As a creditor, the IRS has the support of the federal government. Asides from having comprehensive ways to collect tax debts being owed, the IRS can also be very patient as long as they know payment will come in someday, they can wait till you have the financial capacity to carry out payment.
Some ways to reduce your tax debt include:
A monthly payment plan for paying the IRS! You may be able to take advantage of the United States tax code to get back 30 percent to 40 percent of your losses if you are a victim of an investment that is fraudulent.
Offer in Compromise:
This is a program which lets you carry out a settlement of your tax debts for lower than the amount you owe. It needs you to make a huge sum or short term plan for payment to pay the IRS at a minimized amount. If you owe the IRS higher than you can afford, this could be the best plan for you.
Not currently collectible:
This is a program where the IRS agrees not to collect the tax debt for a period. Not currently collectible means the taxpayer does not have the capacity to carry out payment for his or her tax debt. A taxpayer can be declared currently not collectible after evidence has been received that a taxpayer does not have the capacity to carry out payment.
Income tax debts may have eligibility for a discharge under chapter 13 or chapter 17 of the bankruptcy code. Filing for bankruptcy is one of the main ways to reduce your tax debt but this should be considered only if the requirement for discharging taxes has been met. Chapter 7 offers for a total discharge of debts allowable. Chapter 12 offers a payment plan to carry out repayment of some debts, with the remaining debts discharged.
Immediately we become your representative, we have the knowledge and expertise to deal with the IRS. As a former IRS agent myself, I have a full understanding of how the agency functions so I have the capacity to utilize that knowledge to my advantage. I am also a CPA and carry out forensic accounting which will let me look at your issue in ways you may not have thought of. As a tax attorney, I can represent your interests and negotiate on your behalf like I have successfully done for many clients before you.
There are three types of audits:
- A correspondence audit is done by mail. Never by email or by phone! The IRS will request specific documents that are being questioned in the tax return.
- A field audit is when the IRS requests to come to your office, home or tax preparer’s office to perform the audit.
- An office audit is when you are required to go to an IRS office to meet an auditor. You will usually bring documents that they have requested.
An audit can be defined as a formal review of financial accounts of an organization, business or an individual. An internal audit is carried out by members of similar business or organization and an external audit may be done by a government or regulatory agency.
There are six steps in the process of an audit which should be followed for an audit to be successful, and they include;
Asking for Documents
After the organization has been informed of the audit that is to take place, the auditor asks for documents stated on a checklist like receipts among others.
Preparing a plan for audit
Here the auditor cross-checks the information contained in the document and makes a plan of how the audit will be carried out. A risk workshop may be carried out to pinpoint possible issues. An audit plan is then created.
Scheduling an Open Meeting
Key administrative staff and senior management are called on to an open meeting in which the audit scope is laid down by the auditor.
Carrying out Fieldwork
The information amassed from the open meeting is taken by the auditor and he utilizes it in finalizing the plan for audit. Field work is then carried out by reaching out to members of staff and reviewing processes and procedures. Compliance with procedures and policies are tested by the auditor.
Drafting a Report
A report is prepared by the auditor which details the result of the audit. The report would be made up of posting problems, mathematical issues, payments which were authorized but were not paid and other inconsistencies. A commentary which describes the findings is then written by the auditor and ways suggested to solve the problems.
Setting Up a Closing Meeting
The auditor requires a response from management that shows if it disagrees or agrees with the issues contained in the report, a description of the plan of the management to fix the issue and a date for completion. At the close of meeting, all relevant parties talk about the report and responses to management. If there are any further issues, they are sorted out at this period.
It is not really certain what might lead to an audit by the IRS, and this results in many taxpayers acting nervously.
Although it is not really clear what leads to an audit, tax experts say there are some specific factors that can enhance the possibility of you getting selected for an audit. Some of which include;
You didn’t reveal all your taxable income;
The IRS has access to copies of all 1099s and w-2s and has a detailed understanding of a filter income, so you may have been selected if you didn’t report everything. It is one of the easiest ways to get audited. If you omit an earning by chance, the IRS would easily discover the omission and you may be chosen for an audit.
