New Congress, New Taxes

Since the recent change in Congress, there’s always been some inkling at higher taxes. Here are a few links indicating possible tax hikes. (House votes to link spending changes and tax shifts) and (How the budget got the way it did and what the new Congress may do to reverse that) Where will the tax hikes will be? We do not know. Most candidates would be to eliminate the tax cuts that the Bush Administration put in, or at the very least, not vote to not continue them. (One tax break in particular is the estate tax break deemed to end in 2010. We might think it all right, but don’t say that to the babyboomers heading into their golden years.)

“The lesson is that fighting a war, cutting taxes and funding a major new entitlement program all at the same time doesn’t work.”

“This is putting the American taxpayer on a collision course with higher taxes”

A good or bad thing? At the very least, the individual should always be planning ahead: business operations-wise, estate planning-wise, and investment-wise

No Money + No Job = CNC, typically

People who have tax liabilities, but have absolutely no assets to leverage, cash to pay, and no job, will be considered “Currently Not Collectible” (CNC) by the IRS. They won’t know you’re CNC qualified unless you prove your status to them. This status is definitely a god-send for those who need a little breathing space from the collection activities of the IRS. Mind you however, interest penalties will still accrue against your account while in CNC. What’s interesting is that the Collection Statute of Limitations is still running (rather than being tolled during any court proceeding), which means that once the statute runs, the IRS cannot collect for the liabilities assessed for that particular year’s liabilities. The CNC status usually expires when your financial situation improves.

The funny thing about being under CNC is that it is not an OIC or “Offer-in-Compromise”. An OIC, like an Installment Payment, is an agreement made between you (the taxpayer) and the IRS concerning how you will pay your tax liabilities. An OIC is usually less than your total liabilities, while an Installment Payment is a payment plan for all of your tax liabilities. An OIC, therefore, has a difficult set of criteria to abide by. The main unspoken rule that separates an OIC and an CNC is whether you have a job or are retired.

Other options? If you have no money and want to be cleared of your liabilities (rather than being CNC) but do not qualify for an OIC, you could attempt a filing of bankruptcy. However the laws have changed for bankruptcy back in 2005, making the process more difficult for filers.

In the end, as a note, just because you’re on CNC does not mean you’re out of the woods yet.

Crack Down?

These drives are less a crack down and more like higher efficiencies made by the IRS. With the coming age of information technology and the prevalence of updating and amending tax regulations over the years, it seems like the IRS is more able to analyze returns. Which unfortunately translates into taxpayers should be on the ball to report their income. It’s tough. The IRS is like a business. With technology and efficient procedures, they get better. As individuals and businesses, we too have to step up our abilities in reporting both being on time and being accurate.

• Audits of individuals with income of $1,000,000 and higher increased to 17,015 from 12,835, a nearly 33% increase in just one year. About 1 in every 16 of these taxpayers faced audits last year. If you’re earning that kind of money and they notice a problem, you’re going to hear from the IRS.
• Audits of individuals with incomes over $100,000 surpassed 257,000, an 18% increase from 2005. That’s the highest figure in more than a decade, and well over double the 92,000 completed in fiscal year 2001.
• Audits of S corporation returns increased to 13,984 from 10,417, a 34% increase. This is the highest level since 2000.
• For partnerships, audits of these flow-through returns increased to 9,777 from 8,489, a 15% increase. This category is at the highest level since 1998.
• Audits of small businesses organized as corporations remained about the same. 17,871 audits were completed in 2006, up slightly from 17,858 in 2005.Both of these figures are more than double the 7,294 audits of small businesses in 2004.
• Audits of larger corporations (those with assets over $10 million) dipped by 2.2%, to 10,591 from 10,829 in 2005.While down slightly this year, audits remain up nearly 50 percent from 2003.

How do Tax Professionals negotiate with the IRS? (And other items)

1. Are you currently making payments? The IRS will look at what you’re currently paying and try to capitalize the payment into one lump-sum, which is the amount you’re expected to pay out. For example, if you’re currently paying $200 per month and the IRS times that one month’s payment by 48 or 60 (depending), the taxpayer has to offer at least $9,600 ($200 x 48), or $12,000, or more, before the offer will be considered. There are a few situations that can avoid this.

2. On the payment application form, the IRS asks how you are going to pay the amount if the amount is accepted. They’re getting at whether you either have hidden funds or that you have a third source. Offers to be paid by a non-liable party, such as Mom, Brother, Sister-in-law, often receive more favorable treatment. The IRS does this because they’re getting access to funds not otherwise available.

3. Never never offer zero. It’s a plain negotiating tactic. Even if your tax professional finds that the total amount due is legally in doubt (doubt as to liability), if any offer is submitted offering “zero” dollars, the offer will not even be processed. Sounds crazy? It’s always the better course of action to offer some amount, even if it is believed nothing should be paid.

4. This is a big one: don’t lie about assets. Tell your tax professional the truth about all assets. A lie detected will nullify the agreement and could, in extreme cases, lead to criminal prosecution.

5. This is also a big one after the IRS has accepted your offer: all tax returns and payments have to be processed timely for the next five years or the offer, if accepted, is subsequently revoked, and you’re left paying the original amount.

6. This last tip goes with previous one: always make your scheduled payment. Once in a payment agreement accepted by the IRS, errant taxpayers frequently default (miss a payment) and often end up with forced collection efforts, levies and the like. The agreement is null and void and you’re back at square one, or in most cases, having to pay the original tax liability amount.

tax evasion and false filing and failing to file

Last post was a news clip of a man failing to disclose all his income in his tax returns, a charge that amounts to possible 5 years in jail and fees under Section 7201. Wesley Snipes has also been charged with evading tax by fraudulently claiming refunds, also an attempt to evade or defeat tax, under Section 7201. Snipes’ contention that he didn’t know of the fradulent claims seems questionable because the prosecutor should demonstrate proof that Snipes knew that his accountant was of the type to make fraudulent claims. Furthermore, Snipes, if he wants to claim innocence, should have always filed his return, or at least ask his accountant why a return was not filed. If you make money in any year (more than the minimum of that year), you must file your taxes. Filing taxes is like breathing, people just do it.

False Filing amounts to tax evasion. The United States works on a ‘volunteer return’ system. This doesn’t mean that the citizen gets to decide whether or not he or she wants to file a return. It should be more properly stated that the citizen must “volunteer up information about their income”.

Failing to File under Section 7203 can amount to 1 year in jail with fines. The IRS normally does not send the average late filer a letter indicating possible incarceration. However, this code section is available for any case the IRS deems necessary. Just because you think that you’re small fry, doesn’t mean that the IRS cannot act Section 7203 on you.

File your taxes.

The IRS allows the taxpayer to arrange his or her deals in the light most favorable to them, i.e. to lower tax liability, but only if the arrangement is legal.