IRS Penalty Abatement

IRS Penalty Abatement

Every year after the extension due date new clients contact me ready to file their tax return. This is the time we find out extensions were not actually file, and now they have multiple penalties and interest to pay. I get them updated and write a letter to abate penalties. 

The IRS isn’t in the business of letting people keep money. Penalty abatement is kind of easy the first time around for most clients. Some people don’t even feel it worth asking for penalty abatement/relief because everything involving the IRS is too complicated and time consuming. This is the part where I push up my glasses and tighten the tie getting ready to handle the hard part on their behalf.

I think taxpayers need to understand why the IRS actually uses penalties. Penalties are supposed to be a deterrent for people who fail to follow the rules and are out of compliance with the US tax code. They are a great way to bring in revenue for a under funded government branch so expect to see them applied whenever possible. The IRS apply millions of penalties to tax payers every year bringing in billions of easy money. Life happens and there are additional options to get penalties removed, or abated, for individuals ans businesses that qualify.

The most common used IRS penalties is the failure to file and failure to pay.

The IRS has over 130 different penalties the can assess. in the Internal Revenue Code, but two penalties make up 75% of all penalties assessed by the Internal Revenue Service. 

Failure to pay penalty equals 60% of all penalties.

Failure to file penalty equals approximately 15% of all penalties.

The tax penalties can be disputed by providing an exception when filing your tax return.

Penalties will be removed by the Internal Revenue Service for a few reasons. We normally end up requesting penalty abatement for a statutory exception or reasonable cause.

Statutory exception- Are specific authoritative exclusions to the penalties. Statutory exceptions are rare, but rather easy to make a case for. A statutory exception would be a presidential declared disaster relief.

IRS Fault: If you can prove an error was the result of reliance on IRS advice. We always caution against following an agents advice. We default to the US Tax code and use that. To use the IRS error for a penalty relief is difficult and rarely successful. You need to have documented erroneous advice from the IRS that you reasonably relied on. The IRS doesn’t put tax advice in writing in majority of cases. You can also file penalty abatement based on erroneous verbal advice. Being able to successfully use either argument is not common.

Reasonable cause: providing a valid reason that you couldn’t comply based on your facts and circumstances. This argument normally includes chronic health problems and reliance on a bad tax professional or tax software. Those types of problems can be used under reasonable cause.

To successfully apply for an abatement using a reasonable cause argument for late filing and payment has its own requirements. You must demonstrate that you genuinely tried to comply. Your actions should demonstrate a sense of care. You need to show that your noncompliance was not due to your willful neglect.

IRS agents are also citizens and taxpayers just like you. To successfully prove a reasonable cause, you’ll need to make sure that the IRS knows all of the facts around the circumstances. It can seem unnecessary, but not all situations are the same. Leaving out facts that can clarify your position could result in you receiving a denial letter. If the denial letter fails to address facts crucial to your argument presented earlier. The option to request an appeal of the determination should be explored.

The IRS can provide administrative relief from a penalty under certain conditions. The most widely used relief is the first-time penalty abatement (FTA). FTA can be used to abate your failure to file, failure to pay, and other penalties for a single tax period. You do need to have a good history of filing your returns. You can use first time penalty abatement for your business tax penalties as well. FTA is the easiest of all penalty relief options to get approved. You just have to ask for it. If you need help with the IRS you should contact iIATC Inc for tax resolution services.

Audit Flags

Every year millions of tax returns are audited by the IRS. The average taxpayer main concern behind paying taxes is somehow causing the IRS to audit their tax returns. It’s true that certain things can automatically trigger an audit. An audit doesn’t actually mean your return is wrong. There are items on a return that present higher opportunities for committing fraud or mistakes.

The burden of proof for taking credits and deductions falls on your shoulders. You might have to prove that you are taking a position on your return in line with current tax code. 

The audits are done primarily by mail today. There is a small chance of having an auditor show up in person. No matter how your audit is done you need to respond as soon as possible to ensure they don’t give you a default position. Letter normally state you have a certain amount of days from receiving the letter to respond if you disagree. If you don’t respond they automatically assume you agree with their findings in the letter. If you respond there are one of three things that happens.

The IRS auditors decides the information provided is correct and your return stays the same.

The IRS auditor proposes a change to your tax return, and you can agree to it and/or pay the appropriate taxes, interest or a penalty.

The IRS proposes a change you don’t agree. You have a chance to appeal and enter into an agreement with the IRS.

In the cases of serious tax fraud even though it’s an extremely rare outcome. The IRS can pursue forfeiture of property, jail time, and restitution.

Audit Flags

1. Reporting the wrong taxable income

The IRS actually receives your W-2,1099, and K-1’s before the taxpayers. This goes for both full-time employees and self-employed contractors.

