Why Is My Tax Refund Less This Year?

The Tax Cuts and Jobs Act (TCJA) made the most sweeping rewrite of the tax code in more than three decades.  The last major change to the tax code occurred in 1986 and since that time, the U.S. tax code has gone from less than 30,000 pages to more than 70,000 pages.  Many taxpayers felt the impact of the changes during 2018 with less tax withholding in their paychecks, netting them a larger take-home pay.  Others are feeling the impact when they file their 2018 tax returns.

TCJA went into effect at the beginning of 2018 and the IRS made updates to the tax withholding tables to reflect the changes.  Employers use information a taxpayer submits on his W-4 to determine how much income tax should be withheld.  With so many changes to the tax code, the IRS warned taxpayers all year to check their tax withholding to ensure they were having sufficient tax withheld from their pay so they wouldn’t find themselves with a tax bill when they filed their 2018 tax return.  Many did not heed that advice.  The IRS expects that approximately 21% of taxpayers will owe the IRS this tax season.  Those taxpayers may ask, “What happened to the tax cuts?”  Many headlines in recent weeks have reported lower refunds for taxpayers, making it appear that many will not benefit from TCJA.  With the conversation now being directed toward refunds, the focus has turned away from what is important: tax liability.

A tax return is filed to determine how much tax you owe on the income you received during the tax year.  The return is reconciled with how much tax you paid during the year and the net will result in either you owing a balance or the IRS owing you a refund.  Tax liability and refund are two separate things.  Two taxpayers could have a tax liability of $10,000 and one of them realistically could owe $10,000 when they filed their tax return and the other could get a refund of $10,000.  How so?  The first tax payer may not have had any withholding during the year, meaning he has to pay his entire tax bill when he files his return.  The second taxpayer could have had $20,000 withheld, yielding him a $10,000 refund.

Here’s a practical example:  You go to the store to buy an item that costs $8.00.  You give the cashier $20.00 and she gives you $12.00 back – your “refund”.  The next week you go back to the store to buy the same item, but now it’s on sale for $6.00.  This time you give the cashier $10.00 and she gives you $4.00 back.  Now you’re upset because last week you got a $12.00 refund and this week you only got $4.00.  When you focus on the refund, you lose sight of what you actually paid.  Even though the “refund” was less on the second shopping trip, you actually paid $2.00 less than you did in the earlier week.  The same is true with tax refunds.  With the change in withholding tables to adjust for TCJA, many taxpayers didn’t have as much withheld from their paycheck (similar to giving the cashier $10.00 instead of $20.00).  They aren’t getting as much back in their refund or they may even owe because they kept some of the money that would have been withheld prior to TCJA.  But that doesn’t mean they are paying more tax.

The way to really understand how TCJA has affected a taxpayer is to look at the tax liability on the 2018 tax return and compare it to the amount on the 2017 return.  The tax is reported on line 15 of the 2018 tax return and on line 63 of the 2017 tax return.  Compare the two amounts and if the amount on line 15 of the 2018 return is less than the amount on line 63 of the 2017 return, then you paid less tax in 2018, regardless of the amount of refund or balance due.  And isn’t paying less tax what really matters?

 Is Your Business Considered a Hobby by the IRS?

Very frequently, tax preparers are asked to provide clarification on IRS rules that they heard from a friend, neighbor, or colleague.  Usually some part of the statement is true; however, there is always more to the story or it may not apply to that person’s specific situation.   If you’ve heard the statement, “You can’t deduct a loss from business if it occurs more than three out of five years,” this is not the entire truth.

A person who conducts an activity for profit is allowed to deduct the expenses that are ordinary and necessary in that industry.  If the expenses exceed the income, the amount can offset other income such as wages, interest, or dividends.  However, if your activity is a hobby, you cannot reduce your other income by the losses.

When your losses exceed the three-year rule, the burden of proof now shifts to the taxpayer to prove the activity is a for-profit business. Here are some factors to consider:

•  The manner in which you carry on the activity
•  The expertise of the taxpayer in this industry
•  The time and effort spent in the activity
•  The taxpayer’s history and success in this industry
•  The elements of personal pleasure or recreation

Here are some ways to ensure your for-profit business is not considered as a hobby:

1. Keep thorough and professional books.

2. Use a separate business bank and credit card account(s).

3. Log any personal use of assets, such as a camera.

4. Research trends in similar businesses.

5. Obtain insurance, registrations, certifications, and licenses needed for that type of industry.

6. Maintain a second phone listing for business.

7. Document evaluations of your operation to attempt to improve the business’s profitability.

8. Develop a written business plan and update it annually.

9. Keep a detailed calendar of your business activities.

Here’s an example:  Joe had a business as a personal chef.  This was not his primary way of earning income.  He had a W-2 job with a local city.   did earn about $200 to 300 in income; however, his expenses were much more than that.  Come to find out, he was hosting dinner parties at his home and wanting to write off the food, subscription to cooking magazines, and seeds for his home garden.

