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.

What Does Voluntary Compliance Mean, in Regards to Taxes?

The United States federal income tax system is operated under a system of voluntary compliance. This innocuous sounding term actually packs quite a potent punch. In actuality, there is little that is voluntary about the federal tax system, at least where paying taxes is concerned. Many celebrities and ordinary citizens alike have learned this lesson the hard way, almost always at great financial cost.

Voluntary Compliance and Audits

The “voluntary” nature of taxation relates to the method of submitting and paying income tax obligations. The Treasury department places the burden of figuring, reporting and paying income taxes in the hands of its citizens, rather than automatically collecting the revenue. In contrast, sales taxes and other use taxes are involuntary. Whenever you buy an item or service that carries sales tax, you not only pay the price of the merchandise or service, but the tax as well.

Although the IRS collects taxes under a voluntary compliance system, the assumption is that most of the population will fail to pay its full tax burden, either by mistake or by deliberate attempts at tax evasion. To remedy the resulting shortfall, the IRS has instituted a system of tax audits. A majority of audits are triggered by suspicious items included or omitted from tax returns. Other tax audits are generated because taxpayers who should file tax returns fail to do so or file so-called frivolous returns. An unfortunate minority of taxpayers are flagged for audits by random selection – just plain bad luck.

Tax Evasion and Frivolous Tax Returns

Throughout history, famous and infamous figures have been caught in the net of failure to comply with the “voluntary” system. Notorious gangster Al Capone died in prison as a result of a conviction of income tax evasion. More recently, celebrities like Martha Stewart, Wesley Snipes and Marc Anthony have been snared by convictions for federal income tax evasion.

One persistent but thoroughly discredited strain of tax protest arguments claim that federal income taxes are unconstitutional, or that taxpayers can eliminate their federal income obligations by filing “zero” tax returns. Snipes was one of the more famous figures taken in by this line of reasoning, and as a result was convicted of misdemeanor tax evasion in 2008 and sentenced to 3 years in prison. As of 2014, the movie star was back on the silver screen, headlining in the action feature Expendables 3. Presumably, Snipes will pay a rightful proportion of his earnings from the film, marketed as a summer blockbuster, to the IRS.

The IRS exercises little patience with taxpayers filing what it concludes to be frivolous returns. It imposes an array of civil penalties, listed below:

  • Accuracy-related penalty under section 6662 (20 percent of the underpayment attributable to negligence or disregard of rules or regulations)
  • Civil fraud penalty under section 6663 (seventy-five percent of the underpayment attributable to fraud)
  • Erroneous claim for refund penalty under section 6676 (twenty percent of the excessive amount)
  • Fraudulent failure to timely file income tax return (triple the amount of the standard failure to file addition to tax under section 6651(a)(1))
  • Frivolous submissions other than tax returns under the Tax Relief Health Care Law of 2006 ($5,000 penalty)

Criminal penalties for tax evasion based on frivolous tax returns can also be severe. Both fines and jail time may be imposed upon conviction. Specific penalties are listed below.

  • Felony for attempting to evade or defeat tax under Section 7201 provides as a penalty a fine of up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 5 years with optional additional fine up to $250,000
  • Felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter under section 7206 is a fine of up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 3 years with optional additional fine up to $250,000
  • Felony for promoting frivolous arguments and assisting taxpayers in claiming tax benefits based on frivolous arguments under section 7206(2) may be fined up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 3 years with optional additional fine up to $250,000

Corporate Taxes and Tax Dodges

Individual taxpayers are far from alone in their attempts to minimize their tax burdens. Complex accounting maneuvers with names like the Double Irish or Dutch Sandwich allow major corporations like Apple and Google to evade the 35 percent US corporate tax. But unlike tax evasion or frivolous tax returns, corporate tax dodges are largely perfectly legal – for now. Governments around the world have begun to put measures in place designed to curb offshore tax havens and other corporate tax evasion strategies.

Fair Tax System

The voluntary compliance system is far from the only viable system of income taxation. The so-called fair tax system is based on imposing use taxes – the more goods and services a person uses, the more taxes he or she pays. But fair use systems often impose a heavier burden on low-income taxpayers because they pay a higher proportion of their income use taxes. For this reason fair use taxes are often labeled as regressive — and aggressively unfair.

