The 2019 Illinois Tax Amnesty Program

Do you owe unpaid taxes to the State of Illinois? Well, we have good news for you. If you file any of those unfiled returns AND pay the liability owed, the State will FORGIVE any associated penalties and interest!

So what should you know about the program? Read on.

What tax liabilities and periods are eligible for the 2019 Illinois Tax Amnesty program?
Eligible liabilities are taxes due from periods ending after June 30, 2011, and prior to July 1, 2018.

What is the benefit of participating in the amnesty program?
If an eligible tax liability is paid in full between October 1, 2019, and November 15, 2019, eligible penalties and interest will be waived.

How do you participate?
If you have an existing tax liability, simply make full payments of your eligible tax liability between October 1, 2019, and November 15, 2019. If you failed to file a tax return or incorrectly reported the liability due on a previously filed return for these tax periods, now is the time to file the returns, make corrections, and pay the tax. You must file an original return for non-filed periods or file an amended return to make corrections.

What if you owe only penalty and interest?
If you owe only penalty and interest, you do not qualify for the amnesty program.

How do you ensure your payment is applied to the correct tax period?
The Illinois Department of Revenue encourages taxpayers to make separate payments for each tax liability they’re paying. However, if a taxpayer chooses to make one combined payment, they must clearly identify each eligible tax liability being paid by tax type, tax period, and amount. If they do not specify where the payment should be directed, their payment may be applied according to IDOR’s usual regulations and procedures, which may result in the payment being applied to periods that are not eligible for amnesty.

How do you make payment?
A taxpayer can make their payment via mail, check, in person or via My Tax Illinois. To read all the details on how to send payment, as well as get complete details about the program, visit this post on the IDOR website.

What if my liability has been referred to a collection agency??
If your account has been referred to a private collection agency, do not make your payment directly to IDOR. You must make your payment through the private collection agency. Contact the collection agency for your total amount of eligible amnesty debt or follow the directions you receive on the amnesty letter sent to you by the private collection agency.

Understanding IRS CSED Tolling Events

Many who owe taxes know that the IRS can not collect on a tax debt forever. Each tax assessment has what is known as a Collection Statute Expiration Date (CSED). Internal Revenue Code (IRC) section 6502 provides that the length of the period for collection after assessment of a tax liability is 10 years. Once the CSED has been reached, it ends the government’s right to pursue collection of a liability.

Items that stop the 10 year clock. What is important to understand is that while the normal time to collect is 10 years, various circumstance may “extend” the CSED. What these circumstances essentially do is push the CSED date forward in time. The IRC speaks to “suspension” of the period of limitations, during which the CSED “clock” stops running. Such suspension periods lead to the extension of the CSED.

So what actions stop the clock and for how long? The most encountered suspension (or tolling) events often include:

  1. Bankruptcy: CSED is tolled from the date of filing the petition until the date of discharge, plus 6 months. IRC § 6503(h)(2).
  2. Pending Installment Agreement: CSED is tolled from the date of the request for an installment agreement, plus appeals, plus 30 days. IRC § 6331(k)(2) and 6631(k)(3).
  3. Termination of Installment Agreement: CSED is tolled 30 days from the date of termination, plus appeals. IRC § 6331(k)(3).
  4. Pending Offer in Compromise: CSED is tolled from the date of acceptance for processing of the OIC plus appeals after rejection, plus 30 days. IRC § 6331(k)(3).
  5. CDP Hearings: CSED is tolled from the date of a timely request until final disposition. Additionally, if it is less than 90 days from the CSED, the CSED is reset to 90 days from the date of final disposition. Reg. § 301.6330-1(g)(3).
  6. Military-related Service in a Combat Zone: CSED is tolled the length of service, plus 180 days. IRC § 7508(a)(1)(i).

What does this look like in reality?

To help one understand how this may look when they analyze an IRS Account Transcript, we’ll review a few examples.

Let’s say a 2018 tax return is filed on the due date of 4/15/19. The tax assessed on 4/15/19 ordinarily has a CSED of 4/15/29. The taxpayer request an installment agreement that is reviewed from 8/1/19 until 9/1/19. This will toll the CSED for 30 days for the review and another 30 days post review (or 60 days total). As such, the new CSED will be 6/15/29. Easy enough right?