If you are in doubt, just imagine yourself in front of an auditor explaining your specific situation. If it “feels” like the story above, it may not fly with the auditor, but that does not mean it is not a true business.  What you need to do is plan and strategize.  What can you do today to prove that you are a for-profit business?

Know the rules and then step out in confidence. And, don’t get tax advice from a friend, because it might not be the whole truth! Consult your tax preparer to confirm your specific situation qualifies.


What is the IRS Fresh Start program?

The new Fresh Start initiative makes it easier for individual and business taxpayers to pay back taxes, avoid IRS tax liens, and get tax relief from the IRS.  Here is what you need to know about how to qualify for the IRS Fresh Start tax relief program.


Increase in the Notice of Federal Tax Lien Filing Threshold

One of the biggest improvements in the IRS Fresh Start program is the increase in the IRS Notice of Federal Tax Lien filing threshold.  The IRS has increased the minimum liability for filing a tax lien from $5,000 to $10,000.  IRS tax liens may still be filed on back taxes below $10,000 when needed; however, this change will help protect tens of thousands of taxpayers every year.  Since the Fresh Start Tax Lien change is not retroactive, the IRS cannot automatically withdraw a lien that was previously filed based on the old threshold amount.

Requesting a Lien Withdrawal After the Lien Has Been Released

As part of the Fresh Start initiative, the IRS may now issue a “withdrawal” of a tax lien that was previously filed after the lien has been “released”.  In general, a lien release occurs after an IRS tax balance is reduced to zero.  Although released, the lien still remains on your credit report and other records for approximately seven years.  A lien withdrawal will help remove the lien from your records and assist you in repairing your credit score and obtaining future loans.  Lien withdrawals must be made in writing using IRS Form 12277 Application for Withdrawal.

Tax Lien Withdrawal After Entering Into a Direct Debit Installment Agreement

If you meet certain IRS requirements for the Fresh Start program, you may qualify to have your IRS tax lien withdrawn after entering into a Direct Debit payment plan.  Both individual and business taxpayers may apply for a withdrawal if their tax debt is $25,000 or less.  The IRS debt must be paid off within 60 months (5 years)  or before the Collection Statute Expiration Date (CSED) expires, whichever comes first.  Taxpayers should note that the IRS reserves the right to file a new tax lien and resume collection efforts if a default occurs on the Direct Debit payment plan after the lien is withdrawn.


Streamlined Payment Plans

The Fresh Start program has also made it easier for taxpayers to qualify for an IRS streamlined installment agreement.  As a result of the program, the dollar criteria for streamlined payment plans has been raised from $25,000 to $50,000 and the maximum payoff  term has been raised from 60 months (5 years) to 72 months (6 years).

Under the IRS streamlined payment plan, debts must be paid within the 72 month payment period or prior to the Collection Statute Expiration Date (CSED), whichever is earlier.  As with regular installment agreements, Fresh Start payment plans require a taxpayer to be in current compliance with filing, tax withholding, and/or estimated tax payments.

In-Business Trust Fund Express Installment Agreements

New provisions of the Fresh Start program allow for small businesses who are currently operating and have IRS back taxes to qualify for an In-Business Trust Fund Express Installment Agreement (IBTF-Express IA).  For business taxpayers that owe $25,000 or less at the time an agreement is established, the IRS generally will not require a review of financial statements or proof of expenses.  The IRS tax debt must be fully paid within 24 months or prior to the Collection Statute Expiration Date (CSED), whichever comes first.

Taxes and Criminal Consequences – What You Need to Know About IRS Criminal Investigations

Learn the difference between an IRS audit and an IRS criminal investigation.

An IRS criminal investigation is not the same as an IRS audit.  During an audit, the IRS Examination Division is determining whether or not you have correctly prepared your tax return.  However, during an investigation, the IRS is putting together a criminal case which means you will be prosecuted by the U.S. Attorney’s Office.

If convicted, you could be subject to severe consequences, including fines and possible jail time.  This could end in financial ruin in some cases and up to 6 years in jail, with severe fines and penalties which could result in literally hundreds of thousands of dollars.  It should be noted that the government will not prosecute unless they are able to find a party guilty on at least 3 counts.  However, taxpayers are not often aware that they are under investigation until the last minute, so they may have unwillingly made an incriminating admission to an investigator.  This is why it is important to be aware of the possible signs or causes of a criminal investigation.

Possible Reasons for an IRS Investigation

There are many reasons that the IRS might wish to prosecute a taxpayer.  Below are some of the most common causes of a criminal investigation by the Internal Revenue Service.

