as well as during any period the Appeals Office is considering your appeal request.

If you live outside the U.S. continuously for at least 6 months collection will be suspended while you’re outside the country. Should you be in the middle of a bankruptcy, there is an automatic suspension for a time period because of the automatic stay plus 6 months. Also, if you request a Collection Due Process hearing, collection will be suspended from the date of your request until a Notice of Determination is issued or the Tax Court’s decision is final.

Beginner’s Guide To General Tax Info For Married Couples

So you’re newly married and looking for general tax info, but you’re not sure of how to start. Look no further. We’ve prepared a beginner’s guide for filing tax returns for married couples.

Married couples may file either jointly or separately. Advantages and disadvantages vary for each filing status according to your joint debt load, your income and other factors.  Most married couples benefit financially by filing jointly These benefits include the following:

  • The unemployed spouse can have a fully-funded, tax free traditional Individual Retirement Account
  • A legally recognized marriage can protect the estate
  • Married couples are entitled to higher charitable contribution deductions.

In addition, there are several drawbacks to married couples filing separately, including:

  • The Alternative Minimum Tax exemption for married couples filing separately is half the amount allowed for married couples filing jointly.
  • Adoption credits and exclusions are usually not allowed.
  • The capital loss deduction limit is $1,500 for married couples filing separately, versus  $3,000 for married couples filing jointly.

Married couples living in community property states must divide expenses for state taxes. Mandatory community property states are  Arizona, California, Idaho, Louisiana, Nevada, Mexico, Texas, Washington, and Wisconsin. Alaska is an opt-in community property state.

Tax filing requirements vary for same-sex married couples. They may file joint federal tax returns due to the defeat of the Defense of Marriage Act. However, they may or may not be entitled to file joint state tax returns. Joint returns are allowed in states that recognize same-sex marriage. For same sex married couples who live in states that do not recognize their marriages as legal, states may require one of three possible scenarios:

  • File separate returns by allocating income according to a schedule.
  • Complete pro forma federal returns and use that information.
  • Allocate income based on a ratio.(Alabama only)

If you are unsure of what to do, test the waters by enlisting the aid of a tax professional.

 

General Tax Info To Help Take Some Of The Stress Out Of Next Tax Season

It is important for small businesses to understand that the federal government is cracking down on business owners who try to evade reporting requirements.

At one time, it was possible for small business owners to increase their income by operating small, cash-only enterprises. They skirted the IRS reporting requirement for large bank deposits by making frequent deposits of less than $10,000 each.  No longer.

The tactic is called structuring and it is strictly illegal, and the the government has a powerful new weapon to prevent it. The law now allows the government to seize bank accounts merely on suspicion of wrongdoing — and frequent, small deposits arouse scrutiny. Family-owned businesses and even individuals saving for their children’s college education can be targeted.

An October 2014 article in The New York Times includes several points concerning the new law that all citizens — not just business owners — should be aware of:

  • Making small bank deposits, even frequently, is perfectly legal.  It is the attempt to skirt tax reporting requirements that is against the law. However, it is up to the individual to prove that he or she has done nothing wrong.
  • A bank statement is all that is needed for banks to file suspicious activity reports. Last year banks filed more than 700,000 such reports.
  • Fighting bank account seizure in the courts can require individuals to accrue legal costs of $20,000 or more. Many middle class individuals simply cannot afford that sum — and simply give up, even when they are totally innocent.

It is still important to use bank accounts to obtain FDIC protection. However, to avoid being caught by an accusation of structuring, middle income earners should adhere strictly to the law:

  • Always make deposits of at least $10,000 so that the bank will have to file the necessary reporting paperwork with the IRS.
  • Collect smaller amounts of money in a safety deposit box until you have accumulated enough cash to make a deposit that will trigger the reporting requirement
  • By adhering to the law, you may be saving your business or your financial future.

The IRS recently reported that it is scaling back on future seizures, focusing on cases where there seems to be a clear indication of illegal structuring rather than on ordinary individuals. Nonetheless, it’s better to play it safe. Avoiding even the appearance of structuring is well worth the increased taxes you pay on large bank deposits.