In a more involved example, let’s say a taxpayer files their 2017 tax return on 4/15/18, reflecting a tax liability of $11,906. The normal CSED would be 4/15/28. The taxpayer then files a bankruptcy petition on 5/15/18, and receives a Chapter 7 discharge on 8/15/18. The CSED is suspended for the period of the bankruptcy (92 days) plus six months. Accordingly, the new CSED is 1/12/29. Still fairly straightforward.

Where things often get confusing (for taxpayers as well as for IRS employees calculating the CSED) is when there is an intersection of suspension events. What is important for the taxpayer (as well as the IRS employee calculating the CSED) to know is that more than one case action can suspend the running of the collection statute at the same time. Overlapping suspensions run concurrently; they are not cumulative.

To illustrate this, let’s look at one last example. Taxpayer Rogers owes 1040 taxes for the period ending 12/31/08. The tax assessment date is 06/01/09 which established the original CSED as 06/01/19. Rogers, who is in the Army Reserves, gets called up for combat duty and enters the combat zone on 05/10/14. He subsequently leaves the combat zone on 03/01/15. He submits an offer in compromise on 04/20/15, it is rejected on 10/17/15 and the rejection is not appealed.

Both case actions, entering the combat zone and submitting the offer in compromise, suspend and extend the CSED. The combat zone duty suspends the CSED from 05/10/14 through 03/01/15 plus 180 days (through 08/28/15). Consideration of the offer in compromise suspends the CSED from 04/20/15 through 10/17/15 plus an additional 30 days for the rejection appeal period (through 11/16/15).

However, because these case actions overlap, the CSED will be suspended only from the date Rogers enters the combat zone (TC 500 cc 56 on 05/10/14) through the date the offer in compromise is rejected and the rejection appeal period ends (TC 481 on 11/16/15). In this case, the overlapping of the two case actions (from 04/20/15 to 08/28/15) is considered in the CSED extension only once. If you are a tax geek looking for guidance, see IRM 5.1.19.3(2). As a result of the above, the CSED will be extended 555 days from the original CSED of 06/01/19. The new CSED will be 12/08/20.

Do YOU need help evaluating your CSED?
While you could go through the hassle of calculating your CSED, do you really want to? In this post from our sister site, we talk about some of the nitty-gritty details of the CSED. We also talk about how you can have US calculate the CSED for you for a flat $75 fee for an unlimited number of years. So if you want to know your CSED but don’t feel like calculating it, why not head on over to the other site and shoot us an email or give us a call?

What is the IRS Matching Program?

When a taxpayer earns income, the issuing party will provide them with an IRS form. This may include a Form W2, Form 1099-MISC, Form 1099-DIV, Form 1099-INT, etc. The key thing to remember is that not only does the taxpayer receive this form, but so does the IRS. Well, at some point in time, the IRS runs “checks” to make sure that the income reported on these forms “matches” what is reported on the tax return. If there is a mismatch? Well, let’s just say that the IRS will send you a “love letter” bringing the discrepancy to your attention.

Understanding upfront matching

With this program, the IRS scrutinizes income reporting before issuing a taxpayer’s refund via the following steps:

  1. The IRS receives a tax return.
  2. The IRS matches the return against Forms W-2 and/or Forms 1099 that the IRS has received.
  3. If everything matches between the return and the information statements, the IRS releases the refund.
  4. If the IRS finds a mismatch, the IRS freezes the refund and sends a notice to the taxpayer asking for more information to prove their income and withholding.

Understanding CP2000 matching

When a tax return’s information doesn’t match data reported to the Internal Revenue Service by employers, banks and other third parties, the IRS will send a letter to the taxpayer. The letter is called an IRS Notice CP2000, and it gives detailed information about issues the IRS identified and provides steps taxpayers should take to resolve those issues.

This isn’t a formal audit notification, but a notice to see if the taxpayer agrees or disagrees with the proposed tax changes. Taxpayers should respond to the CP2000, usually within 30 days from the date printed on the notice. If a timely response can’t be made, taxpayers need to call the toll-free number shown on the notice and request additional time to respond.

The key thing to note is that CP2000 matching doesn’t typically happen immediately unlike upfront matching. In fact, it often happens months (if not almost a year) after a tax return is filed. Let’s take a look at a 2017 tax return as an example shall we?