  • Willful Failure to Pay
  • Fraudulent Statements
  • Additional Taxes Due
  • Attempt to Defeat Taxes
  • Tax Evasion
  • Tax Evasion Avoidance
  • Willful Failure to Maintain Records
  • Bankruptcy Fraud
  • Gaming Related Fraud
  • Healthcare or Insurance Fraud
  • Money Laundering
  • Real Estate Fraud
  • Questionable Tax Refunds

Warning Signs that You Might Be Under Investigation by the IRS

Even though it might completely catch you off guard, there are a few red flags which might alert you to the fact that you might be subject to a criminal investigation.  Below are some of the most common tell-tale signs:

  • You are informed by your bank that your records have been subpoenaed by the U.S. Attorney’s Office or the CID (IRS Criminal Investigation Division).  If this is the case, you need to contact a tax attorney immediately for legal advice.
  • If you are currently being pressured by an IRS agent and they suddenly stop contacting you.  They might be in the process of reporting your case to a CID agent.
  • Your friends, relatives or co-workers have been subpoenaed on your behalf.
  • You are undergoing an audit and your IRS agent suddenly stops contacting you.  This occurs because once a case is referred to the CID, it is put on “hold” so as not to jeopardize the case.
  • You are contacted via phone or at your place of business by a CID agent.  Do not offer them any information or documentation or answer any questions without legal counsel present!

If you notice any of the above, you should contact an experienced IRS tax attorney immediately to discuss your options. It is imperative that you use only an IRS attorney at this point as any statements and transactions which are made with your accountant can be used against your case.  Your conversations with your tax attorney, however, are protected.

The IRS Criminal Investigation Process

An investigation by the CID is to be taken with extreme seriousness.  The CID are federal “Special Agents” that wear a badge and are licensed to carry a firearm.  They are highly trained and experienced financial investigators.  They have the ability to contact your bankers, colleagues, employers, family members, friends and anyone else who might have information that is pertinent to your particular case.  The investigative process includes, but is not limited to, subpoenas of bank records, important documents, financial data, and search warrants.

Your first contact with a CID agent is initially through an in-person visit at your home or place of business.  They will then notify you that you are under criminal investigation by the IRS.  Again, you should simply say nothing and immediately notify a qualified IRS tax attorney.

If you are then indicted by the grand jury, you must appear in court starting with a bail hearing and arraignment.  If the judge does not dismiss your case, the verdict is thus left to the jury.  If the jury finds you guilty, you can petition for a lower sentence before the federal judge.  You also have the right to appeal to a higher court (Ninth Circuit Court of Appeals and then the US Supreme Court).

If your appeal is denied, you can attempt to reverse the case or get a new trial by petition a “habeas corpus” if you have just cause in that you were falsely accused, treated unjustly misrepresented, etc.

Possible Outcomes

Quite often, an agreement can be reached out of a court of law that will enable you pay a fine and/or penalty in lieu of jail time.  However, you could be subject to jail time up to (and possibly over) six years, depending on the severity of your case.  Penalties can start at $25,000 a year.

 If You Don’t Have Money to Pay Your Taxes, You Have Legitimate Options

If you don’t have money to pay what you owe the IRS, you have a few options to work with. Whatever you do, don’t ignore the letters from the IRS and don’t let your back tax problem go unattended. The IRS has a great deal of power when it comes to recovering money they think is theirs.

When you owe the IRS money, they can garnish your wages, levy your bank accounts, put a lien on your home, and seize other assets.

Here’s what you can do if you find yourself not being able to pay your taxes.  Note, I always recommend getting in touch with a specialized tax resolution professional to help avoid the harsh penalties and interest that accrued on your back taxes. It’s far easier to navigate towards tax resolution if you have a professional working with you.

First, make sure that you file your returns

Even if you have no hope of being able to pay your taxes, you should at least file your income tax returns. Whatever the penalties are for not paying your taxes, the penalties for not filing are much larger. The IRS will remove penalties for not filing and not paying but you have to have a good reason. I can request to have your penalties removed or reduced. It’s also important to remember that when you file for an extension, it only gives you more time to file. Your payment date remains unchanged.

Revisit your W-4 withholdings

If your employer withholds money from your salary to pay your taxes, you shouldn’t have to worry about paying anything extra from that income source. If you do owe more, it’s a sign that your withholding exemptions are incorrectly reported on your W-4 form. To make sure that you don’t get into tax trouble repeatedly, you should make sure your W-4 form is correct and get advice from a tax professional.

Make a partial payment

If you can’t afford to pay all that you owe, you should pay whatever you can. While you will still be hit with interest and penalty charges, the amount will be smaller than it would be if you paid nothing. These charges are proportional to what you owe the IRS.

Try to work with the IRS

If you can’t pay, there are resolution options available to you if you qualify for them. Options include a payment plan or an offer in compromise, among others. You need to first step up and admit to your inability to pay.

When the IRS grants you a payment plan, you get to pay your back taxes in installments each month. Applying for a payment plan is easy if you owe less than $10,000 – you simply need to fill out the form online. It can be more difficult to get the IRS to accept a monthly payment plan if you owe $10,000 to $50,000. If you owe more than $50,000, you need to complete IRS form 433-A. Generally once you hit the $50,000 threshold, it’s advisable that you hire the services of a competent experienced tax professional. If your repayment plan is approved, you can be granted up to 72 months to finish paying. You need to pay interest and processing fees for the plan, though.

If your financial hardship is serious enough to preclude the possibility of repayment in the future, the IRS has a program called the Offer in Compromise. You need to prove to the IRS that you will never be able to pay the full amount back even over time.