Budget Cuts Could Delay Tax Returns

The budget cuts felt by the IRS could trickle down to taxpayers in the form of delayed tax returns, warn insiders and experts.

BudgetCutSignificant Cuts

According to IRS Commissioner John Koskinen, the IRS suffered budget cuts in excess of 300 million dollars this year, which has led to short staffing and difficulties when working through returns. As a result, taxpayers are likely to experience much longer wait times to speak with IRS customer service representatives.

As the filing deadline draws closer, experts warn that longer and longer wait times will be the norm. There simply is not enough staff available to handle all of the calls that come in during prime tax season.

Longer Waits

waiting

In addition, taxpayers expecting refunds will also have to wait longer, especially if they file paper returns. Paper returns require manual review, and there are simply fewer employees available to handle such reviews. Experts anticipate the stack of returns will grow larger and larger as tax season progresses, leading to significant backlog. There are also serious concerns among experts concerning the quality of return processing by IRS workers. With fewer hands on deck, employees are more likely to experience burnout that could lead to errors or missed fraudulent returns resulting from identity theft or attempts at tax fraud or evasion.

whatyoucandoWhat You Can Do

While taxpayers chomping at the bit for tax refunds will have to exercise patience, there are things that tax filers can do expedite the process, according to the IRS commissioner,

  • Electronic filing is much faster and more efficient than filing paper returns. And the majority of taxpayers qualify to e-file their federal returns for no charge.
  • Utilizing the services of a professional accountant or tax attorney can reduce errors and help taxpayers avoid IRS inquiries for further information. The money spent to pay a professional to prepare your tax returns could be money well spent this year.
  • Complete your returns sooner rather than later if you’re expecting a refund. Waiting until the April 15 deadline increases the likelihood that your paperwork will be buried in the onslaught of returns filed during the IRS’ busiest season.

The bottom line is simple:  the IRS is short-staffed, and the general public must remain patient and work with the IRS as tax returns are generated and mailed or e-filed.

Health Coverage Exemptions: What Are They, Who Is Eligible, And How To Claim Them

The Internal Revenue Service reminds taxpayers that they will see some new things on their 2014 tax return involving the new health care law, also known as the Affordable Care Act or ACA.

healthcare_reformWhat Is It?

Under the ACA Individual Shared Responsibility Provision, taxpayers are required to obtain and pay for qualifying health care coverage throughout the year. If the taxpayer does not obtain this coverage or fails to pay the monthly premiums, they will be required to pay a tax penalty when they file their tax returns.

Who Is Eligible?

Some taxpayers may qualify for an exemption from this requirement if they fall into one or more of the approved exemption categories. These exemptions may be made for a variety of reasons including when affordable coverage is not available, when a taxpayer had a coverage gap of less than three calendar months, or if they are low income and their state did not expand Medicaid.

To complicate matters further, some taxpayers may have coverage or qualify an exemption during some months, and owe a payment for other months.

If you were without qualifying health coverage for any period of time during 2014, you should determine if you qualify for a health coverage exemption. If you qualify for an exemption, you will not have to make the individual shared responsibility payment for that month.

An exemption tool is available at HealthCare.gov to help determine if you qualify.

The following is a list of the most common health coverage exemptions currently in place:connection

Unaffordable Coverage: You may qualify for this exemption if your available health care coverage is considered unaffordable. Coverage is considered unaffordable if the lowest amount you would have paid for available employer-sponsored coverage or for coverage through the Marketplace is more than eight percent of your household income for the year.

Short Coverage Gap: You may qualify for this exemption if you went without coverage for less than three consecutive months during the year.

General Hardship: You may qualify for this exemption if you experienced circumstances that prevented you from obtaining coverage under a qualified health plan, including, but not limited to, homelessness, eviction, foreclosure, domestic violence, death of a close family member, or unpaid medical bills.

Income Below The Return Filing Threshold: You may qualify for this exemption if your household income or gross income is below your minimum threshold for filing a tax return.

Resident Of A State That Did Not Expand Medicaid: You may qualify for this exemption If you are determined ineligible for Medicaid solely because the State in which you live does not participate in Medicaid expansion under the Affordable Care Act. Also, if your household income is below 138 percent of the federal poverty line for your family size and at any time in 2014 you lived in a state that does not participate in Medicaid expansion, you may be eligible for this exemption.