A tax year 2017 return was due April 15th 2018, but could have been extended until October 15th 2018. During the early part of 2018, the payor’s of income (e.g. employers, banks, etc) send their corresponding IRS forms to the IRS. These in turn, populate the Wage & Income module associated with a taxpayers account (i.e. SSN or EIN) all the way until December 31st 2018. Once the extension deadline passes (10/15), the IRS matching program will begin to “flag” unreported/under-reported income between October 2018 and March of 2019 via a code 922 on the Wage & Income transcript (i.e. review of unreported income). The IRS will then send taxpayers CP2000 notices between March and October of 2019!

The income matching and CP2000 timeline illustrated

What Can You Do?

To avoid a mismatch, make sure that you report all of the income that is reported on the IRS forms that you receive. If you are working with a tax advisor, make sure that you give them all the documents you receive so they can file an accurate return and report all income received in a tax year. In addition, if you discover a tax return error, make sure to amend the return as soon as possible to avoid penalties or audits.

Need Help With a CP2000 Notice of Amending A Return?

We routinely assist taxpayers when they need help “fixing” a return. Furthermore, since we deal with filing old tax returns, we have the software to go back up to 10 years if needed!  So, if you need help, give us a call now via the number above or shoot us an email via the address in the footer on this page. We can help you address your letter and correct your return in as little as 48 hours.

What is the IRS Trust Fund Recovery Penalty?

When you pay your employees, you don’t pay them all the money they earned. The federal income tax and employees’ share of social security and Medicare taxes that you withhold from your employees’ paychecks are part of their wages that you pay to the U.S. Treasury instead of to your employees. Your employees “trust” that you will pay the withheld taxes to the U.S. Treasury by making federal tax deposits. This is the reason that these withheld taxes are called “trust fund taxes.”

If federal income, social security, or Medicare taxes that must be withheld aren’t either 1) withheld or 2) deposited or paid to the U.S. Treasury, the government can charge a very serious penalty called the Trust Fund Recovery Penalty (TFRP). If you are looking at an IRS Account Transcript for your SSN (or a tax lien), you may see notations for Civil Penalty, CIV-PEN, or 6672 Penalty. To get a better understanding of trust-fund taxes, you should also understand non-trust fund taxes.

What Are Non-Trust Fund Taxes?

Employers must match their employees’ Social Security and Medicare contributions. Those matching amounts are considered non-trust fund taxes. The IRS typically only holds a business responsible for non-trust fund taxes if they aren’t paid to the government. It does not hold individuals responsible. However, the exact liability rules depend on your business structure. If the business is “self-employed” or the sole principal of an LLC, a person may be held personally responsible for both trust-fund and non-trust fund taxes.

How Much Is the Trust Fund Recovery Penalty Amount?

The Tax Fund Recovery Penalty is not small. In fact, it is equal to 100% of the amount of taxes that were unpaid. Once again, that includes any income taxes withheld from an employee’s paycheck plus the employee’s Social Security and Medicare contributions. Note that Social Security and Medicare contributions are also referred to as FICA (Federal Insurance Contributions Act) taxes.

To illustrate, let’s say you paid an employee $2,000. You noted on the paycheck stub that you withheld $200 for income tax plus $124 for Social Security and $29 for Medicare. However, you didn’t send any of that money to the IRS. In that case, the unpaid tax bill is $353. You owe that amount plus that amount again as a penalty. That effectively doubles your bill!

Who Can Be Responsible for the TFRP?

If these unpaid taxes can’t be immediately collected from the employer or business, the TFRP may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, or paying over these taxes, and who acted “willfully” in not doing so. That includes owners, CEOs, and directors, but it can also include employees, third party payroll administrators, outside accountants, and bookkeepers.

To establish responsibility, the IRS has to prove two things. First, that the individual in question was responsible for remitting the taxes (i.e. the responsible party). Second, the individual must aware that the taxes were due and purposefully or willfully ignored the law (i.e. willfulness). For example, if you or someone related to your organization took the money set outside for payroll and income taxes and used it to pay another bill, that’s a clear sign of willfulness.

How does the IRS Assess a TFRP?

If the IRS believes that a company hasn’t been paying its trust fund taxes, a Revenue Officer from the IRS starts an assessment to identify the responsible party. As part of that process, the IRS requests multiple documents and lots of information from the company. This documentation includes bank statements and canceled checks, but it also includes details about who has passwords for online accounts and who knows PINs for bank cards. Basically, the IRS wants to see who’s paying the bills, who’s controlling the money, and where the money is going. They will also want to conduct an interview known as a 4180 interview (which is based on IRS-Form-4180).

