Do you know what can be scary, not just at Halloween, but year round? Yep, you guessed it, the IRS . We would like to give you some words of caution about the IRS especially as we are nearing the end of October. At Molen & Associates, we highly recommend you focus on your taxes year-round, if you haven’t, then the perfect time to start is this Halloween!
What is the IRS?
The internal revenue service (IRS) is responsible for the collection of income taxes and the enforcement of tax laws. It operates under the authority of the United States Department of the Treasury. The IRS handles the corporate, gift, excise and estate taxes. You may hear the IRS colloquially referred to as “the Taxman”.
Below are different Tax Situations that can be a Halloween nightmare:
1) Tax Audit
Tax Audits are one of the biggest fears many people face, sometimes even more that death. If you are trying hard to follow the entirety of the IRS tax code, audits are something you must learn about. A Tax Audit is a review and examination of your taxes by the IRS to verify that your income and deductions are correct according to the tax laws. A Tax Audit is started when the IRS decides to examine your tax return a little more closely.
Procedure for IRS Tax Audits:
Tax Audits are conducted by the IRS and by the state government agency over taxation.
The IRS uses several different methods for an audit. Here are a couple:
Sometimes returns are selected based upon statistical methods. The IRS compares your taxes Returns against norms for the same returns. The IRS develops these policies from audits of random samples of all returns as a part of the National Research Program that the IRS conducts.
The IRS selects your returns if any issues are found. The IRS tries to audit tax returns as soon as possible after they are filed. Accordingly, most audits will be of returns filed within the last two years. The statute of limitations limits the time allowed to assess additional tax. It is generally three years after a return is due or was filed, whichever is later. These returns are then selected for audit and reviewed by an experienced auditor. Sometimes, audit letters are generated based on these policies without a human ever looking at the return. If auditors note something questionable, they will identify the items noted and forward the return for assignment to an examining group. If you are scared you may be at a high risk of an audit, feel free to call our office to discuss your situation and be aware of what triggers Tax Audits most frequently.
2) The IRS ‘notices’ everything:
The 1040 tax form is what taxpayers use the file to pay their taxes with the IRS. This file is used to report wages, salary, pensions and other types of income. Taxpayers are required to file these types of income on 1040 forms, according to their situation. If you raise any red flags, you may receive an official notice from the agency in your mail box.
In some cases, your reply to the notice will resolve the matter quickly. These types of exchanges of information with the IRS can be done using the U.S. Postal service to solve tax matters. While these are still technically an audit, they are commonly referred to as correspondence audits.
It is important to respond quickly to any tax notices you receive by the IRS. Make a quick response to IRS’s questions as soon as possible. Don’t skip any deadlines regarding notices from the IRS. Although these deadlines may be arbitrary dates, your response may be as simple as calling to ask for more time. As in any good relationship, communication is key. As an example, imagine if you ask your significant other to pick up some Halloween candy from the store via text. You don’t hear anything from them all day, so you assume they are busy working so you pick up the Halloween candy yourself. To your surprise, around 5pm, they stroll in holding a big bag of candy! While you are grateful they did as you asked, you are more frustrated because they didn’t communicate with you. This is similar to what I’m sure the IRS feels in many situations.
Remember that you can always hire an expert to review your IRS notice or audit and advise a best course of action. It is better to pay a professional tax firm such as Molen & Associates. We may not be able to fix all of your issues, but you will know that the IRS is being handled in the best way possible. Finding a firm that speaks the same language as the IRS and has a good reputation with the IRS is key. The fee from our tax firm may be much lower than potential fees from the IRS.
3) Tax Penalties
The IRS tracks all your penalties & interest. They will reflect these amounts on your tax bill via a notice. These may happen if you do not file a 1040 or pay the correct amount of taxes by the filing deadline.
There are two types of tax penalties:
As the name indicates, late tax penalties will be applied if you file your taxes late. It is important to file your taxes by the April 15th deadline for personal returns and C-Corp returns or the March 15th deadline if you are an S-Corp or Partnership. An extension request must be made if you are unable to meet this deadline. A tax penalty will be charged for each month late the filing was done. A very important note to remember here – filing an extension does not extend the time you have to pay, just the time you have to file your income tax return.
Another type of tax penalty used by the IRS is known as underpayment penalty. It is typically implemented when you do not pay all of the taxes you owe throughout the year. A few main rules for the underpayment penalty include:
- Withholding equals approximately 90 percent of your income tax obligation for the year.
- Withholding equals 100 percent of your previous year’s income tax obligation.
In some cases, taxpayers are not subject to an underpayment penalty. The IRS waives the penalty for the following situations:
- Taxpayer was unable to make sufficient quarterly payments due to a natural disaster, casualty, or unforeseen circumstance.
- Taxpayer retired during the tax year.
- Taxpayer became disabled during the tax year.
When your taxes are not paid in full and on time, a .5% penalty will be applied for each month of non-payment. Don’t forget the interest, which is compounded daily. Even at today’s low rates, they will add up quickly. Fore more information on penalties and interest, click here.
4) How do liens, levies and garnishments work?
Your situation will worsen if you ignore the IRS communications and fail to pay in full. Common ways this happens is through liens, levies and wage garnishments. A lien is a legal claim against your property to secure payment of your tax debt, while a levy actually takes the property to satisfy the tax debt. A federal tax lien comes into being when the IRS assesses a tax against you and sends you a bill that you neglect or refuse to pay it. The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property.
A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens.
A Lien is the public notice to all your lenders and is registered with your property. If a lien is listed on a property, you can’t sell the property without paying the lien holder first. The IRS will not release a lien until all your debts are paid in full or if you have an installment agreement in place.
The IRS has been accused of using the structuring arguments to improperly seize the taxpayer property that is unrelated to the transaction. This is now prohibited under the New IRS Reform bill, officially known as Taxpayer First.
The agency now seizes the taxpayer property only if it is shown to be derived from an illegal source that is related to any criminal activity.
Regarding the case of levying, the IRS will take money directly from that fund to pay off all your debt. The IRS will not only seize your property but also use your assets such as houses, vehicles, and properties to pay off all your tax bills.
In order for wage garnishments to occur, a court order i.e. served upon an employer is required. The employer will then deduct a portion of employee’s compensation to pay the portion of a creditor.
Beware and be ready when dealing with the IRS:
Do not forget to pay your taxes on time! Make sure you are ready to handle all tax terrors. Our tax experts at Molen & Associates are the best at working with tax preparation and will handle all of your tax and financial needs.
Contact us today at 281-440-6279! Our experienced tax advisors at Molen & Associates specialize in unraveling your tax headaches and love providing education to our clients. Do not stress anymore, we are on your side!