Be sure to not fall for false promises

Unscrupulous tax professionals and other con artists know how desperate things can get for people who are unable to afford their taxes. They sometimes advertise on television and radio, promising to negotiate with the IRS to bring your taxes down in return for a large fee without first seeing what IRS programs you are eligible for. You should be very careful before engaging these types of companies. Going to a local, experienced tax resolution professional may be in your best interest.

What are My Self-Employment Tax Obligations?

As a self-employed individual, generally you are required to file an annual return and pay quarterly estimated taxes.  Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax.  SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves.  It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.  In general, anytime the wording “self-employment tax” is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).  Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business.  You do this by subtracting your business expenses from your business income.  If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040.  If your expenses are more than your income, the difference is a net loss.  You have to file an income tax return if your net earnings from self-employment are $400 or more.  If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirements.

Who is My Dependent?

There are two ways a person might qualify to be your dependent for income tax purposes:  As a  qualifying child or as a qualifying relative.  The two are detailed below:

Who is a Qualifying Child?

There are four tests to determine if someone is a qualifying child for tax purposes:

  1.  Relationship — the taxpayer’s child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of one of these.
  2.  Residence — has the same principal residence as the taxpayer for more than half the tax year. Exceptions apply, in certain cases, for children of divorced or separated parents, kidnapped children, temporary absences, and for children who were born or died during the year.
  3.  Age — must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.
  4.  Support — did not provide more than one-half of his/her own support for the year.

If a child is claimed as a qualifying child by two or more taxpayers in a given year, the child will be the qualifying child of:

  • the parent;
  • if more than one taxpayer is the child’s parent, the one with whom the child lived for the longest time during the year, or, if the time was equal, the parent with the highest AGI;
  • if no taxpayer is the child’s parent, the taxpayer with the highest adjusted gross income (AGI).

Who Is a Qualifying Relative?

A Qualifying Relative is a person who meets the IRS requirements to be your dependent for tax purposes.  If someone is your Qualifying Relative, then you can claim them as a dependent on your tax return.

Despite the name, a Qualifying Relative does not necessarily have to be related to you.

An individual must meet all 4 of these requirements in order to be considered your Qualifying Relative.

  1. Not a Qualifying Child: The individual cannot be your Qualifying Child and cannot be someone else’s Qualifying Child. They are a Qualifying Child if they meet all the requirements, whether or not they are claimed as a dependent.
  2. Relationship: The person must either have lived with you for the entire year as a member of the household (a person who is not actually related to you may meet the requirements in this way), or be related to you in one of the following ways: your child, stepchild, grandchild or other descendant of one of your children (or stepchildren or foster children), son-in-law, daughter-in-law, brother, sister, half brother, half sister, stepbrother, stepsister, brother-in-law, sister-in-law, parent, stepfather, stepmother, father-in-law, mother-in-law, grandparent, and, if related by blood, aunt, uncle, niece, or nephew. Remember that a child whom you legally adopted is always considered to be your child. Also note that, for the purposes of this requirement, divorce or death does not change any relationship which was established by marriage.
  3. Gross Income: The person must have made less than $4,150 in gross income during 2018.
  4. Support: You must have provided more than half of the individual’s total support during the year.

Key Tax Changes Affect Taxpayers with Dependents

The Tax Cuts and Jobs Act, enacted in December 2017, added a new tax credit – Credit for Other Dependents.  It is a non-refundable credit of up to $500 per qualifying person.  Taxpayers may be able to claim the new credit for dependents that these taxpayers claimed a dependency exemption for in the past.   This change, along with others, can affect a family’s tax situation in 2018.  The law expanded and made significant changes to the Child Tax Credit.  More information can be found in Taxpayers with children, other dependents should check their withholding soon.  Checking and adjusting withholding now can prevent an unexpected tax bill and even penalties next year at tax time.

Achieve Tax Resolution with an Offer in Compromise

An offer in compromise is the IRS’ tax resolution debt settlement program.  It’s a program for taxpayers who owe the Internal Revenue Service more money than they can afford to pay.  It’s the IRS’ version of a “fresh start” when it comes to tax debt.  If approved, the IRS accepts a lesser amount (sometimes a fraction of what’s owed) to settle your debt.  However, it isn’t always easy to gain approval due to its strict criteria.  Your odds for acceptance increase significantly when you have experience negotiating with the IRS. The IRS considers your income, assets, expenses, ability to pay, and whether paying the full amount would cause financial hardship.

Information You Need to Submit an Application for an Offer in Compromise

It’s important to remember that the IRS wants its money and will only accept an offer in compromise if it thinks it wouldn’t receive any money otherwise.  You must be current with all filing and payment requirements to apply.  Additionally, you cannot be in the process of filing bankruptcy.