You made claims to the earned income credit;
This is a credit applied to moderate and low-income filers and can be worth over $6,000 which makes it one of those credits fraudulently claimed. This is a reason you may have been selected.
You filed a Schedule C;
The majority of filers who are self-employed fill out a schedule C to reveal the amount of money they realized or lost in a business.
Making math errors;
Don’t input the wrong figure on your tax return. Ensure you don’t get carried away and forget to place in a figure. Ensure you cross-check the figures as you would have to pay fines even if your mistake was accidental. Try as much as possible to avoid errors.
Other reasons that a taxpayer may have been selected for an audit include;
– Failure to reveal income or sales
– Failure to carry out filing for a return
– Surplus exclusions or credit claimed on a return
– Refund claims or filed returns that are fraudulent or incorrect
– Discrepancies observed when there is comparison to other information obtained from alternate sources
– Exploitation of exemption certificates
– Claiming too many charitable donations
You may have been selected based on a selection that was random or because during screening via computer – records didn’t tally with the provided information or math errors. Selection could also be from examinations that are related to investors or business partners that were selected for audit. Wealth is another factor, the higher your income, the higher the possibility of you being selected for an audit.
The Taxpayer’s Bill of Rights can be of benefit to have, when you want to deal with the IRS. There is additional information at https://www.irs.gov/uac/About-Publication-1, but see below for quick reference:
– The right to receive professional customer service. All dealings with the IRS should be prompt, courteous, professional and easily understandable. If you do not receive this standard of care, you can request to speak to a supervisor about the lack of professional customer service.
– The right to be informed of every decision the IRS makes relating to your tax accounts, and what you need to do to be in compliance with the tax code by having clear explanations of all documents that come from the IRS as well as all outcomes.
– The right to challenge the IRS’s position and be heard. You can provide additional documentation in response to the IRS’s actions which they must adhere to in a prompt and fair way, and receive a response from the IRS if they do not agree with your objections.
– The right to pay only what is legally owed, including interest and penalties, and the IRS to properly apply for these tax payments.
– The right to privacy and to expect that the audit and all IRS dealings will comply with the law and not be more invasive than necessary including due process rights such as search and seizure protections and where applicable, will provide due process hearing.
– The right to retain a representative of your choice to represent you in any and all dealings with the IRS.
– The right to appeal most IRS decisions including penalties owed. You have the right to receive a fair and impartial hearing if appealing an IRS decision. You have the right to take your case to court in an independent forum, and receive a written response from the Office of Appeals.
– The right to a fair and impartial tax system where facts and circumstances are considered that might affect your ability to pay the IRS including underlying liabilities.
– The right to clear deadlines. For you to know the maximum amount of time to challenge IRS decisions to the maximum amount of time the IRS has to audit a certain tax year or collect monies owed, and for you to know when the audit is over.
– The right to all information given to the IRS to be confidential and not be disclosed unless authorized by you or the law, and the right to take action if this is abused.
If you do not have the required funds to pay the entire amount that is due to be paid to the IRS, it is ideal that you reach out to the IRS about your options for payment. Even if you would be unable to pay the taxes by the set deadlines, it is in your interest to ensure you make the highest amount of payment as you possibly can so that penalties due to payment failure can be avoided according to the IRS website.
The following are some things you can do if you do not have enough funds;
Ask for an extension;
An additional 60-120 days can be requested for to pay your debts if the online payment agreement application on the IRS website is filled. You can also reach out to the IRS to set up an agreement for payment.
Paying as much as you possibly can by the deadline will reduce the amount that you would be required to pay in form of interest and penalties on the long run as well as a shorter payment agreement.
Apply for an agreement for installation
If you would require above 120 days carrying out payment of the full debt, send an application for an agreement for installment. You can also submit form 9465 Installment Agreement Request, in written form or contact the IRS. But the fastest path is doing so online.
