3 ble of Contents Table of Contents Chapter One: What Are the Advantages of Getting Tax Advice? Chapter Two: Myths About Tax Relief Chapter One: What Are the Advantages of Getting Tax Advice? Chapter Three: 5 Common Tax Mistakes Chapter Two: Myths About Tax Relief Chapter Four: Chapter Becoming Three: 5 Common IRS Compliant Tax Mistakes When Living Outside the US Chapter Five: Chapter When Four: Are Becoming Pet Costs IRS Tax Compliant Deductible? When Living Outside the US Chapter Six: Chapter State Five: Tax When Problems Are Pet Costs Tax Deductible? Chapter Six: State Tax Problems Chapter Seven: Business Tax Issues Chapter Seven: Business Tax Issues Chapter Eight: Trust Fund Recovery Penalty Chapter Eight: Trust Fund Recovery Penalty Chapter Nine: Levy, Lien & Wage Garnishment Chapter Nine: Levy, Lien & Wage Garnishment Chapter Ten: Penalty Abatement Chapter Ten: Penalty Abatement Chapter Eleven: ChapterOffer Eleven: In Offer Compromise In Compromise Chapter Twelve: Chapter How Twelve: to How Avoid to Avoid Tax Problems Tax Problems Chapter Thirteen: Chapter Thirteen: A Tax Relief A Tax Professional Relief Professional Can Can Save Save You You
4 Chapter One: What are the Advantages of Getting Tax Advice? Chapter One: What are the Advantages of Getting Tax Advice? Filing taxes can be a daunting experience. People often wait until the last minute to file taxes Filing taxes can be a daunting experience. People often wait until the last minute to file taxes because of anxiety, because of which anxiety, often which often leads leads to to mistakes in in tax tax information. information. Before you Before begin filing you begin filing your taxes, give your taxes, yourself give yourself an advantage an by by seeking out out tax tax advice. advice. If you are Ifa you homeowner; are a homeowner; own a small business; self-employed; or to charities, to name a few of the subjects, own a small you business; may needself-employed; some advice. Here are ormore donate detailsto regarding charities, the advantages to name for a getting few of taxthe subjects, you may need advice. some advice. Here are more details regarding the advantages for getting tax advice. Knowing the difference between a gift and income Filing taxes can be a daunting experience. People often wait until the last minute to file taxes because Knowing of the anxiety, Say difference you work which at the between often local church leads a during gift to mistakes and the week income answering tax information. phones, and receive Before a payment, you begin filing it would be wise to know if you would need to claim the income on your taxes. As a rule, if your taxes, give you've yourself make $400 an or advantage more for the year by answering seeking the out phones, tax you advice. would have If you to include are a that homeowner; own Say a you small work business; when at you're the local filing self-employed; taxes. church Also, during if you orreceive the donate week a gift to from answering charities, the churchto phones, of name $150 or and a more few receive it would of the asubjects, payment, it would be wise need to to be know reported if on your would tax return. you may need some advice. Here are more needdetails to claim regarding the income the advantages on your taxes. for As getting a rule, taxif advice. you've make Starting $400 or your more small for business the year legitimately answering the phones, you would have to include that when you're filing taxes. Also, if you receive a gift from the church of $150 or more it would Knowing need to be the reported difference on your between tax return. a gift and income You have just started your own small business. Seeking out advice will prepare you to take the next steps in solidifying your new journey as a business owner. Registering your business is a very important step. For more information, the publication 335 from the IRS is a tax free small business guide, which will help you ease into the world of small business ownership. Also, getting professional tax advice on tracking your business expenses, quarterly estimated tax payments and tax return filings will point you in the right direction. Say Starting you work your at small the local business church legitimately during the week answering phones, and receive a payment, it would be wise to know if you would need to claim the income on your taxes. As a rule, if you've You have make just $400 started or more your for own the small year business. answering Seeking the phones, out advice you would will prepare have to you include to take that the next steps in solidifying your new journey as a business owner. Registering your business when you're filing taxes. Also, if you receive a gift from the church of $150 or more it would is a very important step. For more information, the publication 335 from the IRS is a tax free need to be reported on your tax return. small business guide, which will help you ease into the world of small business ownership. Also, getting professional tax advice on tracking your business expenses, quarterly estimated Starting your small business legitimately tax payments and tax return filings will point you in the right direction. You have just started your own small business. Seeking out advice will prepare you to take the Receiving next steps a settlement in solidifying after your death new journey as a business owner. Registering your business is a very important step. For more information, the publication 335 from the IRS is a tax free If your husband or wife dies, and you receive a settlement due to a class action lawsuit, while small business guide, which will help you ease into the world of small business ownership. it is possibly not taxable, it will need to be properly itemized on your tax return. If not, the Also, getting professional tax advice on tracking your business expenses, quarterly estimated IRS may send a letter demanding payments. Dealing with a death is hard enough, but then tax payments and tax return filings will point you in the right direction. having to deal with the IRS is equally as difficult. This type of issue requires immediate handling. By sending in documents explaining the details of the settlement and amending the tax return can help to have the assessment removed. Seeking professional advice will help in making sure the proper steps are taken to prove the settlement is not taxable. Listed are just a few of the advantages of getting tax advice. Make sure to take advantage of some of the free advice at IRS.gov.