You can find more information about the IRS Offer in Compromise on the IRS website here.  If you want help with your back tax problem, contact me today for a consultation. http://www.sherithomasea.com

After supplying the IRS with your name, address, social security number, and the amount of tax debt you would like it to consider for this program, you need to supply details about your income, assets, and expenses. In addition to wages, your personal income can include:

  • Business profit
  • Self-employment income
  • Rental income
  • Child support or alimony
  • Interest on investments

Your assets can include things such as:

  • Stocks and bonds
  • Resale value of your personal vehicles
  • Market value of your home
  • Balance of your retirement savings accounts
  • Balance of bank accounts, including checking, savings, and investments

For the expense section, you should only include items you pay regularly. These may include:

  • Rent or mortgage
  • Child support or alimony
  • State and federal taxes
  • Daycare costs
  • Costs to maintain a vehicle
  • Auto, health, and life insurance

Compiling this information and completing the application correctly can be challenging even for tax practitioners who don’t have expertise in dealing with the IRS.  Your CPA or tax advisor most likely doesn’t have experience with resolving back tax issues.  That’s why I recommend working with a specialized tax resolution professional to better understand this option and increase your chances of approval.

Fraudsters Target Taxpayers in Million-Dollar Scam

Back in the 2016 tax season, there was a spate of fraudulent tax scams that unnerved the entire nation. The IRS reported a massive 400 percent increase in tax fraud, mostly perpetrated by a group of impersonators who used spoof TurboTax online software to steal user credentials through elaborate email phishing schemes.

Well, the tax scam menace has reared its ugly head once again, only this time it’s much bigger, more elaborate, and more daring than ever before. The Justice Department has announced that it has successfully uncovered a massive telefraud scam that Attorney General Jeff Sessions has termed as the “first-ever large scale, multi-jurisdiction prosecution targeting the India call-center scam industry.”

A total of 56 individuals and five Indian companies have already been charged in connection with the scheme of which 22 have been ordered to pay $8.97 million in restitution to the victims while another 21 were ordered to pay more than $72.9 million in judgments as a punishment for their crimes.

Extortion ring

The tax extortion ring was masterminded by criminals in the U.S. and India over a period of four years with 15,000 victims in the U.S. losing hundreds of millions of dollars and another 50,000 individuals having their personal data stolen. Fraudulent calls were placed by people impersonating Internal Revenue Service (IRS) of immigration officials who threatened arrest, deportation, or fines if the victims failed to immediately pay their debts via wire transfers or prepaid cards.

The shock and awe tactics seem to target vulnerable Americans including older people and immigrants, with the stolen cash routed through call centers to the ringleaders located in eight states in the U.S.  An 85-year old woman in San Diego parted with $12,300 after being threatened with arrest for tax evasion by people claiming to be IRS employees.

A Chicago man paid $5,070 after being threatened with arrest and deportation by supposed immigration authorities.

A New Hampshire woman was told to pay $3,980 to the IRS in payment cards by a caller with caller ID “U.S. Government.”

Nobody is immune though, with none other than the Connecticut state tax commissioner and a lawyer for the Federal Trade Commission having received such calls in recent times.

Be on the lookout

The IRS has posted repeated warnings about tax phone frauds where impostors pretending to be IRS agents call victims claiming that they owe back taxes then threaten arrest or legal action unless quick payment is made.  The criminals sometimes ask the individual to do a wire transfer but more frequently they direct them to obtain a prepaid money card at a retailer then provide the number to the caller.  The callers are usually aggressive, relentless, and ruthless.  They also strive to appear authentic by using robocalling technology that displays “IRS” on your caller identification screen.  They may provide your social security number and fake IRS badges. In some cases, the victim receives a series of follow-up calls by people pretending to be the police or prosecutors.

The IRS lists telefraud scams among a dozen tax scams that consumers should watch out for. The simplest and most effective advice to avoid becoming a victim is to ignore any calls from people purporting to be IRS agents.  The first time you hear from the IRS is never through a phone call or email but rather through written correspondence through the United States mail, usually involving countless notice streams in a highly formalized process.

The IRS typically initiates contact through a CP2000 notice that informs the recipient that the IRS has information that does not match their tax returns.  Payments are requested through an organized and secure platform, not an iTunes gift card.

If you receive any such dubious calls, file a report via the Treasury Website or call the Treasury Inspector General for Tax Administration at 1-800-366-4484.  You can also file a complaint with the Federal Trade Commission.

Your Rights as a Taxpayer

Whether it’s tax time or summertime, taxpayers have fundamental rights under the law when they interact with the IRS.  The Taxpayer Bill of Rights presents these rights in 10 categories.

Here is a wrap-up of these rights with links to more information about each right:

Right to be informed: Taxpayers have the right to know what is required to comply with the tax laws.

Right to quality service: Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS and the freedom to speak to a supervisor about inadequate service.

Right to pay no more than correct amount of tax: Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties.

Right to challenge the IRS’ position and be heard: Taxpayers have the right to object to formal IRS actions or proposed actions and provide justification with additional documentation.

Right to appeal IRS decision in an independent forum: Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including certain penalties.

Right to finality: Taxpayers have the right to know the maximum amount of time they have to challenge an IRS position and the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt.

Right to privacy: Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary.

Right to confidentiality: Taxpayers have the right to expect that their tax information will remain confidential.

Right to retain representation: Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS.

Right to fair and just tax system: Taxpayers have the right to expect fairness from the tax system. This includes considering all facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely.