Once the IRS identifies who was responsible and willful, they will assess the penalty.

What Forms Are Involved in the TFRP?

If the IRS thinks you are responsible, you will receive Letter 1153. This is the notice the IRS sends when the business has refused to pay the payroll taxes, and the IRS has decided to hold an individual personally responsible for the debt. Accompanying this letter is Form 2751.

Signing Form 2751 is an admission that a person is responsible for the unpaid payroll tax. Once the form is signed, it is almost impossible to reverse it. The only way to change the admission is to hire an attorney who can argue that you were coerced into signing. As such, if a person doesn’t agree with the letter, then it is not advised to Form 2751. The notice gives you 60 days to appeal, and to do so, you need to prove that you were not responsible for the unpaid tax debt.

What Is the Statute of Limitations on the TFRP?

If the IRS assesses a penalty, it has up to 10 years to collect it. During that time, if you have not made arrangements to settle/pay the penalties, then you can be subject to “enforced collections” (i.e. the IRS attempting to seize assets, garnish wages, offset refunds, etc.).

However, the IRS only has 3 years to assess the penalty. This clock starts ticking on April 15 after the year the trust fund taxes were due to be filed. For instance, let’s say a company was supposed to pay some trust fund taxes in October 2019. The IRS has three years from April 15, 2020 to assess the penalty. If the IRS doesn’t do anything by April 14, 2023, it can’t do anything after that date.

How Can You Settle the Penalty?

Like other types of tax debt, there are options to pay this penalty. If you don’t have the full payment, you can apply for a payment plan (a.k.a installment agreement). Alternatively, you can try to settle the debt for less than you owe through the offer in compromise program or through a partial payment installment agreement.

The important thing to note is that you should contact the IRS and set up an arrangement before the IRS tries to garnish your wages or seize your assets. It is also important to note that these penalties can not be discharged in bankruptcy.

Need help with your payroll tax problems?

If you have unpaid payroll taxes, have been assessed the TFRP, need a payroll provider to help you get back on track or just have tax debt in general, we can help! Simply click this link to our parent company site and complete the form at the bottom, shoot us an email via the address in the footer or give us a call.

In doing so, we’ll send you our FREE special report entitled 5 Questions To Ask Any Tax Resolution Firm Before Paying Them A Dime, a comprehensive 30-minute Tax Debt Settlement Analysis AND your personalized Tax Resolution Plan (a package valued at $175, but FREE to you for a limited time).

Understanding IRS Reasonable Cause Criteria

Often times, when someone owes taxes that they haven’t paid for a few years, they are surprised when they find out how much the IRS says they owe.   This is because the IRS inevitably tacks on several of the dozens of penalties they are allowed to charge.   However it’s the late filing, the late payment and the penalty for not making Federal Tax Deposits (when combined) that can add a whopping 65% to your total IRS bill.  The good news is that if your tax debt is more than two years old, you’ve maxed out all these penalties!

The IRS does actually have a compassionate side, and it’s typically found in the penalty abatement process. The thing to keep in mind is that the IRS has very strict guidelines for granting penalty abatements, and these guidelines are referred to as “reasonable cause criteria.” 

The primary IRS penalty abatement reasonable cause criteria center on natural disasters, loss or destruction of vital business records, bad advice from the IRS or an accounting professional, criminal activity, medical issues, substance abuse problems, and other serious circumstances.  Thus, you are more likely to have your penalties abated if the circumstances cause you to answer “yes” to any of the following questions:

  • Were any business records lost or destroyed?
  • Were there any circumstances that led to a substantial drop in collecting on accounts receivable?
  • Was there any transition in the business that lead to the failure to pay taxes?
  • Was there a death or serious illness that directly affected the business or personal wages?
  • Was there any embezzlement of funds, theft of valuable property, or identity theft?
  • Were there any alcohol or drug abuse issues that affected the business or wage earning capability?
  • Was there a natural disaster that impacted you or your business?
  • Did you rely on the advice of a CPA or IRS employee in making tax decisions?
  • Were there any circumstances that created substantial financial hardship, to the point where your business was close to going bankrupt?

Specific Internal Revenue Manual (IRM) References

The sections of the IRM outlined below will help you see what the IRS will consider and how they evaluate each circumstances. Please note that this list is not exhaustive and that the IRS will consider the facts and circumstances on a case by case basis. The other thing to note is that if your initial request is denied, it might be approved via submitting an appeal.

