Solving Your Tax Problems
Audits & Notices
Tax problems commonly manifest themselves via some form of written correspondence from the IRS or State. Tax Notices may request unfiled tax returns, propose adjustments to your filed tax return, may ask for back up documentation or seeking to enforce collection via a lien or levy. It is imperative that taxpayers carefully read these notices and pay attention to deadlines as delay may hinder their rights while interest and penalties continue to accrue. Procrastination and hoping this issue will go away on its own is never a good strategy.
Tax Collection Process
Once your tax has been legally assessment, either by self-declaration, consent or by tax court, the next issue to consider is collections. Considerations in the Collection process includes how much you pay, can the amount be reduced, IRS forced collection and collection alternatives. The IRS will send out various collection notices, including the Notice of Intent to File Tax Lien and the more serious Final Notice of Levy. A tax lien gives notice to creditors that you owe money for taxes, whereas a levy is the actual taking of money to satisfy your debt.
If you cannot pay the balance due in full, you have the right to finance your tax debt in method called an installment agreement. The generic parameters of such an agreement is that the IRS will give you 6 years to pay off your debt, financed at about 9 percent. However, if your financial condition shows that you cannot pay back the IRS, you may claim uncollectable status or pay a reduced amount.
Tax Assessment Process
Before the IRS or State can legally collect taxes from you, the balance owed must be properly assessed against you. As a self-declared tax scheme, assessment is accomplished when you file your tax return. Your self-declaration, lets the IRS them know how much you owe in taxes, after you declare your income after you take into account all deductions, adjustments and credits applicable to you.
If you fail to file a tax return, the IRS will calculate your taxes for you based on income provided by third parties, without any regard to deductions. This process called a substitute for return can vastly overstate your taxes because the IRS does not give you credit for any deductions. If you are audited and the IRS proposes adjustment, you will have the opportunity to consent for of contest the proposed assessment. This process will play out with the IRS in Appeals or by going to tax court, after receiving a statutory notice of deficiency.
Reducing your Tax Debt
There are various ways to reduce your tax liability, some are easier than others, as the taxpayer can control independent of the IRS. For example, if you have not filed your missing tax return or you can file an amended tax return, this may your reduce your tax burden. Sometimes, the IRS may have asked for supporting information and you missed their deadline. This may be remedied in a process called a reconsideration. The IRS may have imposed penalties, which may be subject to abatement for reasonable cause.
Other ways to reduce your debt perhaps are not so straightforward and involve a great deal of skill and negotiation. They rely on showing how much you can afford to pay over the time the IRS can legally collect from you, given the ten-year statute of limitations. These strategies partial payment plans, offer in compromise and bankruptcy options.
Problem Solving Areas
- Filing Back Tax Returns
- I Owe The IRS Bigtime
- I’m Being Audited
- IRS Audits & Appeals
- Innocent Spouse Relief
- Tax Court Petitions
- IRS Liens
- My Accounts Are Levied
- Penalty Abatement
- Criminal Investigations
- Installment Agreement
- Statute of Limitations
- IRS Tax Collections
- Collection Defenses
- Negligent Tax Preparer
- DC Non Filer Collection Notices
- Offer in Compromise\
Tax Preparation Services
Tax Preparation | Washington, D.C.
Tax Preparation is the yearly process of formally declaring your income, deductions and credits to self-assess your tax obligations under federal and state law. Your tax record serves as important documentation used for lending, employment and immigration purposes.
Taxpayers may self-prepare their tax returns or engage a paid preparer to file on their behalf. In a system that rewards knowledge and penalizes mistakes, great care should be given in selecting a tax preparer, as licensing, education and experience can range widely.
Due to the complex nature of tax laws, you are likely better off hiring a tax professional if your situation involves self-employment income, rental activity, multi-state returns or an international component.
Selecting a Tax Preparer:
Anyone who is registered with the IRS and has a preparer tax identification (PTIN) can prepare tax returns for pay, however, preparers have different levels of skill, education and expertise. It is important to choose someone who has a credential, as this will serve as an indication of their aptitude and accountability. Credentialed tax preparers include tax attorneys, certified public accountants and enrolled agents.