Understanding Tax Penalties

With the April deadline in our rear view mirrors, many people have long since filed and forgotten about their 2017 tax returns.  For some, taxes will barely be on the radar again until it’s time to ring in 2019. However, you could receive an abrupt reminder of this tedious task unexpectedly in the form of an IRS notice, often including a potential penalty.

These are the most common IRS penalties, as well as information on how you might seek relief:

Failure-to-file and failure-to-pay
The IRS will consider any reason that establishes that you were unable to meet your federal tax obligations despite using “all ordinary business care and prudence” to do so.  Frequently cited reasons include fire, casualty, natural disaster or other disturbances.  The agency may also accept death, serious illness, incapacitation or unavoidable absence of the taxpayer or an immediate family member.

This is usually the simplest error to avoid though, and I always encourage people to ensure their tax returns are filed and paid by the appropriate deadline.

Estimated tax miscalculation
It’s possible, but unlikely, to obtain relief from estimated tax penalties on grounds of casualty, disaster, or other unusual circumstances.  You’re more likely to get these penalties abated if you can prove that the IRS made an error, such as crediting a payment to the wrong tax period, or that calculating the penalty using a different method (such as the annualized income installment method) would reduce or eliminate the penalty.  In these situations, it may be a good idea to consult with a tax professional before proceeding.

Tax-filing inaccuracy
These penalties may be imposed, for example, if the IRS finds that your return was prepared negligently or that there’s a substantial understatement of tax.  You can obtain relief from these penalties if you can demonstrate that you properly disclosed your tax position on your return and that you had a reasonable basis for taking that position.

Generally, you have a reasonable basis if your chances of withstanding an IRS challenge are greater than 50%.  Again, reliance on a competent tax professional will greatly improve your odds of obtaining penalty relief.  Other possible grounds for relief include computational errors and reliance on an inaccurate W-2, 1099, or other information statement.

I urge all taxpayers to take any penalty notices from the IRS seriously.  Mistakes can happen, on both ends of the tax filing process, and swift action should be taken in these instances to mitigate as much as possible any ensuing penalties.  Tax professionals can be invaluable in these situations, and I highly recommend a consultation.

Many taxpayers will owe when they file their 2018 tax returns

An expected 20% of taxpayers will not have enough taxes withheld from their paychecks during 2018. Use this calculator to see if your employer is withholding enough to prevent you from having a large balance due at tax time.


What to Do If You Can’t Pay Your Taxes

Even diligent taxpayers can have a bad year. Business losses, illness, and job loss are common reasons you may be unable to pay your taxes. If this happens to you, don’t panic. The IRS has payment programs to help you.

Understanding complex payment options can be difficult. It’s helpful to hire a qualified tax professional to reach a better resolution with the IRS.  Follow these steps when you can’t pay your taxes on time.

File and Pay What You Can Afford

Don’t avoid filing your tax return if you can’t pay the amount due. File and send in as much money as you can afford. You’ll save the  failure-to-file-penalty and reduce interest charges.

Contact the IRS

Next, contact the IRS to discuss payment options.  The IRS is willing to help taxpayers resolve tax debt.  Submit any missing returns before you reach out to the IRS.  Being current on your tax returns is a requirement for most IRS tax resolution options.

Keep in mind that the processes for tax payment programs may differ in your state.  Below are the general steps the IRS requires to apply for a tax resolution plan.

Negotiate Your Tax Debt

The IRS will consider an Offer in Compromise to settle your tax debt for less than the full amount you owe if you can prove you are unable to pay the debt.  To start the process, fill out the online Offer in Compromise Pre-Qualifier Form.

If you qualify, submit an Offer In Compromise application.  The IRS will review your application and respond to your offer.  If you need assistance, contact a tax resolution specialist to help you negotiate with the IRS.

Set Up an Installment Plan

Under an installment plan, you make equal monthly payments until the debt is paid. For tax debts under $50,000, you can apply for a streamline installment agreement without having to submit financial statements.

If your installment agreement will cover more than $50,000, fill out IRS Form 9465 and mail it in. The form instructions include the mailing address for your state. You may also need to provide detailed financial information on a Collection Information Statement, IRS Form 433-F.

Apply for Hardship Status

What if you don’t have the money to pay your taxes at all? When you suffer a hardship such as illness or loss of income, you may qualify for hardship status. Hardship status means the IRS agrees that your tax debt is currently not collectible (CNC).   You must prove that paying the taxes would create an undue financial hardship.

CNC status does not eliminate your debt.  However, attempts to collect the debt stop until your financial situation improves.  To apply, complete IRS Forms 1147 and 433-F and follow the instructions to mail them to the IRS.

You can recover from an outstanding tax bill. Contact the IRS to discuss a payment plan or a negotiate a lower rate. Navigating tax laws can be tough to do on your own. Consider hiring a tax professional who can explain your options and help you make the best decision.

IRS Tax Debt = No Passport

When you owe back taxes, the Internal Revenue Service uses a number of methods to collect payments. These collection methods include adding penalties and interest to debt, filing tax liens, issuing levies, garnishing wages, and seizing property.  As part of a December 2015 transportation bill, the IRS now has the ability to revoke passports of serious tax offenders.