5 Chapter Two: Myths about Tax Relief Listening to what others have to say about paying taxes could land you in big trouble with the IRS. Friends, family, and your co-workers, unless they happen to work in Tax Law, may not be able to provide adequate tax advice and can guide you in the wrong direction legally. To avoid making mistakes with your taxes, here are some common myths about taxes. Filing taxes is voluntary This is a common myth that people absorb, mostly as an excuse to not deal with paying taxes. People often believe because Form 1040 instruction box describes the tax system as "voluntary" suggests that paying taxes is a choice, not an obligation. The term voluntary actually implies the responsibility that each taxpayer has in determining how much they owe. Students do not have to pay taxes Partially true If you are a student and you earned less than $9,000 for the year, you will not have to pay taxes. But file anyway, if you employer withheld any wages for tax purposes you may qualify for a refund. My home office deduction will equal an instant audit Home offices are more prevalent now than they have been in the past, so the frequency of many people who are now working from home is taken into consideration by the IRS when individuals include their home offices on their tax deductions. Certain qualifications are needed for your
6 home office to be considered as a deduction. Further information can be found on the IRS website. Tax free Internet earnings Your, ebay, Etsy, and Amazon store earnings need to be included in your yearly earnings. If you sold items on the Internet that generated a total profit of $400 or more, you must report this to the IRS. Regardless whether you receive a 1099 form, you are still obligated to report these earnings. Filing an extension protects you from IRS scrutiny An extension does not mean that you do not have to pay taxes, what it means is that you are given more time to file. If you do not have the money to pay your taxes, file anyway, this way you will avoid paying the 25% failure to file penalty. Claiming your pet as an dependent Special rules apply to animals when it comes to paying your taxes. Typically, you are not able to claim your pet or their expenses on your taxes. It would be considered fraudulent to do so. Special rules apply to deduct animals on your taxes include services dogs; pets that are used for protecting a business; and animals who are used for entertainment. See Chapter Seven for more information on this subject. Listening myths or non-professional advice will cause you to pay more to the IRS. It is wise to seek professional advice when filing, to ensure you get the deductions you are entitled to and not cause yourself penalties for filing mistakes.