Simple Tax System

Supporters of a so-called simple tax system include tax expert Austan Goolsbee and policy wonk Ezra Klein. Under a simple tax system the IRS would calculate taxes, credits and deductions and provide taxpayers with a copy of the completed return. Taxpayers who agree with the IRS’s calculations could simply accept the return, while taxpayers who disagree could file their own returns.

The simple tax system has obvious advantages. The IRS has a good idea of what many taxpayers earn and owe anyway, thanks to Form W-2 and various versions of Form 1099. The simple tax system would also ensure nearly 100 percent compliance, since the IRS would be supplying tax returns rather than individual citizens.

As one might expect, the tax preparation industry (including TurboTax) largely disfavors the simple tax return system. Approximately 60 percent of all Americans contract with outside tax preparers to file their federal and state income tax returns. Implementing something like the simple tax system would cut deeply into that percentage.

While the simple tax return system is indeed simple, there are potential pitfalls. First, many taxpayers may accept the IRS’s version of their returns whether it is accurate or not from inertia, laziness or fear of reprisal. Second, even if the IRS and its agents were totally diligent in calculating the maximum credits and deductions, human error must still be taken into account.

Death and Taxes

Given the present financial and political climate, it is unlikely that the voluntary compliance tax system will change in the foreseeable future. It’s also a safe bet that attempts to evade taxes will continue, including extreme cases such as Facebook co-founder Eduardo Savarin, who renounced his American citizenship in 2012 shortly before the social media giant launched its IPO. In the face of such tax evasion attempts, the IRS will also undoubtedly continue its enforcement strategies, including the dreaded audit.

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

Is a Tax on Sugary Drinks Coming?

It is well-known that America has an obesity problem. The Centers for Disease Control reports that 34.9 percent of all Americans are obese. The obesity rates among African Americans are even higher: 47.8 percent. About 42 percent of Latinos are obese, along with about 33 percent of non-Hispanic whites. By contrast, only about 11 percent of Asians in the United States are obese. A major driving factor behind these shocking figures can be linked to the American diet, which is largely derived from sugar.

Related article: The Mexican Soda Tax

Sweet as Sugar

Sugary drinks are an especially prevalent culprit, as they represent almost nothing but empty calories. There have been several attempts to curtail the consumption of fattening foods and especially sugary substances. This includes former NYC mayor Michael Bloomberg’s ill-fated attempt to ban the sale of sugary drinks in selected establishments. But while the proposed cup-size ban was one of the most attention-getting proposed measures, it was hardly unique. Mexico proposed its own tax of one peso per liter of sugary drinks sold within the country in October 2013.

In 2011, Denmark went even further, instituting a ban on saturated fats. It was repealed the following year due to administrative burden and sheer unenforceability. People simply crossed the border into Germany or France where the ban was not in effect. So legislation to curtail consumption of sugary drinks is dead, right?

Taxing Ourselves to Health

Not so much. A recently-published study by the American Journal of Agricultural Economics suggests that such bans may be just the ticket for cutting the consumption of a substance linked to Type 2 diabetes, heart disease and even cancer. According to the study, a tax of just 6 cents on a 12-oz can of pop could result in the consumption of 5,800 fewer calories from sugar by consumers every year. The logic makes sense. Many smokers and ex-smokers cite hefty taxes on cigarettes as an incentive to kick the habit.

Nonetheless, it is fair to say that instituting such a tax would require a heavy lift. A measure proposed by Massachusetts to extend its stiff 6.5 percent sales tax to candy and sugary drinks failed. A 2012 proposal by Florida to prohibit the purchase of junk food and sugary snacks with food stamps also failed. This proposed measure could be viewed as discriminatory against poor people rather than as an attempt to promote improved public health, though.

Bloomberg’s Folly

Although by many accounts he was considered to be an effective and even powerful mayor, Michael Bloomberg suffered one major defeat: his attempt to impose a hefty tax on sugary drinks was struck down in the courts. The tax would applied to movie theaters, restaurants and street trucks but not to the same drinks in grocery stores.

