Tax

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 It was repealed the following year due to administrative burden and sheer unenforceability.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.

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

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

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

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

Why Do You Have to Pay Taxes on Cancelled Debt?

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

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

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

1099-C Disputes

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

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

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

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

Discrepancies and Tax Audits

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

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

Thank Goodness for Exceptions and Exclusions

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

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

Exceptions and Exclusions

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

Don’t Panic, You May Be Exempt

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

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

Photo: Getoutofdebt.org

Are You Leaving Unclaimed Tax Money on the Table?

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

Unclaimed Tax Money Total = $60 billion

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

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

Get Your Billion Back

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

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

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

Unclaimed Property Recovery Programs

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

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

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

Savings Bonds, Pensions, and Forgotten Funds

The Treasury Department has a website where you can search to see if you have any matured yet unredeemed savings bonds. All you will need to perform a simple search is your social security number (or the SS# of the person who gave you the savings bond as a gift). Additionally, the FDIC has a website available to search for unclaimed funds from closed banks at www2.fdic.gov/funds/index.asp, where you can search by name and state for any money that might be waiting with your name on it.

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

Claim Your Money–It’s Yours

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

Taxpayer Advocate, “The Voice of the People”

Tax season can be a very confusing and frustrating time for many Americans, especially in recent years as the IRS has implemented several changes that have impacted United States taxpayers.

Since 2010 the IRS has had its funding cut by 8%, including an 87% drop in their training budget, and have cut nearly 8,000 full time positions. Congress has meanwhile increased the responsibilities of the IRS which now plays a key role in the administration of Obamacare. When you also factor in the complications of last October’s government shutdown and automatic spending cuts imposed, it’s no wonder that many Americans dread having to have any dealings with the IRS.

The Taxpayer Advocate Report

But fortunately taxpayers have a resource fighting on their behalf in the Office of the Taxpayer Advocate, an independent office within the IRS that was created under the Taxpayer Bill of Rights 2 in 1996.  Nina Olson, current US Taxpayer Advocate, identifies the major problems that taxpayers face throughout the year and offers ideas and solutions for each of them in an annual report which is released each December. In addition to reporting these findings to the IRS, Olson is also the only IRS employee authorized to make legislative proposals directly to Congress.

In Olson’s most recent Taxpayer Advocate Service (TAS) report released last month, she identified the most serious problem that taxpayers face is trying to comprehend the complex and often changing IRS tax code. The TAS analyzed IRS data and found that taxpayers spend around 6.1 billion hours a year in attempting to comply with filing requirements. The report states that “if tax compliance were an industry, it would be one of the largest in the United States. To consume 6.1 billion hours, the ‘tax industry’ requires the equivalent of more than three million full-time workers.”

The report also states that “according to a tally compiled by a leading publisher of tax information, there have been approximately 4,680 changes to the tax code since 2001, an average of more than one a day.” This constantly evolving set of rules and regulations makes it difficult for honest taxpayers to keep up with the latest laws and much easier for criminals to commit tax fraud. The TAS report has suggested to both the IRS and Congress for a number of years that the current complex tax code needs to be simplified, and since it has been 28 years since the last fundamental tax reform enacted by Congress, it is perhaps long overdue.

Another major problem the TAS report addresses involves the impact of the IRS budget cuts on their ability to serve the American taxpayers. Because of the funding shortages that the IRS is dealing with, they are unable to answer millions of taxpayer’s phone calls each year, and only able to respond to about 47% of correspondence submitted by taxpayers. Last year the IRS was only able to field about 61% of their incoming phone calls and the average wait time to get through to a representative was nearly 18 minutes.

“The IRS mails over 200 million pieces of correspondence to taxpayers each year, yet it does not track how much of this mail is annually returned as “undeliverable as addressed.” — National Advocate Report

TAS Recommendations

The TAS report recommends that Congress establish new guidelines when setting the IRS budget, and significantly increase their current operating budget to allow better customer service to taxpayers who are honestly trying to file their return. This recommendation is critical due to the fact that the US tax system is based on voluntary compliance, and the IRS has a moral obligation to taxpayers to make compliance as simple as possible. The fact that nearly 43 million phone calls to the IRS go unanswered each year, and that 53% of written correspondence to the IRS is ignored, is unacceptable and fails to serve the needs of the very people who are attempting to honestly comply with IRS regulations.

The report also points out the fact that since the IRS is essentially the “Accounts Receivable” department of the United States government, it is crucial that this department have sufficient funding to perform its duties. In 2013 the IRS had a budget of only $11.2 billion yet it collected a total of $2.86 trillion tax dollars – translating roughly to a rate of return of $255 for every $1 spent. This demonstrates the significance of how an increase in budget levels could impact potential increases in revenue collection and could even help reduce the overall economic deficit that America is dealing with today.

Another serious and growing problem facing American taxpayers these days is tax-related identity theft. In 2012 the IRS received almost 450,000 cases claiming issues surrounding stolen identity. Usually, a tax-related identity theft occurs when someone uses the personal information of another person without their knowledge or permission to collect a fraudulent refund. This causes a series of major problems which could take many months to resolve.