7 Chapter Three: 5 Common Tax Mistakes Chapter Three: 5 Common Tax Mistakes Chapter Three: 5 Common Tax Mistakes 1: Withdraw from your 401(k) without withholding taxes 1: Unfortunately, Withdraw from pulling your money 401(k) out without of your withholding 401(k) prematurely taxes can actually create more debt -- tax 1: debt, Withdraw to be specific. from Especially your 401(k) if without you do not withholding have withholdings taxes taken out of your withdrawal, the Unfortunately, tax debt can be pulling quite large. money out of your 401(k) prematurely can actually create more debt -- tax Unfortunately, debt, to be specific. pulling Especially money out if you of your do not 401(k) have prematurely withholdings can taken actually out of create your more withdrawal, debt --the tax debt, tax Remember: debt to be can specific. you be quite have Especially large. to pay federal if you and do state not have early withholdings withdrawal penalties taken out on of a your 401(k) withdrawal, withdrawal the tax before debt the can age be of quite 59 1/2, large. and those penalties are in addition to the income tax on the actual Remember: withdrawal. you It is have common to pay to federal owe 35 and to 40 state percent early of withdrawal a premature penalties 401(k) on withdrawal a 401(k) for withdrawal taxes. Remember: before the age you of have 59 1/2, to pay and federal those penalties and state are early in addition withdrawal to the penalties income on tax a 401(k) on the actual withdrawal before withdrawal. 2: Don't the pay age It any is of common 59 taxes 1/2, on and to business owe those 35 penalties to income 40 percent are in of addition a premature to the 401(k) income withdrawal tax on the actual for taxes. withdrawal. It is common to owe 35 to 40 percent of a premature 401(k) withdrawal for taxes. 2: Anyone Don't who pay has any a taxes business on business knows that income certain years are better than others. If you have a good 2: year Don't and "forget" pay any to taxes pay on any business quarterlyincome estimated taxes on your earnings, you're asking for a tax Anyone debt problem. who has a business knows that certain years are better than others. If you have a good Anyone year and who "forget" has a to business pay any knows quarterly that estimated certain years taxes are on better your earnings, than others. you're If you asking have for a good a tax year debt 3: Don't and problem. "forget" file your to tax pay return any quarterly estimated taxes on your earnings, you're asking for a tax debt problem. 3: You'll Don't do file the your taxes tax later. return 3: Don't file your tax return You'll The IRS do will the do taxes your later. taxes for you without deduction and with high penalties. The first step to You'll any good do tax the debt taxes relief later. plan is to file all unfiled returns. The IRS will do your taxes for you without deduction and with high penalties. The first step to The any 4. Forget good IRS will tax to report do debt your relief your taxes plan stock for is you to sale file without all unfiled deduction returns. and with high penalties. The first step to any good tax debt relief plan is to file all unfiled returns. 4. You Forget are only to report required your to pay stock income sale tax on the profit of any stock sale -- the difference between 4. what Forget you paid to report for the your stock stock (your sale basis) and what you sold the stock for (sales proceeds). You However, are only investment required companies to pay income only tax report on the profit sales of proceeds, any stock not sale your --basis. the difference If you don't between report You what are you the only paid stock required for sale the on stock your pay (your tax income return, basis) tax the and on IRS the what profit will you automatically of sold any the stock stock tax sale for you --(sales the as difference proceeds). the salesbetween proceeds what However, you are paid investment all for profit. the stock companies (your only basis) report and what the sales you proceeds, sold the stock not your for (sales basis. proceeds). If you don't However, investment companies only report the sales proceeds, not your basis. If you don't 5. Not reporting the sale of business or property If you sell your business or property, make sure to report the sale. Negligence can create the impression of tax evasion and cause tax debt.
8 Chapter Four: Becoming IRS Compliant When Living Chapter Four: Becoming IRS Compliant When Living Outside the US US People living outside the US were afraid, for the most part, about getting IRS compliant. This People living outside the US were afraid, for the most part, about getting IRS compliant. This fear was based on the 10,000 dollar penalty and even the risk of prosecution. However, there is fear was based on the 10,000 dollar penalty and even the risk of prosecution. However, there is hope for the people who want to be IRS compliant. hope for the people who want to be IRS compliant. People living outside the US were afraid, for the most part, about getting IRS compliant. This fear was based on the 10,000 dollar penalty and even the risk of prosecution. However, there is hope for the people who want to be IRS compliant. Since July 1, 2014, US citizens that are green card holders or live outside the USA can avoid the Since July 1, 2014, US citizens that are green card holders or live outside the USA can avoid the prosecution and the ten thousand dollar penalty by following a number of steps. prosecution and the ten thousand dollar penalty by following number of steps. Since July 1, 2014, US citizens that are green card holders or live outside the USA can avoid the There are four prosecution in all and, the if you ten thousand live outside dollar penalty the USA, by following youa should number of follow steps. these steps so that you There are four in all and, if you live outside the USA, you should follow these steps so that you do not have any problems with the IRS. do not have any problems with the IRS. There are four in all and, if you live outside the USA, you should follow these steps so that you do not have any problems with the IRS. People living outside the US were afraid, for the most part, about getting IRS compliant. This fear 1. was First based and on 1. foremost, the 10,000 First and foremost, you dollar have you have to penalty file to file a Foreign and even the risk of prosecution. However, there is a Bank Account Report Report form dating form back dating as back as hope 1. for First the and people foremost, who want you to have be IRS to file compliant. Foreign Bank Account Report form dating back as far as six years. far as six years. far as six years. Since 2. July You 1, must 2014, file US tax. citizens that are green card holders or live outside the USA can avoid the prosecution and the ten thousand dollar penalty by following a number of steps. 3. You need to pay any taxes that are due. There are four in all and, if you live outside the USA, you should follow these steps so that you do not 4. have The last any step problems is submitting with the a IRS. signed affidavit. In this affidavit, you must explain that the failure of filing was done against your will and because of unfortunate circumstances. 1. First and foremost, you have to file a Foreign Bank Account Report form dating back as For more information go to IRS.gov or consult a tax professional. far as six years. With these pieces of information, you can now stay within legal boundaries without being afraid you might have to pay an enormous amount of money in penalties.