But don’t count Bloomberg’s tax out just yet. Recently-installed mayor Bill de Blasio is also in favor of taxing supersized soft drinks. In fact, top officials in the city placed an appeal to the court on June 4, 2012 to reconsider the ruling, insisting that the local Board of Health possesses the authority to impose legislation such as a ban on large sized sugary drinks. A ruling is not expected from the Court of Appeals before July 2014 – so those Fourth-of-July barbecues should be safe – this year.

A Model for Success?

A major factor in the downfall of Bloomberg’s decree was its inconsistency. A uniformly applied tax on all sugary drinks would not face the legal hurdle of attempting to justify why some establishments should be burdened by a ban or prohibition while others were not. Likewise, for such a tax to work, it must be applied over a wide enough area so that it is impossible, or at least highly inconvenient, for individuals intent on beating the tax to simply cross a nearby border. An optimum model may be to combine the stick of a tax or prohibition on junk food with a carrot such as First Lady Michelle Obama’s Let’s Move campaign. This combats childhood obesity by reintroducing young people to the pleasures of activity and fresh air.

Want to learn more about sugar and obesity? Check out the new film “Fed Up,” a new movie targeting sugar in schools.

How To Escape The Alternative Minimum Tax?

In 1969, Treasury Secretary Joseph W. Barr had some shocking news to share with Congress. It wasn’t a report on the cost of having 543,400 soldiers posted in South Vietnam, the peak of the entire war. It was something much more shocking. His minions had discovered that 155 individual taxpayers with incomes exceeding $200,000 (around $2 million in 2014 dollars) were so good at milking tax loopholes they were not paying any federal income tax.

The report created a political fireball. More people wrote to members of Congress complaining about the 155 taxpayers than about the Vietnam War. That was just after 1968, the bloodiest year in the conflict, which had seen 16,589 military casualties and $77.4 billion spent in military costs.

Congress reacted with unparalleled speed. Before the end of the year, Congress had passed the Alternative Minimum Tax, a law specifically designed to stop wealthy individuals from abusing tax deductions. Congress didn’t move quite so fast on Vietnam, which dragged on for another 6 years, but at least those 155 freeloaders were stopped in their tracks.

What is the Alternative Minimum Tax?

The AMT is a parallel tax system that has its own methods and rules for calculating tax liability. Put simply, AMT eliminates many of the exemptions, tax credits, and deductions taxpayers use to reduce their tax bills under “normal” tax rules. The AMT system is much simpler; it has only two tax brackets: the 26% tax bracket and the 28% tax bracket. The result is that more income may be taxable under AMT rules than with “normal” tax rules.

Both tax systems, the AMT and the regular tax system, work in tandem. Taxpayers have the responsibility of using both systems to calculate their tax liability and using whichever system generates the most expensive tax bill. In lower income brackets, the regular tax liability is usually higher because of AMT exemption amounts. In 2014, the first $52,800 for single filers and the first $82,100 for married people filing jointly were exempt from the AMT. At higher income levels, the AMT is not so forgiving.

Who Is at Risk?

What started as a patch to stop 155 wealthy taxpayers from completely avoiding taxes now is now a tax behemoth that affects around 3.8 million taxpayers, according to a report by the Urban-Brookings Tax Policy Center.

According to figures published by the Tax Policy Center, in 1970, the AMT collected just $122 million, barely 0.1% of all individual income tax revenue for that year. Fast-forward to 2010, the AMT generated $102 billion, over 10% of all individual income tax revenue.

The rules that determine when AMT rules apply are complex and there’s no single item that triggers it, but any of these scenarios could trip AMT liability:

  • Having a large family.
  • A gross income of more than $100,000.
  • Holding or exercising incentive stock options.
  • Receiving a large capital gain, such as selling real estate.
  • Earning passive income, such as profits from stock dividends, business investments, rent or commissions and royalties.
  • Excessive itemized deductions, such as state and local taxes, home-equity loan interest and medical expenses.

Damage Control

So, what happens if you are hit with the AMT? What can you do to minimize the impact on your tax liability?
Walking the fine line between tax mitigation and tax evasion is hard enough under the IRS’s normal rules. Add the complexity of AMT and it starts to get crazy. If you suspect you may be hit with the AMT, you really should consider hiring a tax professional before taking any specific actions.

With that disclaimer in place, here a few steps you can take to minimize the damage of ATM rules.