Certain Non-citizens: Individuals who are not U.S. citizens or nationals and are not lawfully present in the United States are exempt from the individual shared responsibility provision. For this purpose, an immigrant with Deferred Action for Childhood Arrivals (DACA) status is considered not lawfully present and therefore is eligible for this exemption. An individual may qualify for this exemption even if he or she has a social security number (SSN).

Members Of Indian Tribes: You may qualify for this exemption If you are a member of a federally-recognized Indian tribe, including an Alaska Native Claims Settlement Act Corporation Shareholder, or if you were otherwise eligible for services through an Indian health care provider or the Indian Health Service.

How To Claim An Exemption

While you can claim most exemptions on your tax return, some exemptions require you to apply for the exemption through the Health Insurance Marketplace. No matter where an exemption is obtained, it will be reported or claimed on Form 8965, Health Coverage Exemptions.

Tax Filing Help: What Is My Filing Status?

According to the Pew Research Center, 74% of online adults use social networking sites. A common feature of these sites is the ability to publish one’s current “relationship status.” Facebook, for example, has ten possible relationship options including “married,” “single,” and probably applicable to all of us at some time: “it’s complicated.”

Although many people opt out of these personal declarations, taxpayers are required to choose an appropriate filing status on their Federal Income Tax Returns each year. And, similar to Facebook, choosing a filing status can be complicated.

The following is a brief discussion of the different filing statuses and how they may apply to you.

singleFiling Single

A person may file “single” if the taxpayer is unmarried or legally separated on the last day of the tax year.

The tax code is not kind to taxpayers who file single. For example, individuals who file single have a comparatively small standard deduction, and their income is taxed quicker and at higher tax brackets. Also, for deductions and credits with phase-out features (such as student loan interest deduction), these phase-outs take effect at the lowest levels of income.

Despite the bleak tax terrain, a taxpayer who files single does have access to numerous deductions and credits, such as tuition and fees deduction and the earned income credit, which might otherwise be unavailable if he or she is married but files separately.

For taxpayers who are married, but separated, there may be the option to file single. However, this exception applies only where the taxpayer is legally separated and the couple has lived separately for the last six months of year.

Head of Householdhead of household

A person may file “Head of Household” if the following requirements are met:

  1. A taxpayer is considered unmarried on the last day of the tax year,
  2. The taxpayer pays more than half of the home expenses, and
  3. The taxpayer’s home was the primary residence of a “qualifying child” or a “qualifying relative.”

Taxpayers who file as head of household have a definitive tax advantage over taxpayers who file as single. Not only is the standard deduction higher, but the tax brackets accelerate at a slower rate, not to mention the increased number of exemptions, depending on the household size.

Similar to the exception for filing single, the head of household status also has a few caveats. For example, a married taxpayer may file head of household if the criteria above is met, so long as the couple was separated for the last six months of the year. Unlike filing as single, this does not require a “legal” or formal separation.

Also, for unmarried taxpayers who jointly support a dependent child, the head of household status may be a way for both parents to share tax benefits associated with the child. This happens when a custodial parent agrees to “release the exemption” by completing Form 8332 and having the non-custodial parent file this form along with his/her return. Although the custodial parent releases the exemption, he/she may still file Head of Household and gain other tax benefits from claiming the child.

Married Filing Jointly married

A taxpayer may file jointly if he/she has:

  1. Married and lived with his/her spouse throughout the tax year, or
  2. Married and not lived with his/her spouse, but has not been divorced or had a legal separation agreement.

In most circumstances, a married taxpayer who files jointly will enjoy a lower tax liability than with any other category. This is because the tax brackets accelerate slower, many tax benefits are doubled (such as the standard deduction or the primary exclusion for sale of a principle residence), and phase outs of certain tax benefits occur at much higher levels of income. Filing jointly also does not restrict access to credits and deductions that might be disallowed if filing separately.

Joint filers should realize, however, that in the event of an audit or underpayment of estimated taxes by one spouse, both signers will be fully responsible for correcting any issues with the return or deficiencies in taxes paid.