Credentialed tax preparers are licensed by their state associations or the IRS and are required to maintain continuing legal education requirements and can represent taxpayers on an ongoing basis, beyond tax preparation. Tax law is broad and open to interpretation, so it is important to choose a tax preparer that has experience with your situation, include your individual state. Tax preparers cannot be expected to know everything, so it is important they possess keen research, analysis, reasoning and communication skills.
Why I need a Tax Preparer:
Many taxpayers unwisely self-prepare their tax returns online via turbo tax or some other large commercial tax preparation software company without any human oversight. While this option is sufficient for simplistic one state wage-based returns, it is not ideal for taxpayers with more complex filing requirements such as real estate activity, multi-state allocations, self-employment income and foreign taxes. Based on my experience, I see many errors on self-prepared returns in these situations resulting in tax overstatements and understatements, which ultimately costs the taxpayer grief and money.
Hiring a tax pro should provide the taxpayer much needed peace of mind that their tax obligations are calculated correctly, owing the legal minimum taxes due. Given the cost benefit analysis, it is a wise investment to work with a tax preparer, particularly given that tax prep fees may be tax deductible too.
Working with a Tax Preparer:
Many of my Clients are transitioning from self-preparing returns because of a change in life circumstance making taxes too complicated and have never worked with a tax preparer. As such, they have many questions on substantive tax law as well as the process of working with a tax accountant.
I suggest an introductory phone chat to gain some background to evaluate whether the tax preparer is a good fit for your situation.
You can also share mutual expectations regarding fees, due dates, timing, and the preferred method of sharing tax documents. You should choose a tax professional you feel comfortable working with as tax preparation is highly detailed work that involves sound communication and good rapport between parties.
District of Columbia and State Taxes
It is important to work with a tax preparer who is knowledgeable about your individual state taxes. Many taxpayers move to the DC area and retain their existing accountant who is not familiar or takes time to learn the new state tax laws. In my practice, I see many errors on District returns related to real estate activity, consulting income and Franchise Taxes. Each state has nuance tax provisions and tax preparers cannot be expected to remember them all. However, a good tax accountant will take the time to review state tax returns to make sure they are calculated correctly.
Tax Planning Advise
Tax planning is the process of evaluating a financial and lifestyle decision from a tax perspective to minimize tax liability through timing the use the deductions, credits, and exclusions. Tax planning needs to be accomplished in advance, as it asks the question of what can the taxpayer do proactively to save on taxes due next year. Also, asked from a different approach, what is the tax effect of completing a certain transaction. It is important for a tax advisor to educate clients on tax strategies on ways to save on taxes throughout the year.
Common Tax Savings Strategies:
Tax planning involves an analysis of business and personal transactions from a tax perspective, that are usually part of a much broader business strategy and lifestyle preference. Examples include evaluations of the timing of income and deductions, purchases and sales of assets, choice of business entity, residency and numerous other business and personal decisions. In my tax practice, taxpayers’ pose many ‘what if’ questions and they are best answered by running a formal tax plan and consultation session. Tax Planning Scenarios frequently analyze:
- Buying a home, including an Investment Rental Property
- Renting your personal residence, timing the Exclusion from Gain
- Moving to or from a State, including steps to change Domicile
- Setting up an LLC for my business, including the S-Corp Election
- Business owner Compensation planning, Salary vs. owner Draw
- Contributing to or taking a Distribution from Retirement Plans
- Receiving or making a Gift, including foreign gift Disclosure
- Moving and working overseas; Foreign Earned Income Exclusion
- Filing jointly or separately with Spouse, including non-citizens
- Itemizing tax deductions, including Charitable Contributions
- Purchase a business vehicle, including accelerated Depreciation
Working with a Tax Planning Attorney:
The first step in working with a tax planner is identifying your specific goals and objectives. Upon researching the issues and crunching numbers, a good tax planner will not impose a course of action upon the taxpayer, rather communicate the benefits and risks associated with a decision, including the projected tax savings. Decisions are made solely by Client after careful evaluation and analysis of all relevant considerations, including those aside from taxes. The tax attorney’s role will be to determine the tax effect of a particular transaction, and to assist the taxpayer in weighing the pros and cons in deciding to partake or refrain from said transaction. It is key for the tax planner to remain independent as to the course of action as it is ultimately the taxpayer’s decision.