In our next post, we’ll talk about how you can create your reasonable cause letter to the IRS and what it should contain.

5 Payroll Essentials Every Employer Should Know

Once you’ve hired your first employee, then you must make sure they get paid right? Well, we’ve seen some of the mistakes that employers typically make when they first start running payroll. This post will talk about the most important elements of processing payroll so that you don’t wind up in trouble.

Understand the labor laws.

As an employer, you must adhere to the federal, state, and local labor and employment laws. The federal Fair Labor Standards Act (FLSA) establishes rules for the minimum wage, premium pay for overtime, and protections for children who work. All employers should be aware of FLSA requirements as well as state and local wage and hour laws. One thing to be aware of is that they sometimes appear to contradict one another. For example, the federal minimum wage is $7.25, it’s $8.25 in Illinois and starting July 1, 2019 it will be $13.00 in Chicago. As such, you must always follow the provisions that are most favorable to your employees (i.e., pay $13 per hour if you’re located in Chicago). Most states have informative websites to help you figure out which laws apply. It’s a good idea to start there and then talk with a professional to make sure you’re following the right set of laws.

Establish your pay schedule.

Once your pay rates are determined to be in accordance with the laws, you then have to figure out how often to pay your employees. The beginning and ending dates of this schedule is referred to as your pay period, which represents the period in which your staff logged work time or earned wages. Pay periods typically include weekly, biweekly, semi-monthly and monthly. The “payday” is the actual date on which employees are paid. It’s usually a fixed number of days after the end of the pay period.

Withholding payroll taxes.

When it comes to payroll taxes, there are two parties, who are required to pay taxes on wages. This would be the employee and employer. These taxes are usually owed to both the federal government and the state, and in some cases to cities and municipalities as well. This post discusses in detail what some of those taxes are and your responsibilities. However, an employer is generally responsible for collecting federal income tax, Social Security, and Medicare tax from employees’ paychecks based on what employees marked in their Form W-4. The employer must then also pay a matching amount of Social Security and Medicare tax as well as Federal Unemployment Tax (FUTA).

Remitting taxes collected and filing the appropriate tax returns.

As an employer, it is your responsibility to deposit federal income tax withheld for your employees pay as well as both the employer and employee portions of social security and Medicare taxes.  However when are you to make the deposits and how do you make them?  Also, what are the penalties for making deposits late?  This post will give you all the pertinent details.

Now for filings. Paying the taxes is one thing, but you must also file the corresponding returns. If you don’t, then the taxing authorities can’t properly match the deposits with other needed information. Federal Form 941 (quarterly federal tax return) must be filed each quarter, and Form 940 (FUTA tax return) must be filed yearly. You may also have to file similar forms for your state. Employers are also required to send Forms W-2 and W-3 to the Social Security Administration (SSA) each year. Most payroll services will handle these filings for you. If you do them yourself, read more about these forms here.

Keep good records.

As an employer, you must keep track of hours worked for hourly, nonexempt employees. Most workers are classified as either exempt or nonexempt depending on their salary and the type of work they do. You can read about these and other classifications in the FLSA and your state’s wage and hour laws. You can learn more about the timekeeping requirements by reviewing this fact sheet from the Department of Labor .

What To Do If You Have Unfiled Tax Returns

Did you know that per statistics in the 2017 IRS Data Book, there were about 14 million delinquent taxpayers at the end of 2016 and 2017? That means that the IRS has identified 14 million people who should have filed tax returns but did not. With that said, falling behind on filing your taxes is something that happens to many people.

We know that this can be scary, and can cause one to have many questions about how to make it right with the IRS.  Luckily, there are steps that you can take to satisfy what the IRS will require of you and get you back into the system so you can get rid of the worry! So, here are 10 things you should know about the situation:

File even if you don’t think you owe. If you were employed with wages and had taxes withheld from your paycheck, it is possible that you may not owe the IRS at all.  This will depend on the amount withheld from your wages and any other deductions you may have (mortgage interest, etc.). If you have refunds, you should actually receive those for the last three years’ returns UNLESS you have amounts owed for other years. In that scenario, the refunds will be applied to any balances due for the other years.

