Paying Your Past Due Taxes and Prioritizing Payments
It's been almost a month since my last post, as I was enjoying the end of busy season a little too much and for too long. So now it's time for some more of my valuable advice.Past due taxes are an unpleasant problem. However, it’s a problem that must be given a high priority. The Internal Revenue Service and state tax departments have tremendous powers to make your life difficult if you do not cooperate or make any effort toward paying what is owed. My website explains the different ways to approach the problem. The option most people will employ is to arrange an installment plan that gradually pays off the balance owed over several months or years. Any future tax refunds will also be applied to the outstanding debt as well. Other remedies generally require you to show extreme hardship with living expenses that exceed current income or non-liquid assets against which you can borrow to pay the debt.
While it’s important to pay the tax debt as soon as possible, you should negotiate an installment plan with the smallest monthly payment possible. You always have the option to pay an extra amount every month, but there may be a month where you incur other unexpected expenses. The smaller the required tax payment, the easier it is to pay it and avoid defaulting on your installment plan. If you are required to set up a new plan, the IRS and some states charge a setup fee. Of course, your monthly payment should always at least be enough to cover the interest that accrues and reduce some of the principal. The minimum monthly payment required by the IRS is currently $ 25.
What if you owe both past due state and federal taxes? I recommend you apply any extra funds you have toward your state tax debt first (with a couple exceptions), provided you’ve already paid enough on your federal tax debt to prevent wage garnishment or bank account levy. The majority of states charge higher interest rates on past due taxes than the IRS does (currently 3% annually). New Jersey, for example, charges 6.25%, and Rhode Island has the highest interest rate, currently charging 18% (higher than some credit cards!). Unless you owe past due taxes to Indiana or Utah, which currently charge a rate of 2%, I recommend you push to get your state tax debt paid ahead of your federal tax debt. Also, just like current state taxes any past due state taxes paid are deductible on your federal tax return. If you itemize your deductions, paying past due state taxes can reduce your taxable income and ultimately reduce your federal tax liability in the current year. The federal tax deduction you get for past due state taxes serves as a sort of “tiebreaker” for the numerous states that charge the same 3% interest rate as the IRS on past due taxes.
It is also important pay taxes from later years ahead of earlier years. For example, suppose you owe federal taxes for the 2010, 2011 and 2012 tax years and the total balance owed is just under $ 50,000. It is important you be current on your 2016 taxes and be ready to pay any balance owed when it is time to file. If the balance owed at filing time brings the total amount from the current and prior years to over $ 50,000 and you are unable to pay what is owed for 2016, your installment agreement will automatically default. You will need to re-apply for a new installment agreement, paying another fee to the IRS and monthly late payment penalties will temporarily increase from 0.25% of the balance owed to 0.5% until a new installment plan is in place. Without an installment plan in place late payment penalties accrue at a rate of 0.5% of the outstanding balance every month. With a plan penalties are 0.25%. Penalties are ultimately capped when they reach 25% of the balance owed for any given year. After penalties from prior year federal taxes reach the maximum 25% of the balance, only interest will continue to accrue on the taxes. Making payments toward taxes owed on a later year, however, that hasn’t reached the 25% maximum penalty yet will reduce the penalties that are still accruing.
Setting up an installment plan doesn’t always require the services of a tax professional, but the larger the balance owed and the longer the time period over which you hope to spread the payments, the more likely you are to need one. Don’t ignore your unpaid taxes. Communicate with the tax authorities or risk serious consequences.
2016 tax season is over! And, new IRS deadlines
Hello Everyone,I know it's been almost three months since my last post. Busy season is finally over and I am back to a more civilized routine, instead of working the 18 hour+ days, seven days a week. It was a rough busy season but I count my blessings because I expect next year to be even rougher, with the changing deadlines for the returns of my clientele who file business returns.
Deadlines for all business returns (partnerships, S-Corps, C-Corps) for tax years that begin anytime in 2016 will be as follows:
Partnership returns (Form 1065)
First deadline is March 15, 2017 (note change of deadline).
Extended deadline is September 15, 2017.
C-Corporation returns (Form 1120)
First deadline is April 17, 2017 for corporations on a calendar year (note change of deadline).
Extended deadline is September 18, 2017 (five month extension instead of usual six month extension).
For corporations on a fiscal year other than a calendar year, the first deadline is the 15th day of the fourth month following the end of the corporation's fiscal year.
S-Corporation returns (Form 1120S)
First deadline is March 15, 2017 for corporations on a calendar year (note there is no change of deadline).