9 Chapter Five: When Are Pet Costs Tax Deductible? Hobby Expenses If you raise chickens, iguanas, turtles or any other animal for fun but occasionally sell the extra offspring, the IRS considers this a hobby. You're expected to report any income you make, but you can deduct costs, up to the amount of income, thus offsetting a portion of your hobby costs. Report hobby income on Form 1040, line 21 as activity not for profit, and claim expenses on Line 23 of Schedule A. However, you can't claim a hobby loss against your other income. Service Animals If you need a guide dog or other animal trained to help you live or work with a disability, you can claim the cost and upkeep of the animal as medical expenses. Keep: Documentation of your disability All expenses related receipts Livestock If you run a farm or ranch where you raise animals to sell, you can write off any associated animal-related costs. That includes:
10 The cost to buy and raise them Any veterinary care Any required licensing. Registration with appropriate breed organization Claim depreciation on an animal that is an income-producing asset Guard Animals If you have your own business and it entails having animals guarding your inventory or company properties, you can deduct expenses relating to the upkeep of the animals. Note that you can't deduct the entire purchase cost of the animals. But you can apply depreciation on the purchase, like you would on mechanical equipment at a rate determined by a local breeder. Charitable Contributions If you keep foster pets awaiting adoption or train service dogs, you can write off the expenses as charitable donations. Keep careful track of expenses, including mileage driven. Save receipts and written proof the animal was not your personal pet with your other tax documents. Government Incentive Occasionally, your local government puts into effect a few tax incentives to encourage citizens to own or breed a particular animal. This is commonly done to encourage the growth of an agricultural sector. For more information check your state website.
11 Chapter Six: State Tax Problems Chapter Six: State Tax Problems Chapter Six: State Tax Problems As of 2009, seven states -- Alaska, Nevada, South Dakota, Washington, Texas, Wyoming, and As Florida of 2009, -- do seven not charge states -- an Alaska, income Nevada, tax. Two South other Dakota, states, New Washington, Hampshire Texas, and Tennessee, Wyoming, and tax Florida As of 2009, only dividend -- do not seven and charge states interest an -- Alaska, income. tax. Nevada, Some Two states other South charge states, Dakota, income New Washington, Hampshire Texas, tax on businesses and Tennessee, Wyoming, but not taxand only Florida individuals, dividend -- do or and not charge vice interest an versa. income. income The amount Some tax. Two of states other income charge states, tax charged income New varies tax Hampshire on from businesses and Tennessee, state to but state. not tax individuals, only dividend or vice and versa. interest The income. amount Some of income states charge tax charged income varies tax on from businesses state to state. but not Knowing individuals, about or vice the taxes versa. you The are amount obliged of to income pay will tax reduce charged the varies risk of from having state problems. to state. Here Knowing are the most about common the taxes ones: you are obliged to pay will reduce the risk of having problems. Here are Knowing the most about common the taxes ones: you are obliged to pay will reduce the risk of having problems. Here Working are the most in one common State ones: and living in another Working in one State and living in another In Working the event in of one working State and in one living State inbut another living in another, one must file a state income tax return In in the both event states. of working Being informed in one State is the but key living to stay in another, out of trouble. one must That file is why a state calling income the tax State return In the event of working in one State but living in another, one must file a state income tax return in department both states. of Being revenue informed for any is clarifications the key to stay about out this of trouble. subject That is highly is why advised. calling the State in both states. Being informed is the key to stay out of trouble. That is why calling the State department of revenue for any clarifications about this subject is highly advised. Sales department tax of revenue for any clarifications about this subject is highly advised. Sales tax In Sales the event tax of being a business owner, you must collect state sales taxes on merchandise sold. In Owning the event a business of being comes a business with owner, great responsibility. you must collect If you state do sales not abide taxes on by merchandise the sales tax rules, sold. In the event of being a business owner, you must collect state sales taxes on merchandise sold. Owning your company a business can comes be audited with by great the responsibility. State, incur costly If you penalties do not and abide ultimately by the sales be shut tax rules, Owning a business comes with great