Archive for the ‘Penalties’ Tag

Back to Basics – Part XXXVI – Form 9465 Installment Agreement

Originally published in the Cedar Street Times

April 1, 2016

After more than a year, our Back to Basics series has come to an end.  We covered the 1040, all the major Schedules (A, B, C, D, E, and F) and 27 of the most common forms.  To access any articles from the past you can read them on my website atwww.tlongcpa.com/blog .

For our last article, we have some wonderful news!  The IRS recently announced that starting next year, on a three-year trial basis, they are moving to a voluntary income tax system.  You will be asked to pay what you feel is fair and what you can afford, but there will be no requirement to actually pay income tax.

If you haven’t picked up on the date of this publication yet, it is April Fool’s Day;  this utopian ideal will have to sit on the shelf a little longer!  But, if you do find yourself in a situation where you owe more than you can manage to part with by the due date of April 18th, there are some options for you.  Remember that even if you file an extension, the tax is still due by April 18th this year.

The IRS says that if you can pay your balance due in full within four months of the April 18 due date you can simply call them at 800-829-1040 and advise them of this.  You will still have to pay interest (currently 3 percent per annum) and penalties (0.5 percent of the unpaid balance per month – effectively another 6 percent per annum) until paid in full, but you will not have to setup an installment agreement…which is your next option.

If you think you will need more than four months to pay off the balance, then you need to set up an installment agreement to avoid letters threatening actions such as liens, asset seizure, and taking your first-born child.  Well, maybe the first-born child part is a little overdramatic.  Even the concept of seizing assets, although splashed across notices relatively early in the collection phase, is hardly ever a reality, and you would likely have to have a $100K or more tax bill before they would consider taking and selling off your assets.  Wage garnishments and liens do happen more often, however.

An advantage to an installment agreement, is that it cuts the late payment penalty in half – from 0.5 percent per month to 0.25 percent per month.  There is a $120 charge from the IRS to setup and installment agreement, but I recommend you have direct debit setup to take the payment directly out of your bank account each month.  This reduces the fee from $120 down to $52.  It also prevents you from accidentally missing a payment.  If you fail to make a payment, you can be kicked out of the program, and have to reapply, and pay a new fee.  Also, if you have a balance from an old year, and you need to add to it, you generally have to setup a new installment agreement as well.

You can file for an installment agreement using IRS Form 9465.  This can be e-filed with your tax returns, or mailed by paper.  Or, you can set it up online at http://www.irs.gov.  If you owe less than $25,000, you will generally be approved without any hassle, as long as you have a good filing history.  You can take the balance owed and divide by up to 72 months.  I generally recommend that you keep the monthly commitment low so you know you will not fail to be able pay some month and then get kicked out – but go ahead and make extra payments whenever you can to pay it down faster.  Even if you owe up to $50,000, you can still get automatic approval, but you will need to fill out page two of the 9465 that asks a few more financial questions.

If you owe over $50,000, then you also have to send in a 433-F Collection Information Statement.  This has a lot more specific questions about your finances, and is pretty much like providing personal financial statements.

California has a similar installment agreement process, but the amounts and rules differ a bit.  California generally only allows an automatic installment agreement if you have up to $10,000 of unpaid tax liability.  You can go up to $25,000, but you have to show that you have a financial hardship (not by your definition, however!).

The late payment penalties are five percent of the total unpaid tax liability during the first month, and then 0.5 percent each month thereafter until paid in full (capping at 25 percent like the federal does.)  The interest rate is currently the same as the federal three percent rate.  The fee to apply is $34, and you must pay off the balance in less than three years.  I typically recommend just paying the FTB off, if possible, and then only dealing with the IRS on one installment agreement.

The California installment agreement request is made on Form 3567.  You can also fill it out online at ftb.ca.gov by choosing “Installment Agreement” under the “Pay” section.  Your other option is to call the FTB at 800-689-4776.

Finally, there are also options for an offer in compromise, if you clearly will not be able to pay off your tax debts in the future based on your income and certain expenses.  The process is fairly mechanical, and you generally will either qualify or you will not.  It is not like you sit around and negotiate the amount.