Extended deadline is September 15, 2017
For individual returns, next year's deadline will be April 17, 2017 and October 16, 2017 for returns on extension.I could go into how these changed deadlines will affect next year's tax season, as they will impose added burdens on an already burdensome time, but I'd rather focus on the more relaxed time I'm enjoying with my family and spending time outside now that busy season has ended. More posts to come... until next time, get out there and enjoy the warm pleasant spring weather!
Choosing the right kind of tax professional
This subject has been discussed on many other blogs, online media, in print and elsewhere but I thought I'd add my two cents on this one.
First, let's look at the different types of tax professionals. They come in many different varieties -there are Certified Public Accountants (CPAs), lawyers, Enrolled Agents (EAs), other designations not recognized by the IRS or any state tax authority (i.e. Accredited Tax Preparer, Accredited Tax Advisor), and those who prepare tax returns with no formal license or designation at all.
CPAs: Many people typically think of them first. But a majority of CPAs do not actually specialize in tax-related work. The CPA designation is best distinguished by their ability to issue an official opinion on the accuracy of financial statements issued by a publicly traded company for its investors, or for a privately-held business that seeks a bank loan or other investment. CPAs are licensed by the state boards of accountancy in the states they practice.
Lawyers and law firms: They may also offer tax return preparation as a service to their clients. They more typically represent clients in formal matters before the IRS, either informally or in courtroom proceedings, and also advise clients on tax-related issues associated with transactions. Lawyers are licensed by the state judicial branch, also known as the "state bar".
Enrolled Agents (EAs): They are licensed by the IRS and are known for specializing in all tax-related matters - preparation of returns, representation of clients before the IRS or state tax agency in an audit, formal tax assessment, or negotiating a plan to pay past due taxes, and advising clients on the tax consequences of a transaction. EAs must pass an IRS-administered exam on topics about individual, business and formal representation on tax matters, and must take 24 hours of continuing education every year, solely related to tax matters.
There are also individuals designated as Accredited Tax Preparer, Accredited Tax Adviser and others which are administered by private organizations. They usually require the passing of an exam and continuing education to acquire and maintain. Individuals with these designations are not recognized by any state or federal authority as having any special competency to prepare tax returns. The designations also do not allow anyone to represent clients before the IRS or any state tax agency. Since they are not regulated by the states or IRS, I would personally exercise caution in using a tax professional with one of these and no other designation.
Finally, there are tax professionals with no formal licensing or designation at all who simply prepare tax returns. While caution should be used in selecting someone without any state or IRS-administered license, there are many unlicensed tax preparers who have prepared and filed returns for their clients for literally decades without a problem. Also, many unlicensed tax preparers obtain the Annual Filing Season Program (AFSP) certificate, which requires 18 hours of continuing education on tax issues annually, including a federal tax law refresher course.
The bottom line here is that there is no "one size fits all" in selecting a tax professional. While I think an EA makes the most sense for most individuals and small businesses (the type of clientele I serve), I am obviously biased on this subject. You need to select a tax professional like you would a doctor or an auto mechanic - go to someone you trust and with whom you feel comfortable knowing your information. Unless you are single, have one job with little or no investment income, and the only tax-related document you receive every year is a W-2 statement, tax return preparation and tax planning are not "commodity services" where all providers are the same. You need to find someone who understands your situation and possibly already has a number of clientele in a similar situation as you, and can readily adjust their services to fit your situation as it changes over the years. Choose wisely!
Welcome to the CAJ Tax Solutions Blog.
This is my first real blog post. The 2016 tax season is almost upon us in full force, so there won't be much time to post to here, but I want to get this blog started.
My first piece of free tax advice that I hope will be the first of many posts to come:If you have all or most of your tax records now and are ready to start having your annual return prepared, now - and I mean right now - is the time to get these records to your tax professional. Chances are that he or she will be able to prepare it in a very short time and get it filed quickly, because few if any of their clients have all the necessary records ready for them, or choose to procrastinate because they know it's unlikely they are receiving a refund and don't want to face the unpleasantness of knowing they have a tax bill to pay. Tax bill or no tax bill to face, 2015 is over and your situation for last year cannot be changed, and if you do owe money, waiting until April will not change that. It's better to know ahead of time what you will owe (or the refund you will get) on your 2015 taxes so you have more time to plan accordingly. Even if you don't have all of your necessary tax records now, if you have most of them, your tax professional can at least begin entering what you do give to them and your taxes will get finished that much sooner when you have the rest of the records.Thanks for taking the time to read this! Comments are always welcomed. Until next time...