End of Year Tax Tips – Part 2

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If you itemize your medical deductions, your qualified medical expenses in tax year 2012 are more valuable and deductible than those incurred in tax year 2013. Medical deductions will be more difficult to claim as itemized medical deductions in tax year 2013.

Specifically, for medical expenses to be claimed for tax year 2012, your qualified medical expenses must exceed 7.5% of your adjusted gross income before they can be claimed as an itemized deduction. In tax year 2013, your qualified medical expenses must be more than 10% of your adjusted gross income. Therefore, accelerating your out of pocket qualified medical expenses before December 31, 2012, may ensure that you meet the criteria for this year’s itemized deduction that you may otherwise be ineligible for in tax year 2013.

You want all the deductions you can get because that translates in to lower taxes and helps you to avoid tax problems.  If you’ve done all you can to minimize your tax bill and you still can’t pay it, call Montgomery & Wetenkamp at (800) 454-7043 to get help from an experienced tax attorney.

End of Year Tax Tips – Part 1

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‘Tis the season for holiday cheer … and last minute tax planning. Bah humbug!  With the tax year about to end, tax season will officially begin; it’s finally the time to ensure that you will not need to hire a tax relief attorney in April 2013.

My usual end of the year advice includes comparing your prior year tax returns with your present year income, tax withholdings, financial transactions, and withdrawals to determine whether you need to make late December moves to ensure you don’t owe a tax debt. This usually includes ensuring that you properly withheld taxes on your income throughout the year and/or made your estimated tax payments, and invested accordingly. While this advice is still sound, as of the date of writing of this article, if things in Washington D.C. remain the same, my advice also includes, earn it now if you can.

Being mindful to not illegally manipulate your income, i.e. you earn your income when you have a right to receive the income; accelerate your income in 2012, if you can. Since your tax rate may increase beginning January 1, 2013, the money you earn now is worth more now than it will be in just a few weeks because your tax rate is likely to increase. Likewise, self-employed individuals who have the ability to time the payment of deductible expenses may want to defer those expenses for tax year 2013, because those expenses will be more valuable in tax year 2013 than in tax year 2012.

The IRS "Lock-In" Letter

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It is common for self-employeds to fall behind on their estimated tax payments and find themselves stuck with insurmountable tax debt.  As a tax attorney, I see this all the time.  However, even W-2 employees can owe taxes at the end of the year if they claim too many allowances on their Form W-4.

The IRS is big on “voluntary compliance” — in other words, they initially rely on the taxpayer to figure out how much to have withheld for taxes during the year and how much he/she owes when taxes are filed.  But the IRS can also come back and audit you if they believe there were errors on your tax return.  Similarly, the IRS can force you to claim a lower number of allowances if they believe you are not having enough federal taxes withheld.  They do this by way of the “lock-in letter.”  The IRS lock-in letter instructs the employer to withhold federal income taxes at a specified higher rate and prohibits them from accepting a W-4 that reduces that rate.  Of course you may dispute the lock-in rate and get it changed . . .  with IRS approval.

Do You have Reasonable Cause?

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Sticking your head in the sand and trying to ignore your IRS tax debt can be costly. The most obvious problem is penalties and interest, which causes the debt to increase with every passing day.

And it is not as easy as you might think to get the IRS to disregard (or “abate”) the penalties. The IRS will consider penalty abatements if the taxpayer is able to show reasonable cause; however, this is a pretty high standard when it comes to tax obligations. Reasonable cause exists when the taxpayer exercised ordinary business care, but still failed to comply with their tax obligation (i.e., usually filing and/or paying late).

In its analysis of “ordinary business care” the IRS is supposed to weigh all applicable facts and circumstances, including the following:

  • taxpayer’s reason for non-compliance
  • compliance history
  • length of time
  • circumstances beyond taxpayer’s control

Death, serious illness, and natural disasters are typically some of the strongest “excuses” for building a penalty abatement case. Forgetfulness is almost always a losing argument. Most of the time it makes more sense to seek tax relief through other channels because penalty abatement is often a dead end road.

Year-end Tax Tips

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Tax attorneys typically come in two flavors.  There are those who help you to avoid tax problems through tax planning.  These tax attorneys will advise you on the tax consequences of transactions and will help you to avoid paying more taxes than necessary.  And there are those who try to clean up the mess that has happened through poor tax planning.  These “tax relief” attorneys will help you with tax controversies and help you in situations where you owe taxes and cannot pay.  Our firm focuses on the latter, but today I want to pass along a few tax planning tips from Fox News writer, Kay Bell.  These are her year-end tax strategies, and they are specifically geared for what may lie ahead for us in 2013 (i.e., the “fiscal cliff”):

  1. Accelerate your income into 2012, if possible, to avoid having to pay higher taxes at a higher rate next year. However, be careful you are not illegally manipulating when you receive the income; the IRS looks at when you had a right to the income.
  2. Take capital gains in 2012 to avoid potentially higher rates.
  3. Sell major assets that have lost value (unless capital gains tax go up in 2013).
  4. Get medical and dental work done now that you can still easily claim itemized medical deductions.
  5. But some may want to defer itemized deductions until next year in order to offset potentially higher tax rates.
  6. Convert your traditional IRS to a Roth IRA

As always, these are very generic tax tips and you should consult a CPA, tax attorney, or other tax professional who is familiar with your individual circumstances before making these types of decisions.