responsibility. If you do not abide by the sales tax down. rules, your This company happens can due be to not audited being by informed. the State, Collecting incur costly state penalties sales tax and on ultimately each bought be shut item down. your company can be audited by the State, incur costly penalties and ultimately be shut and down. This reporting happens it monthly due to not according being informed. to state guidelines Collecting will state keep sales your tax business on each bought out of trouble. item and This happens due to not being informed. Collecting state sales tax on each bought item and reporting it monthly according to state guidelines will keep your business out of trouble. For reporting more information it monthly according go to your to State state website guidelines or consult will keep a tax your professional. business out of trouble. For more information go to your State website or consult a tax professional. For more information go to your State website or consult a tax professional.
12 Chapter Seven: Business Tax Issues When you operate a small business, avoiding any costly penalties, fees and audits from the Internal Revenue Service (IRS) is crucial. Here are some of the most common small business tax mistakes and how to prevent them. 1. Failing to file and pay your taxes on time Forget to file and you ll pay for it: The IRS imposes a 5% monthly charge for those who file late, up to the first five months following the return s due date (up to a 25% maximum charge). Forget to pay your taxes, and it gets even worse: the IRS charges 6% interest a year on unpaid taxes, in addition to late payment penalties of.5% per month after the April 15 deadline. The bottom line is you should both file and pay Uncle Sam on time to avoid costly penalties, so keep this in mind before tax season rolls around. 2. Forgetting about estimated tax payments Some businesses are required to make quarterly estimated tax payments during the year on income that is not subject to withholding. This includes money you earn from self-employment, interest, dividends and gains from the sale of assets. If you are filing as a sole proprietor, a partner, an S corporation or a self-employed individual, you generally will have to make estimated tax payments if you expect to owe tax on $1,000 or more when you file, according to the IRS
13 3. Not taking business deductions or taking excessive deductions You can potentially reduce your tax burden by taking several legal business deductions. The IRS says you can deduct all ordinary and necessary expenses you incur while operating your business. On the other hand, taking excessive deductions or mixing personal and business deductions like claiming a family vacation as a business expense is not allowed and can lead to an audit, or worse, a federal tax fraud charge. 4. Keeping poor records Record keeping is one of the most important aspects of running a small business. With good records, you can properly deduct all business-related expenses. Keeping good records is all about being organized. Keep all business documents in a filing cabinet, documenting purchases by each month and year. Another option is using an online accounting software program or hiring a bookkeeper.
14 Chapter Eight: Trust Fund Recovery Penalty In the United States, the term Trust Fund Recovery Penalty, refers to a tax penalty assessed to the directors or officers of a business entity that had failed to pay a required tax on behalf of its employees. The name comes from the fact that Social Security and Medicare taxes are paid into a Trust Fund which is used to pay out benefits under these programs. This tool is often misunderstood, as it essentially allows the Internal Revenue Service to asses a penalty against the responsible third parties involved. The government must not only show the person was responsible but it must show that the person willfully failed to perform their duties of collecting and paying the taxes. Payroll taxes are the bane of small businesses. Normally, the taxing authority will not be waiting in front of your doorstep to collect your taxes, so more often than not the funds are used for other purposes and the payroll taxes are put on hold. Section 6672 of the Internal Revenue Code is what governs the payments of tax on any employee s wages. Any person who was required to, collect, truthfully account for, and pay over the individual is liable to a penalty equal to the total amount of the tax that went unpaid. Once it has been assessed the Trust Fund Penalties cannot be discharged in bankruptcy, the tax payer will still be liable even if the business is liquidated. The IRS determines who to assess the penalty against by conducting interviews and filing a report using the form Tax payers that were unhappy about the scope of the interview has the right to petition a court and be heard from their point of view. Congress passed this law to ensure prompt payment of any withheld income and employment taxes. If you are assessed and deemed to be a responsible person, a letter will be provided for you, instructing you that there are plans in place to assess the Trust Fund Penalty against you.