If you owe more than $50,000 in tax-related debt, including penalties and interest, the IRS can revoke your passport at any time.  This new provision allows the Department of Treasury and the IRS to authorize the State Department to take away U.S. passports for individuals with serious tax debt.  The State Department now has the authorization to deny, revoke, or limit taxpayers’ use of a U.S. passport.  In addition to this, the State is not supposed to issue new passports to any individual with serious tax debts.  As the law states now, the State Department will act upon the  new legislation when told by the IRS to do so.

Your passport can be revoked both when you are in the country and when you are traveling out of the country.  For example, you could be on a trip to Europe and the government could revoke your passport not allowing you to return to the United States.  It is important to note exceptions can be made for emergencies and humanitarian reasons.  If you have already been working with the IRS to pay off your tax debt, the new passport-revoking provisions do not apply to you.  Additionally, if you are under a signed installment agreement, you will still be able to travel.

Some people find the new bill to be controversial, as passports may be required for domestic travel beginning this year.  After September 11th, 2001, the United States issued the Real ID Act, which was put into place to tighten access to federal facilities.  Part of the Real ID Act created a national standard for state-issued IDs; however, four states, Louisiana, Minnesota, New Hampshire, and New York did not comply, potentially making their IDs no longer valid for domestic flights.

This means individuals from these states must use their passports to fly within the United States, which creates an issue if passports are revoked for tax debt issues.

Here’s What the IRS Can Seize From You

Your personal property is likely very important to you. That is why when the IRS threatens to take it, it’s imperative to take decisive action, and quickly. Waiting too long to fight for your valuables can result in jewelry and furniture being removed from your home, your vehicles being repossessed, and even your personal residence being put up for auction. Business owners can face losing their properties, locks being placed on the doors of the company to prevent access, business equipment being removed from the workplace, and even the loss of supplies and inventory to the IRS, essentially shutting down the business for good.

During an IRS asset seizure, a taxpayer can lose everything they’ve worked hard for. Here is how the IRS seizure process works and what the agency can take from you.

Valuing Assets

Before assets are taken from a person, the IRS will first decide to take them based on the value. The amount of money that will need to be invested into selling the property will be subtracted from the appraisal. Even minor items will need to go through an initial appraisal process before the agency determines whether it is appropriate to seize them in order to settle the debt. The assets will need to be able to at least pay a portion of the tax liability upon the IRS determining that all other options will not be able to satisfy the debt.

What The IRS Can Take

In general, if the IRS is considering taking seizure action against you, it may pursue any and all of your real and personal property that contains sufficient equity. Intangible property, such as goodwill or rights to property, can also be seized. From jewelry to stamp collections, furniture to boats, and vehicles to paintings, the IRS can take it all.


The IRS typically uses in their in-house Property Appraisals and Liquidation Specialists (PALS) group to handle auctions. Sometimes, the IRS will also hire an outside company in order to auction the items off to buyers in exchange for money to be applied against the outstanding IRS debt. During the auction, there is generally a minimum bid that will be accepted by the IRS. There are many legal steps that first must be done, and the IRS will need to abide by any and all statutes relevant to the auctioning of personal and real property. Until the auction takes place and the property is sold for a value deemed reasonable, the IRS will be the owner of any properties that were taken. All IRS-seized property and scheduled auctions can be found on the designated IRS seizure and sale website here.

After the Sale

For buyers of IRS auctions, several legal processes need to be followed. These will be found within the auction rules, which the general public may not be familiar with. Many times, buyers will have to contend with various types of liens and other encumbrances and claims on the purchased property. They also are responsible for the immediate removal and transport of the purchased property from the IRS storage site. For the IRS, as long as the minimum bid is reached and the appropriate paperwork is signed, the agency considers the auction a success.

Debt Application

Whenever a tax lien is filed, the public is notified of a taxpayer’s failure to pay debts. In some states, the IRS cannot seize certain property, such as a home. However, in many states, this is still a possibility. If any properties are sold at a value higher than what is owed to the IRS, any additional money will be paid back to the taxpayer. If the value is less than what is owed, the money will still be put towards the debt, reducing the amount owed. This is generally what happens with smaller seized items that are taken to relieve tax debts.

Stopping the IRS Seizure Process

While the IRS possesses the power to seize and sell assets, taxpayers are also empowered to prevent the IRS from taking such drastic action. Before the IRS escalates their enforcement efforts, there are numerous opportunities for a taxpayer to effectively steer their IRS case towards a favorable and affordable resolution. When faced with a difficult IRS problem and the threat of a potential asset seizure, it is absolutely essential to have someone in your corner who understands the process and can help.

IRS Tax Lien vs. IRS Tax Levy: What’s the difference?

Taxpayers are often confused about the difference between an IRS tax lien and an IRS tax levy. Both are a part of the collection process when a taxpayer owes money to the IRS, but there are some crucial differences. It’s important to understand the difference between a tax lien and a tax levy in order to protect your rights and your property. Here’s a look at tax liens and tax levies and what you need to know about each.