Married Filing Separatelyseparate

A taxpayer who is entitled to file married filing jointly, also has the option of filing “married filing separately”. There is a long list of disadvantages for filing separately, including the disallowance of numerous tax credits and deductions, as well as disadvantageous changes in how certain types of income are taxed, such as social security benefits. There are, however, some very important reasons why you may consider filing separately:

Separate liabilities – If either you or your spouse plans to file an aggressive tax return or if you anticipate an unpaid tax liability, filing separately can protect the other spouse from being jointly liable. Filing separately can also protect the refund of a non-liable spouse if the other taxpayer has prior debt for which their tax refund may be seized. In either situation, filing separately protects a married taxpayer from potential liabilities incurred by their spouse.

Preferential Tax Treatment – In some situations, filing separately will actually result in a lower individual tax liability. For example, if significant medical expenses are incurred during the year, the 10% AGI limit with the joint income may be too high to claim any benefit. However, by filing separately, the 10% AGI threshold could be much lower, allowing the taxpayer to deduct more of the medical expenses when filing separately. It is important to note however, that if one spouse files separately, the other spouse is also required to file separately. Therefore, taxpayers should review their separate returns together and compare those results to a joint return to determine the net benefit.

widowerQualifying Widow(er)

A taxpayer will qualify as a “qualifying widow(er)” if:

  1. The taxpayer’s spouse died in 2012 or 2013
  2. The taxpayer did not remarry before Jan 1, 2015
  3. The taxpayer paid more than half the costs of maintaining the home
  4. The home was the primary home for a dependent child during the tax year

Generally, in the year the taxpayer’s spouse has died, the taxpayer can file a joint return with the deceased spouse. The tax benefits of filing jointly is carried forward two additional years with the qualifying widow filing status, which provides greater tax benefits than filing as head of household. Effectively, the qualifying widow status allows the surviving spouse the same standard deduction and tax bracket as a joint-filer. This status, however, is only available to surviving spouses who have a dependent child in the household.

In conclusion, a taxpayer’s life and “status” may change from year to year, often making it a complicated process when trying to file their tax returns. While updating your filing status with the IRS may seem about as daunting as choosing your relationship status on social media sites, being aware of how the IRS defines each filing status will make that decision much easier and ultimately more beneficial for you.

Don’t Hang On: Check Out IRS.gov for Tax-Related Information

IRS building

This coming week which includes the Presidents Day holiday, is traditionally one of the busiest periods of the year for the IRS, with long wait times for individuals attempting to contact the IRS by phone. This year promises to be no exception. If anything, wait times should be even longer, if an earlier report from the IRS Taxpayer Advocate is to be believed.

 

Potential Long Telephone Hold Times For Taxpayers

on hold

According to the report, the IRS has been severely hampered in its ability to respond to telephone inquires from taxpayers due to cuts mandated by the sequester. Coupled with the expected surge in phone calls during the Presidents Day holiday period, the result could be extremely long waits for anyone hoping to reach an IRS agent by phone. The advice from the IRS is simple: don’t call us.

Instead, the IRS advises taxpayers that many of the answers they seek are available through the IRS.gov website, which operates 24/7 with no holds and no waiting. In fact, the IRS.gov website contains a wealth of information on subjects ranging from tax refunds to resolving overdue tax bills. The following list includes topics covered by IRS.gov. By checking out its resources, including 1040 Central and the IRS Services guide, you may save yourself from the frustrating experience of waiting, and waiting — and waiting – to attempt to reach an IRS agent by phone.

Where’s My Refund?   wheres my refund

If it’s been less than 21 days since you filed your federal income tax return, don’t expect an IRS representative to respond to inquiries concerning the status of your refund. Instead check out the Where’s My Refund tool on IRS.gov or via the free IRS2Go Smartphone app, available for iOS and Android mobile devices. Plug in info on your current, pending refund to obtain its current status. Status updates for “Where’s My Refund?” occur once every 24 hours, usually overnight, so checking once each day is sufficient.

No W-2? Try This Before Calling The IRS

By law, employers are required to supply workers with W-2 forms on or before January 31 each year. If you haven’t received yours by the middle of February, check with your employer to determine if your correct mailing address is on file. If appeals to your employer don’t yield your W-2 form, by all means, contact the IRS, which will issue a letter to your employer. But it’s best to wait until after the Presidents’ Day rush if possible. In the meantime, you can begin working on your tax return by using information from your final pay stub from 2014.