Utilize an alternative payment method
Your tax burden could be financed by a personal loan or credit card. If you would prefer to manage those instructions – dealings with the IRS, bear in mind that there is a processing fee for credit cards.
It is up to you to select the best choice for your credit standing or budget. Utilizing a credit card or loan to carry out payment of your taxes can have an effect on your credit. The most crucial thing is to carry out payment before the deadline because tax debt collectors and a tax lien can result in financial issues as well.
Unpaid taxes can amass penalties which can grow largely over a period which is why it is crucial to deal with the situation as quickly as possible. Alternative methods are offered by the IRS to carry out payments of tax debts like Tax Penalty Abatement, Offers in Compromise, Currently Not Collectible (CNC) status, or payment programs. It is wise to have a tax advisor like a tax attorney to assist you in carrying out negotiations if you feel like it is something you can’t handle or deal with.
Generally, the IRS cannot levy your income or property until 30 days from the date of the Final Notice of Intent to Levy letter that is delivered via certified mail. Before those 30 days, you have the right to file for ‘Collection Due Process Rights’ where the IRS will have to try and work out a payment plan or some other payment plan with you if they ascertain that you cannot pay what they think you owe.
Before it gets to the Final Notice of Levy, the IRS will usually mail out three to four other letters before it will mail the Final Notice of Intent to Levy. You should take these letters seriously and take action as soon as possible by calling the IRS directly if you want to negotiate with them directly or contacting a tax professional to negotiate on your behalf.
The following are other conditions that have been set forth by the US congress before the IRS can begin a levy.
– Provide a written notice of intent of levy which also explains your right to make an appeal of the levy
– The notice must be personally delivered, sent by mail to your last known address or left at your residence 30 days before they take action
– It must consist of a detailed explanation as to why the levy is been carried out, your collection alternatives and the levy process.
Intent to levy does not mean that the IRS would come to your home and take over it but it means you have neglected past notices to pay taxes and that the IRS is becoming very intent about the collection of payment. A tax levy is a method used by the IRS to collect what you owe them since you are not willing to pay them by yourself. In most scenarios, your bank account will be levied by the IRS as well as your social security, assets, and wages. A tax lien may also be included to your home alongside a tax levy.
But if you do receive ‘intent to levy notice’ from the IRS, it can be scary because it means something has probably gone awry with your taxes and nothing has been done by you to fix the issue. While this may not be a good scenario, you might be able to get back to the good side of the IRS if the right moves are made by you in handling the intent to levy cautiously to ensure that the situation does not get worse.
Agents of the taxing authorities need to regularly carry out site visits to make sure that what you may have stated in the papers you filed in response to the request of an audit is true. They mostly do this to intimidate any individual that always seem to evade complete payment.
However, you are under no obligation to let them in. They are only allowed into public spaces of your home or business. Do not give them any records or documents; instead say you have ‘representation’ in which case the interview should be terminated.
Always ask to see the person’s credentials. A Revenue Officer, for example, is most likely there to collect unpaid income or payroll taxes. A Revenue Agent is slightly different as they audit you and/or your business. A Special Agent investigates criminal activities. They must notify you if you are under criminal investigation.
Do not lie to the IRS. This could be held against you later. Again, tell the agent that you have representation either through a CPA or tax attorney and the interview should be terminated.
If you, your employees or any member of your family are visited or contacted by the I.R.S, it is crucial to put the following into consideration;
– Even though you have been paid a visit of contacted by an agent of the I.R.S, this doesn’t mean that you have not done everything appropriately.
– Stay courteous and respectful.
– Ask for proof that the person works with the I.R.S like an ID-card, ensure you put down the name of the agent and the identification number.
– Ensure you have a full understanding of the type of I.R.S inquiry. If this information is not provided voluntarily by the I.R.S agent, then it’s best to ask for it. Ensure you comprehensively ask the reason the agent is making the appearance or contact.