15 You will then have a 60 day period, or 75 days if you reside outside of the United States, from the date of the letter to appeal your proposal. The letter explains your rights to you in full, and if you should not reply to this letter, a penalty will be assessed against your social security number and you will then be sent another letter notice demanding the payment of penalties. Once the penalty has been asserted, collection action can then be taken against your personal assets. Below is a discussion of elements developed by the Internal Revenue Service to consider whether a tax payer is liable for the Trust Fund Recovery Policy. In lots of instances the clients merely worked in an office and didn't have the authority or responsibility to pay these taxes even though he or she signed the checks. We have set out the sections that the IRS Collections and Appeals office use to determine someone s liability. 1. The Trust Fund Recovery Policy is imposed on any person required to collect, account for and pay over taxes held in trust, who willfully fails to perform any of these activities. The TFRP may be imposed for: Willful failure to collect tax Willful failure to account for and pay tax, or Willful attempt in any manner to evade or defeat tax or the payment thereof 2. TFRP is equal to the total amount of the tax evaded, not collected or not accounted for and paid over. 3. The TFRP is generally accepted from discharge in bankruptcy because it is entitled to priority status. It is possible to avoid the Trust Fund Recovery Policy by making sure that all of your employees taxes are collected, filed, and paid to the Internal Revenue Service when it is required. Make your tax deposits and payments on time to avoid any penalties.
16 Chapter Nine: Levy, Lien & Wage Garnishment We are often asked to distinguish a lien from a levy from a garnishment. Here s an easy way to remember the subtle differences between the terms: Lien is a claim against assets Tax Lien: A tax lien is a debt attached to property in satisfaction of amounts owed to the federal government. The lien is recorded in the clerk s office of the county in which the taxpayer resides. You cannot sell your assets (including your home) without first paying off the IRS. A lien is not a levy. A lien is the claim against your property. As discussed below, a levy is the actual seizure of the asset. There are ways to get rid of a tax lien imposed on you, but adhering to the requirements and paying your debt on time and in full is definitely the best way to get rid of a tax lien. The lien will be released within 30 days after you have paid your debt. Other options are, if the conditions are in the best interests of both the government and the tax payer. 1. Discharge of Property The discharge removes the lien from any specific properties. Several Internal Revenue Codes exists to determine the eligibility of the tax payer for a discharge.
17 2. Subordination Subordination will not remove the lien, but does exist to allow creditors to move ahead of the IRS which will make it much easier to obtain a loan or mortgage. There are certain criteria though to qualify for eligibility. 3. Withdrawal A withdrawal removes the public notice of federal tax lien and assures you that the IRS is not competing with other creditors for the rights to your property, however you are still liable to pay the amount that is due. Levy is a seizure of assets There are publications available in.pdf format for download on the IRS websites that explains all these options fully and in more detail. Tax Levy: The levy is the actual seizure of the asset to pay off a tax amount. An example would be a levy on a bank account. When the IRS levies a bank account, it means that it sends notice to the bank that the funds in the account should be frozen and used solely to pay off the amount the taxpayer owes in back taxes. In other words, levying a bank account means that the IRS has taken ownership of the funds in the account. Garnishment is a type of levy that seizes wages from the taxpayer s paycheck. Wage Garnishment: The IRS wage garnishment is a type of levy. Typically the IRS imposes a garnishment by sending a notice to the taxpayer s employer. The employer is instructed to withhold upwards of % percent of the wages and send those wages to the IRS. When you receive a Notice of Levy or Lien, you should get professional help right away!