Need Help Preparing Your Tax Return? Volunteers And Free File Have Your Back

help

If you’re tearing your hair out trying to complete your tax return, but cannot afford a commercial tax preparer, don’t despair. Check out IRS.gov for a listing of volunteer tax assistance available to low income taxpayers and seniors. The Volunteer Income Tax Assistance (VITA) program provides assistance to taxpayers with income of 53,000 dollars or less, disabled individuals, seniors and taxpayers with limited or no English speaking ability. The Tax Counseling for the Elderly (TCE) provides assistance to all taxpayers, especially seniors age 60 or older, who have questions about pensions and retirement-related issues. Information on both programs is available through IRS.gov.

Can’t Pay Your Tax Bill? Don’t Panic

bill

Individual taxpayers who owe 50,000 dollars or less or businesses that owe 25,000 dollars or less in combined taxes, penalties and interest are eligible to establish an installment agreement through the Online Payment Arrangement Application available on the IRS.gov website. The fee for establishing an installment agreement is 52 dollars for direct debit, 120 dollars for standard or payroll deductions or 43 dollars for low income taxpayers. The system is available from Monday through Friday from 6:00 a.m. to 12:30 a.m., Saturday from 6:00 a.m. to 10:00 p.m. and on Sunday from 6 p.m. to Midnight. All times listed are Eastern Time.

If you don’t qualify to apply online, you can still request an installment agreement by completing Form 9465 – Installment Agreement Request and Form 433-F – Collection Information Statement. Submit the complete forms, along with the fee by mail. You can also contact the IRS by phone at 1-800-829-4933, but again, it’s best to wait until after the holiday period to make the call. Even then, expect a lengthy wait.

If you wish to establish an Offer in Compromise, the process is more complex. But you can determine whether you should even undertake the effort by utilizing the Offer in Compromise Qualifier available through the IRS.gov website. Bear in mind that even if the results indicate that you may be eligible, there is no guarantee that an Offer in Compromise will be approved.

Missing Tax Return? Request A Copy Or A Tax Transcript Online

irs-logo

If you are missing crucial information from a prior year tax return, you can request a replacement copy from the IRS by submitting Form 4506 – for a cool 50 dollar fee, not to mention a lengthy wait of up to 75 calendar days before your request is processed. Ouch. If you need an actual photocopy of your return, you’ll have to bite the bullet and pay the price.

But in many cases, you can obtain the same information from a tax transcript — for no charge and on the spot via IRS.gov or the IRS2Go app. You can also go the old-school route and submit Form 4506-T by mail. Expect to wait five to 10 calendar days for your transcript to arrive. The following list indicates the types of transcripts that are available.

  • Tax Return Transcript: Available online and by mail, a Tax Return Transcript includes most of the information from Form 1040-EZ, Form 1040-A and Form 1040. A Tax Return Transcript is usually sufficient for applications from mortgages lenders and commercial student loans.
  • Tax Account Transcript: Available online and by mail, a Tax Account Transcript includes basic information such as return type, marital status, adjusted gross income, taxable income, credits and payments. It also indicates estimated payments or prior year overpayments applied to the current year tax return.
  • Record of Account Transcript: Available only online, a Record of Account Transcript combines information from the Tax Return Transcript and the Tax Account Transcript.
  • Wage and Income Transcript: Available only online, a Wage and Income Transcript includes income date from W-2s, Form 1099 and Form 1098. Information for the current year is generally not available before July.
  • Verification of Non Filing Letter: Available only online, a Verification of Non Filing Letter only indicates that you did not file a federal tax return for a particular year, not whether or not you are required to file a return for that year. Verification of Non Filing Letters for the current year are only available after July 15.

Have General Tax Related Questions? Check Out Publication 17, Tele-Tax Or The Tax Map

guide

Publication 17, published annually, is a searchable income tax guide that addresses questions such as who can be claimed as a dependent or whether you are eligible for the Earned Income Tax Credit. The Tax Map allows keyword searches for single-topic queries. The Tele-Tax line (1-800-829-4477) provides recorded information on a range of tax topics 24/7, with no wait.