In order to address the increasing problem of tax-related identity theft, the IRS created the Identity Protection Specialized Unit (IPSU) in October of 2008. While the original intent of this unit was to provide a central point of contact for identity theft victims to resolve their tax-related issues quickly and efficiently, the results that taxpayers receive are anything but effective and timely.

The time required to have identity theft related tax cases resolved by the IRS averages 312 days, delaying proper refunds to victims, causing problems to overlap tax years, and requiring a number of different units within the IPSU to be involved before a final solution can be found. There are currently more than 20 separate divisions within the IPSU that are required to coordinate and pass information along to each other in order for a case to be resolved. While the original intent of creating the IPSU was to provide a stream-lining of sorts for these types of cases, its internal complexity of different units has only made the process more time consuming.

The TAS report recommends that the IRS review the structure of the IPSU and make appropriate changes so that the process of addressing identity theft can truly be stream-lined as the unit was originally intended. In addition, the report recommends increasing the funding to this division of the IRS so that the increasing volume of cases coming in can be resolved in a more timely manner.

Conclusion

Dealing with the IRS can be a dreadful time for many taxpayers each year. Whether it’s trying to keep up with the always changing tax-code, resolving identity theft issues, or attempting to contact the IRS with questions, there are many hurdles that Americans face when attempting to comply with US tax requirements. Fortunately, the Taxpayer Advocate Service exists for the sole purpose of serving as the “voice of the people,” offering assistance to taxpayers while making recommendations for improvement to the IRS and Congress.

For more information about the Taxpayer Advocate Service or to view the full 2012 TAS report, visit http://www.taxpayeradvocate.irs.gov.

Photo: PRWeb

How to Spot a Shady Tax Preparer

According to the IRS, about 60 percent of taxpayers use tax professionals each year. While most are honest and well-trained, this is an area ripe for fraud if you choose poorly. After all, getting your taxes done by someone else means handing over a lot of personal information, your Social Security number (the Holy Grail for thieves), and those of your spouse and dependents, possibly your birth date, and your bank account information. The IRS wants you to remember, even if you hire someone to do your taxes, you bear the responsibility for what is in your return.

Until recently, anyone could hang out a shingle calling themselves a tax/financial professional, with zero experience or qualifications.  That’s why the IRS now requires tax preparers to get an IRS-issued Preparer Tax Identification Number (PTIN).  This helps, but where thieves smell money, there will always be unscrupulous people who slither past the rules. No determined thief is going to let a little thing like an IRS requirement stop him or her from scamming you.

But it’s not too difficult nowadays to spot a shady tax preparer and avoid them altogether.

Here are three red flags the IRS wants you to watch for:

  1. Is the preparer willing to provide you with his or her PTIN?
  2. Is the preparer willing to sign your return and provide his/her PTIN?
  3. Will the preparer ask you to sign an incomplete return? The IRS warns, a reputable preparer will never do this.

If the answers to any of these questions are unsatisfactory, don’t walk away. Run!

Others Points to Watch For

Ask the preparer about his or her qualifications.

  • Where did you get your training, and have you stayed up with the tax changes through continuing education?
  • How long have you been doing this?
  • What professional groups do you belong to?

Get a full list of the fees you will pay.

  • A reputable preparer will be upfront about fees.  You need to be upfront too, by explaining the extent of your return. If you have multiple small businesses, special credits which require extra forms, or a fistful of W-2s, say so.
  • Your fee should never be a percentage of your expected refund.  That encourages unscrupulous preparers to fraudulently jack up your refund. The preparer may initiate the fraud, but again, you are ultimately responsible and will be left holding the bag.
  • What is the expected time frame till your return is done?
  • Will the preparer review the completed return with you?
  • Will he/she be available for questions after the tax season?
  • If you are due a refund, will it be issued in your name?  Beware a preparer who says the refund will be issued to him/her, and you will be paid in cash. There’s no way for you to know if the refund was actually much larger than what you are paid.  If it’s a cash-only set up, say no and find another preparer.

Your prospective tax preparer needs to pass your inspection. If you feel uncomfortable during the initial meeting, trust your instincts and go elsewhere. You can do a simple background check of a preparer by contacting your local Better Business Bureau. If you have doubts, check the standing of a CPA by contacting the state board of accountancy. For attorneys, contact your state bar association, and for Enrolled Agents, check with the IRS Office of Enrollment.

You can read more about how to spot a shady tax preparer by checking with the IRS. If you feel you have stumbled upon a bad apple tax preparer, you can report the individual with the IRS by clicking here.

“If you feel that you have been a victim of a bad tax preparer or you feel that the IRS may flag a return you filed for inaccuracies, you may want to contact a professional to review your situation,” says David King, President of Optima Tax Relief. “Remember, the IRS is much more accommodating to individuals/businesses that voluntarily amend a past return as opposed to them amending it themselves.”

Photo: Commercial Appeal