You should check to see if your W-2 or 1099 you receive from any company matches your own records. If you think it is incorrect, immediately inform the company, and request that they file a corrected W-2 or 1099 with the IRS. If a company fails to update their information you would have to file a complaint with the IRS to go through this process of updating those records.

2. Charity donations

If you’re giving away large amounts of money to a charity when your income is low. Be prepared for some scrutiny from your tax pro and the IRS. If you are audited and can’t substantiate your donations. You and the tax pro will have fines and penalties to pay. Any large donation should be appraised, and you should file the Form 8283 for any donation over $500. Make sure you keep all of your charity receipts and follow the IRS’s tips for charitable donations.

3. Business Vehicles

Cars/ SUVs are still the main transportation for alot of business owners. Having a vehicles under your business doesn’t exclude you keeping track of personal miles. Running personal errands to pick up friends and go shopping should not be included. You should always keep a record of your mileage using qualified record keeping guidelines.

4. Home office

This deduction is on a lot of peoples deduction list. Who wouldn’t want to be able to take electricity, internet, and other expenses you use at home and get a benefit. There is a specific definition of what qualifies as a home office, so claiming it could easily trigger an audit. Ensure the room is where you do the majority of your work, and that is not used for any other purpose, especially personal use. This type of deduction can trigger an in-person audit where the IRS want to actually see the room you are claiming for a business deduction.

5. Tax Errors

Simple tax mistakes like small mathematical mistakes are the top reason for alot of audits. The IRS will normally fix these and send you a correction. This can also result in you actually receiving a larger refund as well. 

6. Round numbers

On indication of making up income and expenses is have a series of even or round numbers. This is a common practice for people who don’t keep records and try to prepare a return from memory. Audits don’t always happen immediately. They normally come a few years later. You should have documentation to support your deductions and credits. When preparing you return use the actual numbers that match your receipts and other records.

7. Business Losses

The main requirement for being considered to have a business by the IRS is actually doing something to earn a profit. If your business just constantly loses money year after year it will cause some red flags. If you report a loss three out of the last five years. The IRS might consider your business a hobby or fraudulent depending on your specific circumstances. If you have a business ensure your run it like one with receipts and backup.

Rideshare Driver Deductions

Rideshare Driver Deductions

Uber and Lyft drivers are considered independent contractors. The beginning of the year you will receive a 1099 that details the images driven, fees taken, and income paid to you from each service. For those who made 20k and had over 200 rides or deliveries you will receive a 1099-k. As a Contractors you will file a schedule C with your 1040 individual returns. 

Most rideshare drivers can deduct mileage, parking, tolls, food for passengers, and any other allowable expenses on Schedule C of their federal tax form.

The only requirement for claiming expenses is that they need to be “ordinary and necessary.” 

Uber drivers are able to take deductions for:

  1. Car Payments. Yes, car payments are deductible. You don’t have to actually own your car. If you are making lease payments the amount you pay is deductible up to the portion of the business use of your vehicle. 
  2. Licenses, Registration, Tags and Title, insurance, and uber fees are all deductible.
  3. Mileage Uber does tell you the mileage you drove for them, but you are required  to keep track of your personal use of your vehicle before you can actually take the deduction. 
  4. Tax and legal fees. You can deduct the cost of filing tax returns related to your business and tax planning. If you are a do it yourself type of person. you can take the cost of your tax prep software. 
  5. Home Office Deduction
  6. The new 20% Deduction on Pass-Through Income. On top of the allowed business deductions, the current tax law allows you to take a 20% deduction on pass-through income. To qualify for this deduction, you need to have business income. As long as your income is $157,000 (filing single) and $315,000 (filing jointly). If you have a business loss you will not see this 20% deduction on pass through income. The deduction on pass-through income is set to expire on December 31, 2025.

This list is not an all inclusive list of the allowable deductions for rideshare drivers. These are some of the most common.

2018 Tax Law Update Business

The new tax cuts and jobs act was recently signed into law for 2018. There are some pros and cons from this passage. One of the biggest changes is the overall decrease in corporate tax rates. Last year C corporations were subject to graduated tax rates of 15% for taxable income up to $50,000, 25% for income over $50,000 to $75,000, 34% for income over $75,000 to $10,000,000, and 35% for income over $10,000,000. If you happened to own a personal service corporation, you were subject to a flat income tax rate of 35% on all of your income. Now in the 2018 tax year the corporate tax rate a flat 21%. The new flat rate is now only 25% for personal service corporations. The new tax cuts and jobs act (TCJA) also gets rid of the corporate alternative minimum tax. An additional pro of the TCJA is the increased write off amounts for §179 deductions when you purchase new vehicles and machinery. There is a new pass through 20% deduction that your business could possibly take.