Be wary of ads you see on TV or on the radio that talk about getting rid of your tax debts.  A retired collection officer at the IRS of 30 years once told me that many of these groups charge you fees go through all the work to fill out the forms and gather the information whether or not you even have a remote chance of qualifying.  Then you simply get rejected, and you are in a worse position than when you started.  Instead, they could do some preliminary analysis, and not generate a lot of busy work for themselves.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

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IRS Affected by Government Shutdown

Originally published in the Cedar Street Times

October 4, 2013

Due to the inability of Congress to come to terms regarding the government shutdown (or just about anything for that matter), I have a pretty good chance that this article will still be worth reading by the time it is published in the newspaper on Friday!

Everyone is aware by now that over 800,000 federal employees are on furlough. I read that this is more than all the employees of Target, General Motors, Exxon, and Google combined.  That is a lot of people!  Included in these 800,000 are most of the Internal Revenue Service employees.

Many of you may be cheering right now, but certainly not anyone that is waiting on a refund or currently trying to work out any problems with the IRS.  Prior to the furlough, telephone wait times to speak with an IRS agent have been 15 – 45 minutes, or sometimes you would get the message that they were too busy to even put you on hold, and then hang up on you.  Right now you will have an indefinite wait since the call centers are completely closed.  All local IRS offices are also closed to the public as well.  The shutdown will of course put even more pressure on wait times when funding is restored, and there is a backlog of problems to resolve.

This is an interesting time to be shutdown considering that extended personal tax returns are due on October 15.  The IRS still expects individuals and businesses to file all tax returns on time, keep making income and payroll tax payments, etc.  Presumably, they have some essential employees still on-the-clock to let the mailman in and to make deposits!  They are encouraging electronic filing since those returns are processed automatically by computers.  Paper returns will not be processed, however any payments enclosed will still be processed!  All tax refunds are suspended until normal operations resume.

Computer generated IRS notices will continue to be mailed out, but all audits, appeals, and taxpayer advocate cases are suspended.  If you had meetings scheduled they will be rescheduled.

The IRS website will still be up and running, but certain services may be unavailable.  The IRS automated telephone system will also still be working (800) 829-1040.

I can only assume that penalties and interest will still accrue even if you are waiting on the IRS to resolve an issue.

I called the IRS employee emergency hotline for kicks.  They are informing employees that they cannot perform any work, even if they want to volunteer their time to keep certain cases moving, and they cannot use any government computers, equipment, or other resources.  If they were en route traveling when the furlough began, they were to immediately return home.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Independent Contractor Vs. Employee: 1099s Due Jan. 31

Originally published in the Cedar Street Times

January 25, 2013

By the end of this month, business owners will have sent 1099s to their independent contractors and W-2s to their employees.  Many business owners think it is their choice, or perhaps a choice they can make together with the person performing the services on how they are to be treated.  It is not.

Business owners certainly see the savings to treat workers as independent contractors – no payroll taxes, no overtime, no break periods, no meal periods, no workers’ compensation insurance, no benefits, or a myriad of other California laws to follow.  Even if the worker gets higher pay to cover the extra taxes incurred as an independent contractor, he does not have to carry unemployment insurance or disability insurance on himself and sometimes thinks that is a personal benefit.  Of course, not having insurance is problematic for the worker and for the system as a whole, which depends on people paying premiums.

At the end of the day, people who are employees wearing the cloak of an independent contractor, are usually getting the short-end of the stick, because they really are dependent on the employer, and no longer have the ordinary benefits afforded by labor laws.  California knows this, and they come down hard on the employers when it is discovered that employees are misclassified as independent contractors.  Unfortunately, even for business owners that treat a misclassified independent contractor well, it can come back to haunt them if the individual becomes disgruntled.

Misclassification can get extremely expensive, or even sink a small business.  Besides legal fees, you could be hit with the tax liability, penalties, and interest from the IRS and FTB for all the back payroll taxes for the employee during the period misclassified.  You may also have to pay back wages and benefits the employee would have been entitled to.  The California Labor Commission can also fine you $5,000 to $25,000 per violation.