IRS Tax Lien:

A federal tax lien automatically arises when the IRS assesses a tax against a taxpayer and sends a bill, but the taxpayer neglects or refuses to pay it.

The IRS then files a Notice of Federal Tax Lien with the county recorder in the county where you live, own property, or conduct business. The lien does not have to name the property to which it attaches; it automatically encumbers all real estate and personal property in the county. This public document alerts creditors that the government has a legal right to your property, including real estate, financial assets, vehicles, and equipment. It also attaches to all future assets acquired during the duration of the lien.

If credit reporting agencies pick up on the lien, it will be included in your credit report, damaging your credit score, and affecting your ability to borrow money, buy a home, or rent an apartment. It could even impact your ability to get a job.

A lien does not take the taxpayer’s property or take away the taxpayer’s right to sell the property. But it does give the IRS first dibs on the sales proceeds. For example, the IRS files a federal tax lien in the county in which the taxpayer owns a residence. The residence is worth $200,000 and has a $100,000 mortgage on the property. The taxpayer has a right to sell the home, but the $100,000 proceeds from the sale ($200,000 sales price less the $100,000 mortgage) will first go to the IRS to be applied against the tax debt before the taxpayer receives any proceeds from the sale.

You can get rid of the lien by paying your debt in full, settling the debt, or waiting until the statute of limitation expires – in most cases, 10 years. Even if you work out a payment arrangement with the IRS, the IRS may still file a federal tax lien.

IRS Tax Levy:

An IRS tax levy is different from a lien. A lien protects the government’s interest in your property when you don’t pay a tax debt, but a levy actually takes the property to pay the tax debt. If you do not pay the amount due or make arrangements to settle your debt, the IRS can seize and sell any real estate and business and personal property that you own or have an interest in.

The IRS can levy wages, bank accounts, subcontractor pay, accounts receivable, retirement accounts, homes, cars, and business equipment. However, seizing the taxpayer’s primary residence is rare and the IRS must first get legal approval. As such, seizing a home is usually reserved for only the most egregious cases.

There are a few things that the IRS cannot levy. These exemptions include unemployment benefits, workers compensation, most household goods, and some tools of your trade. Taxpayers commonly assume that if a federal tax lien has not been filed, the IRS cannot seize wages or bank accounts. This is incorrect. The IRS must file a federal tax lien before taking real estate and other property, but they can levy wages, bank accounts, and accounts receivable even if a federal tax lien has not been filed.

IRS levies are not a matter of public record and do not affect your credit report. However, because levies involve seizing assets, they typically cause a lot more problems for taxpayers than liens.

Avoiding IRS penalties

Can’t pay your tax balance? Did you know you can avoid up to 25% in penalties? The penalty for not filing a tax return is 5% of the tax balance due, up to a maximum of 25%.  That penalty can add up fast!   So even if you can’t pay the taxes due, file your tax returns! The penalty for not paying your tax balance is only 1/2 of 1 percent of the unpaid balance for each month or partial month the taxes remain unpaid. That is substantially LESS than the failure to file penalty. So don’t put off filing your tax returns on time, even if you have to delay payment.

What To Do If You Are Audited by the IRS

Filing a tax return is a responsibility that all people need to follow to stay compliant with the IRS. While most people will be able to file their taxes and receive a tax return, those with more complex tax situations, or are simply a bit unlucky, could face an audit from the IRS.

If you receive notification that you are to be audited, there are several things that you should do to make the process easier and ensure you get through it without any penalty.

Confirm the Audit

Millions of people every year receive some form of notification from the IRS that is calling something into question. While most people may overreact and assume it requires a full-blown audit, there is a chance that they just need one piece of information to finalize their review. Before doing anything, you should carefully review the letter and confirm with the IRS whether or not you’re going through a full audit.

Gather Information

If it turns out you are to be audited, the next thing you need to do is gather and provide as much information as possible. You will need to collect all of your tax-related forms including your W-2 statements, bank account statements, mortgage account statements, and anything else related to income or any form of tax deduction. Having all of this organized and ready for the IRS will lead to a quicker review and determination.

Speak with Tax Professional

If you hired an accountant to prepare your taxes, or if you paid for an audit support service, you should reach out to them immediately.  They will help you to gather the information you need and present it in a format that the IRS is seeking.  They will also be able to answer any specific questions that the IRS may have, which can take a lot of the work off your shoulders.

Be Polite and Courteous

Going through an audit with the IRS is a stressful experience. Furthermore, it can be easy to feel defensive and angry towards the IRS agent. However, it would be a big mistake to be rude or not provide all the information they are seeking.

Instead, you should focus on being polite and courteous and give as much information as promptly as possible. That will keep you on good terms with IRS during the entire process and will increase your chances of receiving a satisfactory review.

Undergoing an audit can be stressful and challenging.  However, there are several things that you can do after you get your notification of the review that will reduce your risk of penalty and make it a less stressful experience.  You should contact your qualified tax professional to see what resources are available for you during an audit.