Implementing your Tax Plan:
Once the taxpayer has agreed on the tax savings strategy, after having fully evaluated the benefits and costs, it is then necessary to implement the tax plan. The devil is in the detail with tax planning as certain steps and actions will need to be precisely followed. Some steps will also need to be completed by a certain date or within a specific time frame. For example, if you are rolling over funds from a retirement plan, this will need to be done within 60 days. Similarly, if you elect s-corporation tax treatment for your LLC, this will need to be filed with the IRS by March 15th. It is imperative that the tax planner communicate the process and supervise completion of all steps in the process, until the plan is fully implemented. Also, the tax plan should be reviewed periodically to make sure it still makes sense if there is change in circumstance, including changes in tax laws.
State Tax Issues
States have independent powers and authority to assess taxes and penalties, perform audits and enforce collection, distinct from the IRS. Some States are more aggressive than others, and States compete against each other for your tax dollar. State tax problems can generally be addressed independently of IRS Problems, though many of the same strategies applies. Addition, it may be wise to address state tax issues first.
Domicile vs. Residency
There is great confusion amongst taxpayers when it comes to what state they are required to file, with authority lying in domicile and residency. You are domiciled in a State if this is your permanent legal residence meaning this is the place you intend to be, even if you do not live here currently. Domicile indicators include drivers’ license, voting, car registration, real property ownership, business pursuits and social ties. You may also be a Resident of another state if you maintain a place of abode here and spend more than 183 days there, even though you are domiciled somewhere else (special rules exist for Military service members and their spouses). You may be considered a part-year resident if you either moved into or out of your State and were domiciled subsequently or previously elsewhere, the significance being that part year residents pay taxes during their allotted time here, while those domiciled are taxed for the full year, subject to credit for state taxes paid elsewhere.
Credit for Taxes Paid to Other States
State residents are taxed on all income earned from all sources, regardless of location. If you have received income from another state and are required to pay taxes there, you may be eligible for a credit to avoid double taxation. For example, if you are working in New York you may be able to claim a credit for NY taxes paid on your VA resident return. May taxpayers forget to claim this credit, resulting in an overpayment of their tax. Do not claim a credit for taxes paid to the District, instead seek a refund, as DC does not tax non-residents unless you are operating a business or rental activity and paying the franchise tax.
State Reciprocity Agreements
Certain border states may have agreements governing how residents and workers are taxed. For example, Taxes on wages are owed to the District of Columbia based on residency and not work location. So, for Residents who live in DC and work in VA or MD, make sure you adjust your withholding to your state of residency, particularly if you have moved. If you live in New Jersey and work in New York, you are going to be taxed by New York State on your income and received a credit for NY taxes when your file your tax return in NJ.
Foreign Tax Issues
The tax code is filled with provisions that address taxation of foreign nationals working here and U.S. Citizens earning income overseas. Foreign nationals are taxed on their income, based on their residency status and subject to tax treaty benefits. U.S. citizens on their worldwide income, subject to exclusion for foreign earned income if certain conditions are met. Both groups should pay attention to any disclosures that may be required for certain foreign transactions.
Foreigners located in the U.S. may be required to file a U.S. tax return. Your immigration status and time spent in the U.S. will be used to determine whether you should file as a Resident or Non-Resident and which tax form you may need to file (1040 or 1040NR). You will need to apply for an Individual Tax Identification Number (ITIN) in order to process the tax return. Careful attention should be paid to an applicable Tax Treaties with foreign Countries.
If you are a foreign national working here in the United States, you should pay careful attention to your Country’s tax treaty to determine any benefits. Under these treaties, residents of foreign countries may be exempt from U.S. income taxes on certain items of income they receive from sources within the United States. You should also consult your State tax authorities to find out if your State taxes the income of foreign individuals and, if so, whether the tax treaty applies to any of your income.
Taxpayers working overseas are still required to file a tax return, though may not owe any income tax. The Foreign Earned Income Exclusion of the tax code provides if you spend at least 330 days in a foreign country over a one-year period, may be able to exclude foreign earned income from U.S. taxation. If you do not qualify for the Exclusion, you may be able to claim a credit for any foreign taxes paid.