– Instantly inform the agent that you request time to get advice from a Tax Representative.
– Once the request has been made by you, you are no longer obligated to provide answers to any more questions, but ensure you still remain respectful while not providing information.
Even though you have gotten a phone call, letter or been paid a visit by an agent of the I.R.S, this doesn’t mean you are guilty of any wrongdoing. Audit selections are made based on a computer model that closes returns according to how much dissimilarities there are from a national norm. Most times, after the required documentation or information has been supplied to the I.R.S and it is satisfactory, the file is usually closed.
Accountants provide cover for general bookkeeping, financial planning, preparations and filing of tax returns, providing assistance with cost, budgeting, estate planning and asset management and can assist in carrying out comprehensive business growth decisions.
The CPAs or Certified public accountants have gone through training that is more specialized and also have the needed credentials. To carry out basic business advice and tax filing, it may be ideal to utilize an accountant. Also, for numerous estates and financial planning, out of state returns, audits or asset management, it is ideal to spend more to hire a CPA.
Although the CPAs place more emphasis in filing of your tax returns and management of your finances, a tax attorney assists in helping out with the legal parts of the proceedings of your finance like filling a lawsuit against the IRS or providing representation for you if the IRS files a lawsuit against you, international business tax laws, tax fraud investigations, payroll taxation problems or IRS criminal investigations.
Nonetheless, both tax attorneys and CPAs have the capacity to offer support for tax planning and they can provide help to organizations and individuals in relation to financial decisions by placing emphasis on the likely benefits from tax or the implications of those decisions. For these circumstances, the tax attorneys provide enhanced specialization when it comes to the legal questions that have to do with tax planning while CPAs have more knowledge on the implications they have on your finance.
Additionally, both the tax attorneys and CPAs can assist companies and individuals to defend themselves when it has to do with issues related to tax. Tax attorneys are different because they have the knowledge and expertise in handling legal setbacks and can provide representation for clients in the court system while they are defending themselves from or going against the IRS. A CPA can assist in making a legal case stronger especially if he or she assisted in the preparation of the tax returns that resulted in the issue. Also, a tax attorney provides the benefit of an attorney-client privilege while a CPA only provides attorney-client privilege if serving towards the direction of a lawyer to provide the client with information that is relevant to the case.
So depending, if your CPA is aware of your predicament and is convenient assisting you in dealing with the IRS, then you might be okay having that individual represent you in an audit. Nonetheless, from our experience with other clients, a lot of CPAs do not like handling the IRS or audits.
If you want to battle your audit in Tax court, then you will require a tax attorney to provide you with representation. Many people put themselves in more trouble by providing too much information to the IRS which can result in self-admissions.
When an employee decides to exercise stock options, they may end up with an unexpected tax liability. To mitigate that, it’s essential to understand the kinds of stock options that were granted to you and the consequences of the exercise of your stock options.
First, let’s get some basics:
Stock options can be:
Why are they called “statutory”? When employers decide to issue those stock options, they choose to comply with certain “statutory” requirement (requirements set by law/statute), in exchange their employees get special treatment. That special treatment is: no taxable event takes place not at grant of option, not even at the exercise of the option, only when the underlying stock is sold. And even then, the underlying gain would be considered capital gain (if all other requirements are met).
There are two kinds of statutory stock option:
1. Incentive stock options
2. Stock options issued under the employer stock purchase plan
Incentive stock options (ISO)
In general, those options are granted for any reason connected with your employment. To be eligible for ISO treatment three things must happen:
1. Option must satisfy a number of requirements set out in the statute (hence, “statutory”) – we will discuss those requirements a bit later
2. Employee to whom the option is granted (you) must satisfy two “holding period requirements”
– you cannot sell the stock before the later of:
– the two year period from the date of the grant of the option OR
– the one-year period from the date of transfer of the stock to you
So, you must hold the stock until the later of: two years after you got the option or one year after you got the stock.