 

If you Don't Have a Friend Like Sheen

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Not everyone has a Charlie Sheen they can turn to when the IRS comes knocking.  You can blame your accountant for your IRS problem, or you can blame your ex-spouse, or you can blame the economy.  But chances are the IRS won’t care whose fault you perceive it is; they will just want the tax debt paid.

It is human nature to try to ignore the problem for as long as possible.  We procrastinate and we hope it will go away on its own.  Some of our clients don’t file returns when they become due for fear of incurring more and more debt.  However, in most cases, failing to file only makes things worse.  Some people ignore IRS notices or don’t even open IRS mail when it comes — again, this is not the best course of action.

The best way to get back on track with the IRS is to file all past-due returns and face the problem head-on by getting in touch with a tax professional as soon as possible.

The Sacramento Gold Dust Mystery

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In these days of FATCA and offshore accounts, for some it is hard to imagine those days when the preferred place to hide money was under a mattress or in a backyard hole.  There could be many reasons for wanting to conceal one’s true wealth, but few of them tend to be very honest.  Although, I suppose some people just don’t trust themselves to spend their own money responsibly.

The technicians at Clark & Rush, a Sacramento-based heating & A/C company, found $300,000 worth of gold dust packed away in 12 old baby food jars.  They happened upon the stash in September while doing an installation on an old home in Sacramento.  The gold dust was given to the homeowners who requested that their names not be made public.  Looks like somebody has some secrets.

Some people try to illegally hide money and assets from the IRS, and there is literally no end to the creativity.  But whether it is done in an effort to pay less taxes or to escape the collection arm of the IRS in an asset seizure situation, it is the wrong approach to tax relief.  No competent tax relief attorney will ever advise you or help you to do this.  A tax attorney will assist you with tax avoidance so that you pay only as much as you are legally required to pay, but will never help you with illegal tax evasion.

CSEDs – Part II

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I have written about CSEDs before.  These are the statute of limitation periods in tax cases; the “Collection Statute Expiration Dates.”  In a previous blog post, I listed what kinds of events can suspend the CSED.  Here I would like to address a couple additional details.

1. Waivers / Extensions (IRM 5.1.19.1)

If you are asked to sign a CSED waiver or extension, you are essentially agreeing to give the IRS additional time (beyond the standard 10 years) to collect the tax from you.  You are giving up the tax relief available to you at the end of the tunnel.  Before the 1998 tax reform, IRS revenue officers were essentially free to secure CSED waivers under any circumstances imaginable.  Also, there were no restrictions on how many waivers could be obtained from the same taxpayer or how far into the future the CSED could be extended.  Today CSED waivers have gone almost completely out of fashion, although some are still obtained in connection with installment agreements as required by law.

2. Substitute for Return (IRM 5.1.19.3.15)

A Substitute for Return (SFR) is an IRS-filed return that leaves out important exemptions or expenses you may be entitled to and may overstate your real tax liability.  Some believe that if a taxpayer goes back and files his own original return, this action automatically resets the CSED for that particular tax year.  This is not necessarily the case.  If the original taxpayer-filed return results in a lower liability, the original CSED remains intact.  And if the original return results in a higher liability, the CSED is updated (extended) only on the additional assessment.  A fine distinction, but an important one nonetheless.

IRS Phishing Hits New Low

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By now we are used to reports of phony IRS emails spamming computers around the nation. We know that identify theft scams can result in loss of privacy, loss of property, tax problems, and countless hours of work trying to straighten things out with the IRS and other government agencies. The IRS has made it abundantly clear that they do not communicate to taxpayers via email, and if ever we were to receive an email that purported to be from the IRS, we can rest assured that it is a phony. We know to leave suspicious-looking emails alone (not open them) and immediately report them to phishing@irs.gov.

But now there are reports of phony IRS websites too (See IRS Special Edition Tax Tip 2012-13).  The phony IRS websites look much like the IRS e-services website, but don’t have the all-important .gov designation. There’s a fool-proof way of steering clear of phony IRS websites. If you find yourself on a website that begins with www.irs.gov then you know you are on the official IRS website. If it begins with anything else, it shouldn’t take a tax attorney to tell you that it’s not the IRS!

IRS Doc Requests

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If you are working with the IRS in an effort to resolve a back tax debt, chances are you will have to divulge to them some, if not most, of your financial information.  You may also be required to submit documentation to substantiate (or prove) that the information you have provided is accurate.  And it’s not just out of curiosity; the IRS requires certain documents to verify that what you have told them is correct.

The most common types of documentation have to do with proving your income and expenses.  Income is typically substantiated by submitting one or more paycheck stubs, and expenses are typically substantiated by providing bank statements, receipts, or other proof of payment.  It is also common for the IRS to require you to demonstrate the absence of something.  For example, proof that you do not have access to a 401(k) or proof that you were unable to obtain a home equity loan, etc.

If you are working with a tax attorney or other representative, they will advise you on what information will have to be provided to the IRS.  And if it must be divulged, a tax attorney has the skills to present your case in a favorable light to help you obtain the best possible deal.