There were a few downsides for businesses in the TCJA. The first con was the new 20% deduction phases out for higher income businesses and personal service companies. The 2nd and major issue has been the removal of the meals and entertainment deduction. Businesses that take clients to sports events and restaurants will be losing this deduction. Food expenses that were previously 100% write off in 2017 starting in 2018 they are now cut to 50%. The food given out at your workplace like donuts and coffee will be a reduced write off in 2018. No matter what changes go into law be prepared by planning with a professional.

Foreign Income Reporting Requirements

Foreign Reporting Requirements

By law, U.S. citizens and residents must report their worldwide income. This includes income from foreign trusts and foreign bank and securities accounts.

You must file required tax forms. You may need to file Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may also need to file Form 8938, Statement of Specified Foreign Financial Assets. Certain domestic corporations, partnerships, and trusts that are considered formed or availed of for the purpose of holding, directly or indirectly, specified foreign financial assets (specified domestic entities) must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year.

There is a foreign earned income exclusion. If you qualify, you won’t pay tax on up to $100,800 of your wages and other foreign earned income.

Unmarried taxpayers. If you are not married, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Married taxpayers filing a joint income tax return. If you are married and you and your spouse file a joint income tax return, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

Specified foreign financial assets include the following assets.

1. Financial accounts maintained by a foreign financial institution.

 2. The following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution:

a. Stock or securities issued by someone that is not a U.S. person (including stock or securities issued by a person organized under the laws of a U.S. possession),

b. Any interest in a foreign entity, and c. Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person (including a financial contract issued by, or with a counterparty that is, a person organized under the laws of a U.S. possession).

Exceptions: If you do not have to file an income tax return for the tax year, you do not have to file Form 8938, even if the value of your specified foreign financial assets is more than the appropriate reporting threshold.

Duplicative reporting. You do not have to report any asset on Form 8938 if you report it on one or more of the following forms that you timely file with the IRS for the same tax year.

Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations.

Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.

Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. Instead, you must identify on Form 8938 the form(s) on which you report the specified foreign financial asset and how many of these forms you file.

In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts. Visit IRS.gov for more information. The FBAR is not filed with a federal tax return. When the IRS grants a filing extension for a taxpayer’s income tax return, it does not extend the time to file an FBAR. It should be filed at https://bsaefiling.fincen.treas.gov/main.html.

  1. the US person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
  2. the aggregate value of all foreign financial accounts exceeded $10,000 at anytime during the calendar year reported.

The new annual due date for filing Reports of Foreign Bank and Financial Accounts (FBAR) for foreign financial accounts is April 15. Schedule an appointment today so IATC Inc can help you.

What is Bookkeeping?

What is Bookkeeping?

Bookkeeping is one of the most outsourced functions of today’s accounting firms and businesses. A fairly large amount of accountants would gladly tell you it’s not worth their time to do your bookkeeping. Accountants at International Accounting & Tax Consultants feel just the opposite. Bookkeeping and accounting are really not the same thing. Bookkeeping is just one of the many functions of accounting.  Accounting encompasses many different functions involved in managing the financial affairs of a business. Accountants do prepare reports based largely on the work of the bookkeepers.

 

Bookkeeping is a crucial record-keeping task. Bookkeeping is considered entry level work, but it actually forms the foundation of information your accountant uses. When transactions are not properly recorded it’s costly to have to go back through your books and find the error. Preparing source documents for all the operations of a business. The transactions recorded cover buying, selling, transferring, paying and collecting activities. The source documents include papers such as purchase orders, invoices, credit card slips, time cards, time sheets and expense reports. Bookkeeping involves the ability to determine and enter in the source documents the financial effects of the transactions and other business events. Those include paying the employees, making sales, borrowing money or buying products or raw materials for production.

 

Bookkeepers also make entries of the financial transactions into journals and accounts. A journal is the record of transactions in chronological order. An accounts is a separate record, or page for each asset and each liability. One transaction can affect several accounts.

 

Bookkeeping involves preparing reports at the end of specific periods of time, such as daily, weekly, monthly, quarterly or annually. To do this, all the accounts need to be up to date. Inventory records must be updated and the reports checked and double-checked to ensure that they’re as error-free as possible. A bookkeeper also compiles the adjusted trial balance. While a small business may have a hundred or so accounts, very large businesses can have thousands of accounts. You have probably heard once or twice before about closing the books, which means bringing all the bookkeeping for a fiscal year to a close and summarized. Bookkeeping is still an important task for any company. Give your company the best foundation you can by using knowledgeable professionals like those at IATC.