1. Invest in Your Retirement

Reduce your adjusted gross income by investing as much as you can into tax-deferred accounts, such as a 401(k), a 403(b), a 457(b) plan or an IRA.

2. Invest in Pre-Tax Healthcare

Instead of including medical expenses as an itemized deduction, which are harder to claim under AMT, sign up for a pre-tax medical deduction plan. This will reduce your salary and help both the AMT and your regular tax.

3. Spread Gains and Losses

Reduce the impact of large, one-time gains and deductions by delaying the sale of an asset. If delay is not practical you can also spreading out big gain or losses by structuring payments into several installments.

4. Exercise Stock Options Strategically

If you know you are going to be subject to AMT, sell incentive stock options the same year you exercise them. If you exercise and sell in the same year, you have to pay regular tax on the income but not AMT. Even the AMT has a silver lining. If you decide to hold incentive stock options, wait to sell them in years when you don’t face AMT tax brackets.

5. Business Expenses Refunds are Your Friend

Ask your employer to pay you back for business expenses you incurred as an employee. Under AMT rules this is a tax-free event. Under regular tax rules, claiming for unpaid business expenses as an employee is smart because it reduces your taxable income. With AMT, any unpaid business expenses you claim for as an employee are added back to your income.

6. Take Bare-Minimum Deductions

Minimize your state and local tax deductions, a deadly AMT trigger, by only paying property taxes when they are due. Prepaying for state and local taxes is great when you claim them as a tax deduction, but under AMT rules they come back to bite you.

You May Need A Pro

Mitigating your taxes under the alternative minimum tax system can feel like someone moved the goalposts or changed the rules half way through a game, because most deductions and tax breaks no longer apply. Previously effective tax mitigation measures can become expensive tax traps and the most tax-efficient moves may feel counter-intuitive or even foolish. So, if you’re playing under AMT rules this year, you may want to consider hiring a tax professional who is used to the AMT playbook, even if you normally file your own taxes.

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.

3 Lessons We Can Learn from Toby Keith’s I Love This Bar & Grill’s Tax Warrant

These days, the celebrities and tax troubles go hand in hand. The Toby Keith’s I Love This Bar & Grill restaurant in Syracuse, New York, has been hit with a $189,000 tax warrant in back taxes according to the New York Department of State.

The chain of restaurants, which was inspired by Toby Keith’s 2003 country hit “I Love This Bar,” has 15 locations throughout the United States. The warrant was filed in Onondaga County, New York, on April 8. According to John Thomas, the chain’s marketing vice-president, the issue is being addressed. However, as of April 22, 2014, the warrant is still open.

The only reason the story of a restaurant with tax problems has got any traction with the media is because Toby Keith’s – who was named Billboard’s top country artist of the decade – is part of the business’s name. Still, there are three important lessons we can all take home from this story.

1. When It Comes to Business and Taxes, Be Careful What You Sign Up For

Toby Keith has no business interest in the Toby Keith’s I Love This Bar & Grill restaurant chain, except for a licensing agreement that allows the company to use his name. Each Toby Keith’s I Love This Bar & Grill restaurant is locally owned and operated, and therefore, Keith has nothing to do with the management of the restaurant. The actual business that was hit with the tax warrant operates under the rather less catchy name of CRGE Syracuse LLC.

Toby Keith, the person not the franchise, has quite a different view of taxes as his corporate namesake. In a 2011 interview with the Boston Herald on the subject of rich people paying higher taxes, he was quoted as saying to Country Weekly “It would be unpatriotic not to try to save the country. I’m sure people will bitch about it, but if it meant we get to operate in this country and live here another day, then so be it. ” However, that didn’t stop Keith from getting negative publicity for his namesake tax issues.

It is important to be aware of how a business is run and how it deals with its taxes before you attach your name, reputation and money to it. Even within a marriage, you must be confident your spouse is not involved in shady business, if you plan to file a joint tax return, as you could also be liable for their “mistakes.”

2. Don’t Mess With Taxes, Particularly Other People’s Taxes

Toby Keith’s I Love This Bar & Grill’s tax warrant is for back taxes on unpaid sales taxes. You may think that taxes are taxes, and that the type of back taxes you’re delinquent on doesn’t really matter; but you would be wrong. State taxation departments treat unpaid sales taxes more harshly than unpaid income taxes. While a state’s taxation department may be willing to accept a settlement on income taxes owed by a business in financial difficulties, sales taxes are rarely forgiven.