Taxpayers who marry non-citizen spouses may be unsure how to file their combined tax returns. By applying for a tax identification number for the non-citizen spouse, this would enable the couple to file jointly, with the more favorable joint tax rates and allowing for greater tax savings. A Tax analysis should be completed to verify the savings as the tax will be computed on both parties combined income. Taxpayers who have previously filed as Single because their spouse did not have a tax identification number, may be able to amend to file jointly.
Taxpayers with certain foreign bank accounts may need to disclose the details of these accounts to the U.S. Treasury and IRS if the account balances exceed certain thresholds. Penalties for non-compliance can be severe, however if you have reported all income from these accounts you may be able to file your disclosures late without any penalty. Other late filings require the showing or reasonable cause. Additionally, taxpayers who receive certain foreign gifts may be required to disclose these transactions on their tax returns though no taxes are due.
Some Foreign taxpayers who are selling real estate in the U.S. may be subjected to 10% withholding taxes on the contract price. Many foreign taxpayers do not know that this withholding requirement can be eliminated by calculating the estimate tax on the capital gain, if any, from the Sale. One Client was able to pocket nearly all surplus money at the Closing after the IRS accepted our tax calculation on the gain.
Business Tax Filings
Individual Taxes refers to the 1040 series of tax forms and includes Schedule C, Profit or Loss from Sole Proprietorship. Sole proprietorship is the simplest form of business with one owner. Business Taxes usually refers to Corporations (1120 series) and Partnerships (Form 1065), which are separate legal entities and file separate tax forms. Profits then flow to the Individual via a Schedule K-1. Though the business is required to file a return, it doesn’t pay any tax to the IRS.
Forms 1099 and W-2
If you have received a 1099-Misc, this means you are considered a free-lancer, are subject to the self-employment tax and must report the gross amount on Schedule C. Unlike form W-2, no income taxes have been withheld and remitted to the IRS or State on your behalf by your employer. Though you are now subject to greater taxes, form 1099-Misc and Schedule C do allow for claiming business deductions to help reduce taxes.
Self-employment tax is imposed by the IRS at 15.3% for individuals engaged in business and is used to fund Social Security and Medicare. The tax is applied to your business net profits. You are expected to estimate and pay this tax quarterly throughout the year, along with your regular tax. Your tax filing in April should be a reconciliation of your net income, tax calculation and your estimated taxes paid in.
Many taxpayers forget to claim this credit, resulting in an overpayment of their tax. Do not claim a credit for taxes paid to the District, instead seek a refund, as DC does not tax non-residents unless you are operating a business or rental activity and paying the franchise tax.
LLC and S-Corp Election
Many sole proprietor taxpayers opt to set up a limited liability company (LLC) for appearances and for liability protection. There is no tax consequence, unless you make an election with the IRS to be taxed as a separate entity and file a business tax return. Carefully attention should be paid to state taxes for businesses, particularly the D.C Franchise Tax. The S-Corp Election is a self-employment tax savings strategy that may benefit certain taxpayers.
Taxpayers that have an LLC may opt to file Form 2553 with the IRS and treat their entity as a separate entity for taxes. Dual sets of tax returns are then required (one for business and one for personal). The owner would be required to take a salary from the company via a W-2. The remaining profit would flow through to the individual, and not subject to self-employment tax.
Schedule C filers can deduct all ordinary and necessary business expenses. It is important to correctly categorize your expenses on the Form and retain back up support. Some overlooked expenses include the home office, depreciation, travel and meals. It may be necessary to issue 1099’s to recipients for amounts paid for professional fees and contract labor.
Schedule E filers can deduct all the expenses associated with renting their investment property, including interest, taxes, repairs, utilities, etc. If you are just renting out a room in your house, then you must allocate these expenses for the percentage share that applies to the rental portion. Though most rental properties generate tax losses due to depreciation, the loss may be suspended rather than currently deductible as a passive activity.
You will need an IRS tax identification number (EIN) for the business to open a business bank account and business credit card. Keep a ledger of your income if it differs from the amounts received into your bank account. You must keep the actual receipts for your purchases and not just your credit card statements. Keep these records for 3 years in a safe place.