So, how do you know if someone is an employee or an independent contractor?  According to law it comes down to the right to direct and control the details and means of the work.  The IRS published Revenue Ruling 87-41 listing twenty points to consider as a guide.  They have also published their own internal auditor’s training guide, which provides more insight.  You can even file a Form SS-8 Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding to get an IRS determination in writing.  This form is most often used by disgruntled workers along with Form 8919 when they feel the employer misclassified them and they now owe tax or cannot get unemployment or disability benefits.  However, employers may also file the Form SS-8, or simply use it internally as a kind of double check to see if they feel they are classifying workers correctly.  All of these documents mentioned are available free online with a simple Google search.

Here is a simplified rundown of the twenty points from Revenue Ruling 87-41 which would help in the determination process.  You do not have to have all of them and no single one is decisive, but the first three are given a lot of weight. You may have an employee if: 1) you require the worker to follow specific instructions on when, where and how work is to do be done; 2) you provide formal or informal training for the worker; 3) the worker has predetermined earnings and always get paid for the work and does not have the ability to make a profit or incur a loss; 4) the services performed by the worker are highly integrated into your own and affect business success; 5) the worker is personally required to perform the services instead of having the option to have their own worker perform the services; 6) you hire, supervise, and pay for your worker’s assistants; 7) you have a continuous relationship with the worker – such as working with you every day; 8) you dictate the hours or days the worker performs services; 9) the worker works full-time for you; 10) you require the worker to perform services at your work site even though it could be done elsewhere;

11) you require the worker to perform services in a specific order or sequence; 12) you require written or oral reports regularly; 13) you pay hourly, weekly, or monthly versus by invoice or project completion; 14) you reimburse the worker’s travel and business expenses; 15) you provide the worker’s supplies, tools, computers, etc.; 16) you provide an office for the worker; 17)  the worker does not provide the same services to anyone else; 18) the worker does not advertise his own services to the general public, have business cards, etc.; 19) you can discharge the worker at any time instead of having to honor contract terms; 20) the worker can terminate his services without having to honor any contract terms.

Ultimately, the determination is a legal issue.  If you do not feel comfortable making the decision on your own, an attorney that focuses on employment practice matters should be consulted.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Do You Know if You Need to File a 1099-Misc by January 31st?

Originally Published in the Pacific Grove Hometown Bulletin

January 4, 2012

Happy New Year!   Now that the holidays are over and you are starting those New Year’s Resolutions, perhaps you should add one more to the mix – reviewing whether or not you need to file 1099s.  Penalties have doubled this year, and if you paid a non-employee over $600 in the course of your business during 2011, you likely need to file a 1099-Misc by the end of this month.

Penalties

Due to the strain of the economy, pressure is being put on taxing authorities to collect revenue wherever they can.  One way of collecting this revenue is through penalties for failure to comply with regulations.  This year we are witnessing increasing penalties, the creation of new penalties, and the enforcement of old penalties not previously enforced.  The filing of 1099s is no exception and is a large target because it also helps the taxing authorities identify people who fail to report income (and pay tax) of their own volition.  You may think, “I have never done this before,” but given the increased enforcement, this is a hollow reason for not reconsidering your position.

The federal penalties have doubled this year to $100 per 1099 for failure to provide a 1099 to a recipient, and another $100 for failure to file a copy with the IRS (I am sure you will find it a relief to know that the combined penalties are capped at $3 million for most of us!).  California has matching penalties of $50 each and they can also disallow the deduction for the amount you paid the person in question.

Who Gets 1099-Misc Forms

Generally, 1099-Misc forms are filed for service-providers that your business (sole proprietorship, nonprofit, or other business entity) pays to someone other than a corporation over $600 during a year.  There are many exceptions and reading through the instructions for form 1099-Misc (available online) is a great way to find out if you have filing requirements.  Exceptions include payments to attorneys, medical service providers, royalties, fish payments, direct sellers, and many more.  Just because you have a CPA or someone else prepare your taxes does not mean they know all the people for which you need to file 1099s.

When to File

Form 1099-Misc is required to be mailed to recipients by January 31st.  You also have to file a copy with the IRS by February 29th.  Copies mailed to the IRS have to be filed on specific forms printed in red ink, unless they are electronically filed by professionals or other online service providers.  The printed forms and software can be found at your local office supply store.

If you need additional help with a 1099 filing determination or with actually filing the 1099s this year, you should seek professional help as soon as possible.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.