 

Make IRS.gov Your Go-To Site For Tax-Related Information

IRS-website

As the above list indicates, IRS.gov is a rich resource of information and assistance. Content on the site is updated frequently, including download links for nearly all the forms needed to file tax returns and carry out tax-related functions. You can resolve many of your tax-related issues efficiently by utilizing the tools available. If your questions aren’t answered there, you can always consult one of the experts at Optima Tax Relief to resolve your tax-related issues.

 

 

Reporting Foreign Income To The IRS: What You Need To Know

You may live or work abroad, but if you are an American citizen or legal permanent resident, Uncle Sam still wants his rightful share of your income. Even if you reside outside the United States and receive earnings from a source located outside the United States, you must report that income.

Depending on your circumstances, you may have to pay taxes both to the government where the company from which you earned your income is located and to the Internal Revenue Service. However, in some cases you may receive tax credits or tax exclusions for some or all of your foreign income.

The details of reporting foreign income vary according to individual circumstances. Nonetheless, there are general guidelines for nearly everyone who receives foreign income.

Foreign Income Tax Credit

If you are taxed by the country from which your income is earned and that country has established a tax treaty with the U.S., you may be able to claim the Foreign Income Tax Credit. This credit was designed to help you avoid double taxation and allows you to claim a credit for income tax that you have paid to a foreign government. The intended net result of the tax credit is to ensure that the total income tax that you pay is no more than the highest result that you would have paid to a single government.

If you hire an accountant or a tax attorney to figure your taxes, he or she will undoubtedly apply the Foreign Income Tax Credit on your income tax return. Some tax preparation software programs also include provisions to calculate the Foreign Income Tax Credit if it applies to you. If not, choose a different tax preparation program.

Foreign Earned Income Exclusion

Do not confuse the Foreign Earned Income Exclusion with the Foreign Income Tax Credit. The Foreign Earned Income Exclusion is designed to allow American citizens and legal residents who reside outside the country to exclude most or all of the income earned from foreign sources from their federal income tax liability. The amount of the exclusion varies each year; for 2013 the maximum exclusion was $97,600 per individual taxpayer. Married couples could conceivably claim a larger exclusion.

The Internal Revenue Service has established strict guidelines for taxpayers who wish to claim the Foreign Earned Income Exclusion for a given tax year. Taxpayers must meet all the guidelines listed below to qualify for the exclusion.

  • Must have foreign earned income
  • Must have established a tax home in a foreign country
  • Must pass either the bona fide residence test or the physical presence test

The bona fide residence test requires that you are a bona fide resident in a foreign country for a period that includes at least a full tax year. The physical presence test requires you to be physically present in that foreign country for at least 330 days during a single 12-month period. You need not be present for 330 consecutive days, however.

foreign money

U.S. Government Employees Living Overseas

Income earned by employees of the United States government, including military personnel on active duty, does not qualify for the Foreign Income Credit or for the Foreign Earned Income Tax Exclusion, even if the income was earned overseas. However, spouses of government employees who earn income from foreign sources may be eligible for either the Credit or the Income Exclusion. It is necessary to consult with an attorney or accountant who specializes in this subject with specific questions about your particular circumstances.

Foreign Income Earned While Living in the United States

If you reside within the United States full time, in most instances, you must report income earned from foreign sources on your federal income tax return, even if you are taxed on that income by the foreign government. This requirement pertains to earned and unearned income. Self employed workers who earn income from foreign clients must also report their foreign earnings on their federal income tax returns.

No W2 or Form 1099? No Excuse

The requirement to report foreign income applies even if you do not receive a W2 Form, Form 1099 or equivalent form from the foreign income source. It is your responsibility to provide an accurate calculation of your income by calculating payments from pay stubs, wire transfer records, dividend reports, bank statements or PayPal monthly statements.

Once you calculate your foreign income, you must combine it with any domestic income you have earned in order to calculate the adjusted gross income to be included on your federal income tax return. Failure to report foreign income is considered tax evasion, and if you are caught, the consequences could be dire. You could be hit with hefty fines or even face jail time.

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.