If you dispose of the stock before satisfying two holding period tests, you may have disqualifying disposition. The effect of that is income you get from sales of stock (less your cost – the exercise price of option) = your compensation.
You need to be aware of the two dollar limitations:
1) Percentage limitation on the total number of shares you can acquire under ISOs
At the time the option is granted to you, you may not own more than 10% of the voting stock of the corporation. This limitation would not apply if, at the time the option is granted, the option price is at least 10% higher than the fair market value of the stock and the option must be exercised within 5 years of the date of grant.
2) Annual dollar limitation on the amount of stock for which you may be granted ISOs
If your ISO was granted after 1986, follow this steps:
1. Get the fair market value of stock on the date of grant of option
2. Multiply the FMV from #1 by number of options you could have exercised for the first time during the calendar year – so, in essence, this is the value of the additional “perk” you received as an employee of the company.
3. Does that amount from #2 exceed $100,000? If yes, some of those options would not be ISOs.
Let’s calculate how much:
Take the number you got in #2 (the value of your “perk”) and subtract $100,000. Then divide the result by the FMV of the stock you got in number 1.
What you have here is the number of “excess” shares that would not be able to get that special ISO treatment as the statute only allows $100,000 in that “perk” to be received by you.
That number of “excess” shares will not be considered ISO and will be treated as nonstatutory stock options.
Back to the statutory requirements for an option to be an ISO:
1) The employer must have a written/electronic plan to grant those options.
2) That plan must specify the total number of option shares that may be issued and the employees who actually can receive the options
3) That plan must be approved by shareholders within 12 months before or after the date of adoption
4) The option must be granted within 10 years of earlier of the plan adoption or shareholder approval
5) The option must not be exercisable after 10 years from grant date
6) Option price must not be less than the fair market value of the stock when option is granted.
7) Employee cannot transfer the option (only if he or she dies)
8) Option must be exercisable only by employee during his or her lifetime.
There is also annual dollar limitation on options that qualify for ISO treatment.
All other stock options are nonstatutory.
What happens when we exercise incentive stock options?
1. We have no regular tax liability until we sell the stock.
2. BUT we may have alternative minimum tax liability. We include in our income for alternative minimum tax the difference between the fair market value of stock and exercise price of the option once your rights became fully vested. So you can follow the same process as we did for the nonstatutory stock options.
Now, if you dispose of the stock in the same year you include the gain in income for AMT purposes, that gain is limited to the difference between the amount you sold the stock for and the price you paid for the stock.
2. Nonstatutory Stock Options
If the option has an “ascertainable fair value” at the time it is granted to you, that fair value becomes part of your compensation (it is taxed to you as ordinary income).
Option does NOT have “ascertainable fair value” at the time it is granted to you (like when you join a start up/company that’s not publicly traded) – no taxable event occurs until you exercise/dispose of the option.
If the stock went up between the date you got the option and the date you exercised the option, that increase in value of the stock becomes part of your compensation (and it is taxed as ordinary income).
However, most times when you are granted the nonstatutory stock option, they are given to you with some kind of conditions (you are to work for the company for 2 years, etc.). If that’s the case, the stock is not considered vested (“belonging to you”) until those conditions are satisfied or removed. So that increase in value will be added to your compensation only when your rights in ownership of that stock become “substantially vested.” And after that any additional increase in value of the stock will be taxed at capital gain rates.
So we have several major time points to keep in mind when we think about tax consequences of nonstatutory stock options:
1) Date of grant of options
2) Date of vesting (conditions removed or satisfied)
3) Date of exercise of option (you purchase the stock at the option price)
4) Date of sale of the stock you bought.
You will need to know the value of the stock at every one of those time points.
The increase in value of the stock between 1 and 2 –> your compensation at date 2 (ordinary income)
The increase in value of the stock between 2 and 4 –> capital gain
The information above takes into consideration the legal guidance as of December 2015. As the law changes, your tax consequences of the stock option exercise may change too. It’s always best to consult your tax professional and get advice tailored to your particular situation.