Why? Because sales taxes are paid by a business’ customers not the business. Sales taxes are added to the value of goods and services after costs and profit margins are factored into their price. Just like companies withhold income taxes from their workers wages and send them on to the IRS, businesses are not supposed to keep their clients sales taxes. When a business fails to transfer sales taxes to the state, it is, in a way, stealing from both its customers and the government.

3.Tax Warrants Aren’t Fun, But It Could Be Worse

The silver lining of getting a tax warrant on your business is that it could be worse. Look on the bright side: the taxman didn’t seize your company or sell its assets. Although that may still occur if you fail to pay your tax bills, tax warrants, like the one filed against Toby Keith’s I Love This Bar & Grill, allow businesses to remain open while they try to sort out their tax problems. Nevertheless, they do give the taxman the right to levy a business’s bank accounts and collect unpaid taxes.

If you would like to learn more about the thrilling world of tax warrants, read this article on how to remove a tax lien.

Yikes! Courtney Love Slapped with a $320K Tax Lien

Our attraction to the wealth, success and fame of celebrities is only eclipsed by our obsession with their downfalls. There is even a term for it: celebrity syndrome, which was — quite fittingly — coined by Oprah Winfrey, America’s favorite pop-psychologist. The Germans have an actual word for the pleasure derived from the misfortune of others: schadenfreude, which literally translates into English as harm-joy.

Our latest fix of schadenfraude comes in the form of singer and actor Courtney Love, who last Tuesday was on the wrong end of a $320k tax lien from the Internal Revenue Service.

Courtney Love is the widow of Nirvana lead-singer Kurt Cobain. She was also the lead-singer for her own rock band, Hole, and starred in several movies, such as “The People vs. Larry Flynt.” Last Tuesday, Love was hit with a $319,749 for unpaid taxes during 2012. This is not the first time Love receives bad news from the IRS. Love also had a lien of $324,335 filed against her in 2009 for unpaid taxes from 2007, which she has since paid off.

Maybe she should read our article on how to remove a tax lien.

We don’t know why Love has had trouble paying her tax bills. Previously, Love has blamed her financial woes on bad accountants and dishonest managers. For instance, she has repeatedly claimed that up to $250 million were lost from Nirvana’s earnings while her husband was still alive.

Tragically, according to an interview Love gave to Vanity Fair in 2011, financial difficulties were a big factor in her husband’s suicide. The Vanity Fair article quoted as saying, “We could never find our money! … Do you think Kurt would have killed himself if he had known he had $54 million?”

Love’s income comes from royalties and investments from Cobain’s estate and her acting and singing career. For people who have never earned $324,335 in a year, it can be hard to understand how someone can make enough money to owe $320k in taxes and still not have enough cash to pay her dues to Uncle Sam. However, it shouldn’t be a surprise. Being a talented artist, or being married to one for that matter, does not shield you from impulsive spending, financial illiteracy, plain bad decisions, or dishonest advisers. Anyone can mismanage his or her money, regardless of income level.

The only positive aspect of celebrity syndrome is that as we rubberneck on the financial woes of others we may stare long enough to learn how to avoid making the same mistakes. In the case of wealthy celebrities like Courtney Love there are two reminders worth considering.

First, it’s not how much you make that matters, but how you make do with what you have.

Second, it’s true you should always pay yourself first, but whatever you do, don’t forget to pay the IRS.

This brings us back to Love’s $320k tax lien. What is a tax lien? Is it the same as a tax levy? Does Courtney’s $320k tax lien mean the IRS can seize her home or car?

The short answer is no. Just because Love has a tax lien against her doesn’t mean the IRS has the right to seize her assets to pay off her tax debt. Although that may come later, if she doesn’t pay her taxes soon. A tax lien is a claim the IRS places on your assets. It stops you from selling your assets until you first pay the IRS. It’s similar to having a mortgage on your home; you can’t sell your home without first paying the mortgage.

Photo: Wikimedia Commons

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.

Terminology for a First Time Tax Filer

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.

Who Has 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.

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.