18 Chapter Ten: Penalty Abatement The IRS penalty for late filing of your tax returns has gone up to 25% of the unpaid taxes on the returns and the IRS penalty for paying IRS taxes late has also gone up to 25% of the unpaid taxes on the returns. So, for example, if you should owe $ in taxes from four years ago, the penalties you will have incurred will be $ If you should then add up the interest on top of the penalties, your total tax balance including your IRS penalties and interests have now nearly doubled to $ The Tax Penalty Abatement is an IRS tax resolution method that allows taxpayers to repay their applicable tax bills, but then the accompanying penalty or interest is removed from the tax bill. In order to qualify for a Penalty Abatement, you have to provide the IRS with in depth details and reason for not being able to sufficiently pay the entire amount due. The IRS applies a standard of reasonable cause. the following are reasons that the IRS will consider to reduce a penalty: 1. Death, Serious illness or unavoidable absence. Your spouse became seriously ill. Your spouse took care of the taxes. You did not file on time because you had to attend to your spouse. You had a major drug problem. You were in rehab for a couple of years. As soon as you were clean, you started to address your tax duties. Your child passed away. Physically and mentally you could not take care of your taxes. You were incarcerated. You promptly addressed your tax duties when you got out.
19 2. Fire, Casualty, Natural Disaster or other Disturbance Your neighborhood was hit by a hurricane, tornado, or earthquake. Your office caught on fire and destroyed all your business records. There was a major flood in your area and your home was seriously damaged. You had to take care of your living situation before dealing with taxes. 3. Unable to obtain records Your employer was late on providing you a W-2. The W-2 was received after the tax return was due. 4. Mistake was made Your tax return was filed. You discovered a mistake made on the tax return. You took steps to correct the mistake. 5. Erroneous advice or reliance Generally, you will not be granted penalty relief for relying on your accountant, CPA, bookkeeper, bank, or any other third party. The IRS may waive IRS penalties for oral or written advice provided by the IRS. 6. Ignorance of the Law You did not know you had to file a tax return. You earned Social Security income for years. You were not required to file a tax return. This year your spouse passed away. You started to receive your spouse s pension. You are now required to file a tax return but you did not know it. 7. Hardship You can show that there would be substantial financial loss if you paid your taxes. You filed bankruptcy when the taxes were due. It is important that tax payers seeking a reduction of penalties reference the correct section of the IRS Penalty Handbook. The employees at the IRS will be using a computer program when reviewing your appeal, it is known as a reasonable assistant. The program will only understand a form if it s filled out properly and in a certain way.
20 Chapter Eleven: Offer In Compromise Chapter Eleven: Offer In Compromise An Offer in Compromise allows you to settle your tax debt for less than the full amount you owe. An Offer in Compromise allows you to settle your tax debt for less than the full amount you The IRS will only consider an Offer In Compromise if it is for one of the following reasons: owe. 1. There is doubt as to whether the IRS correctly determined the amount you owe. The 2. IRS There will is only doubt consider as to whether an Offer the In debt Compromise fully collectible. if it is for This one means of the your following assets reasons: and income are less than the amount you owe. 3. The debt is correct, and you are able to pay the debt in full, but doing so would cause 1. undue There is economic doubt as hardship. to whether This the is IRS called correctly effective determined tax administration. the amount you owe. 2. There is doubt as to whether the debt is fully collectible. This means your assets and income are less than the amount you owe. If you 3. are The making debt is an correct, offer in and compromise you are able based to pay on the debt second in full, or third but doing reason, so the would IRS cause will take undue economic hardship. This is called effective tax administration. other factors into account. If you are making an offer in compromise based on the second or third reason, the IRS will take To determine whether you can pay and how much, the IRS generally looks at these four components: other factors into account. To determine 1. Your ability whether to pay you can pay and how much, the IRS generally looks at these four components: 2. Your income 3. Your expenses 4. Your assets 1. Your ability to pay 2. It will Your not income consider your offer if any of the following is true: It will not 3. Your consider expenses your offer if any of the following is true: 4. Your assets You are in an open bankruptcy proceeding. You You are have in an not open filed bankruptcy required proceeding. federal tax returns. You You have have not not filed made required required federal estimated tax returns. tax payments You have not made required estimated tax payments
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