File original returns to replace IRS created returns.  Sometimes, when you don’t file a return, the IRS files one for you.  In IRS terminology, this is called a Substitute for Return (SFR).  Our experience has been that a SFR is the worst tax return ever! It reports the income that shows up on W2s and 1099s but doesn’t give you any deductions or exemptions.  You may already have a bill from the IRS that was created in connection with a SFR.  The good news is that you can correct these returns, and possibly lower the associated tax and penalties, by filing an “original” return.

Gather your records.  When you have old tax returns to file, it is important for them to be as accurate as possible. So the first things you want to do is pull together your records for the years where you did not file.  This may include 1099s or W2’s you received for work your performed, mortgage interest you paid, or interest, dividends and stock sales.  Don’t worry if you are missing records because if you are:

Secure your IRS transcripts. Your records are supplemented by securing the IRS transcripts that will show what has been reported to the IRS. Basically, you want to make sure you report everything the IRS has for your SSN, otherwise, they will send you some notices claiming that you under reported income. Getting the transcripts will cross-check your records, filling in anything that is missing. The appropriate transcript to request is called the Wage and Income Transcript. You can get it via this page on the IRS website and you can request it online or you can use Form 4506-T to request it via mail.

Review the past six years of activity.    If you have six or more years of unfiled returns, make sure you do the above two steps for each year. Why? In most cases, the IRS requires the last six years’ tax returns to be filed as an indicator of being current and compliant.  This is per Policy Statement 5-133 and Internal Revenue Manual 4.12.1.3.  As such, make this your starting point of your analysis.

Review other sources of income. The IRS transcripts are a checking point, but you will also need to check for things that aren’t reported on them. For example, if there is income you earned that is not on the transcripts (e.g. cash payments), you need to make sure you calculate it and include it on your return.

Review your business income and expenses if you’re self employed.  Income can be recalculated using several methods, including 1099 reporting to the IRS or your bank deposits.  Working with this number, determining what you spent to generate that income. When done, take a look at what is left (i.e. the profit). You can then compare that number to what you spent for that year to live (e.g. rent, mortgage, utilities, etc.) to make sure it appears reasonable/logical. Too often, we see tax returns where there is no business profit, which then begs us to ask “so just how did you live that year?” Rest assured, if we can ask that question, the IRS WILL also be thinking of it too!

Perform a financial review if you think you may owe.  Unfiled returns are really a two-step process:

  1. Getting the returns prepared and filed and,
  2. Negotiating solutions for any balances due with the IRS collections division.  

To perform the second step, one has to prepare a financial analysis of their situation and present it to the IRS. This involves a review of your current income, living expenses, property and debts. It is often the case that the amount owed on unfiled returns cannot be repaid. So performing this analysis will help you determine if your “resolution” will ultimately be to enter into a payment plan, request an offer in compromise, or have your account be put in an uncollectible status.

Consider filing the returns separately if you’re married. If you’re married, but only one spouse was responsible for creating IRS debt, strong consideration should be given to filing a separate return. Filing separately can limit who the IRS can collect from – protecting the non-liable spouse.

File your returns in person if possible. If possible, the unfiled returns should be hand-filed at an IRS Taxpayer Assistance Center. Note that the centers are by appointment only so you will need to schedule it via the previous link. If you bring an extra copy to the center, you can get it stamped by the IRS as proof of filing.  If you are working with an IRS Revenue Officer, the returns should be filed directly with that person.  It can take the IRS several months to process the returns. But if you file them directly with their personnel, it can speed up the processing time, which will then “stop the clock” in terms of certain penalties.

If you owe money, the next step is to enter into one of the 10 resolution options solutions to solve your IRS tax debt as discussed on our sister site.

What Is An IRS Lock In Letter?

Uh oh…a “Love Letter” for the IRS!

The IRS uses information reported on Form W-2 to identify employees with potential withholding compliance problems. What this means is that if a taxpayer chronically claims too many withholding allowances, and generates significant tax balances when they file their return, the IRS may “flag” them. In some cases, if a serious under withholding problem is found to exist for a particular employee, the IRS may issue a lock-in letter to the employer.

How employees get in trouble.  While rare, some employees may actually qualify to be “exempt” from having federal income tax withheld from their checks. Unfortunately, most people who indicate to their employer that they are exempt from withholding, usually do so based upon the poor advice of fellow employees, friends or family members.

Form W-4, Employee’s Withholding Allowance Certificate, is used to indicate to your employer how much federal income tax you would like withheld from your paychecks. The greater the number on the W-4, the smaller the amount of taxes they will withhold. If you claim to be exempt, then no federal income taxes are taken out.

Steps the IRS will take. If the IRS does not think an employee should be exempt (or is withholding too little) they may send them a 2802C Letter. This is basically a “warning” letter to tell you that you need to self-correct the matter before the IRS acts. One way to do this is to use the IRS Withholding Calculator to ensure you are claiming the correct number of allowances.

If you don’t make changes, then the IRS will send you (and your employer) a 2801C Letter. This letter basically states that the IRS has determined that you’re not entitled to claim exempt status. You will be given a telephone number to call the IRS within 60 days for a modification. After that date, your employer must withhold income tax from your wages at a single rate with zero allowances. Once a lock-in rate is effective, an employer can not decrease withholding unless approved by the IRS.

Can a lock in letter decision be reversed? The short answer is yes. Here are the steps that one would take:

  • Call the IRS at 855-839-2235 within 30 days from the date of the letter.
  • When you call, have the following information available:
    • Form W-4 and worksheets. (You must complete the “Two Earners Multiple Jobs Worksheet” on the back of the Form W-4, if you have more than one job or your spouse works.)
    • Most current pay stubs for all jobs.
    • Number of withholding allowances you (and your spouse) are claiming on your Form(s) W-4.
    • The social security number and date of birth for any dependent you are entitled to claim.
    • A copy of the current tax return due, including all schedules, forms, and attachments.

The IRS will then consider your explanation of why you believe you are entitled to a different withholding rate or number of withholding allowances (or exempt status). If they agree with the information provided, then the lock in letter will be reversed.

Are you receiving letters from the IRS? If so, just know that help is available. Feel free to give us a call and we can discuss your situation. Whether it is adjusting your withholding, filing those unfiled tax returns or dealing with an outstanding tax debt, we can help you address the matter and put it behind you!

How Late Can You File A Tax Return?

April 15th is the annual deadline for most people to file their federal income tax return and pay any taxes they owe. But what happens if you can’t file on time? What happens if you file your return after the due date? If you were owed a refund, can you still receive it? This post will answer all of the above questions and then some.

Annual Due Date For Filing Return. Everyone is pretty familiar with the date of April 15th here in the US. This is “Tax Day” or the date that most people are required to file their Form 1040 U.S. Individual Income Tax Return. While this date may move slightly from year to year (due to local holidays) note that it is actually mandated by law. 26 U.S. Code § 6072 actually stipulates the due dates for individual and corporate tax returns.

Can’t File By Due Date? By law, the IRS may assess penalties to taxpayers for both failing to file a tax return and for failing to pay taxes they owe by the deadline. Now, one way to avoid the late filing penalties is to file an extension. Filing Form 4868 Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, will give you an extra 6 months for you to file your return and have it be considered on time. Now, if you owe money, that is still due on April 15th. If you fail to make a payment by then, you will still be subject to the late payment penalties noted above.

Filing After Extension Due Date? If you file after the extended due date, then one of two scenarios occurs:

  • You had a balance due and are now subject to the late filing and late payment penalties
  • You have a refund and are NOT subject to any penalties, but the clock is now ticking for you to claim your refund or lose it.

3 Year Deadline To Claim Refund 26 U.S. Code § 6511 outlines that a taxpayer basically has 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, to claim their refund. So while you won’t pay any penalties for late filing a return in which you were owed a refund, know that you generally only have 3 years to claim it. What happens if you don’t file by then? Well, that refund becomes the property of the US Government and you lose it forever!

What If You Don’t File Voluntarily If you fail to file file a tax return, the IRS may file a substitute return for you. This return might not give you credit for deductions and exemptions you may be entitled to receive. The return the IRS prepares for you will lead to a tax bill, which if unpaid, will trigger the collection process. This can include such actions as a levy on your wages or bank account or the filing of a notice of federal tax lien.

Need Help Filing Your Past Due Return? For filing help, you can call the IRS at 1-800-829-1040 They can help you obtain wage and income information to help prepare a past due return. If you don’t want to speak to anyone at the IRS, you can obtain your transcripts electronically by using the IRS’ Get Transcript tool to request a return or account transcript. You can also get tax forms and instructions to file your past due return by calling 1-800-Tax-Form (1-800-829-3676).

Now, if you would rather avoid all of the above and have a service file your tax returns for you, we’d be more than happy to help. Just go to this page to get started and you can be filed in as little as 24 hours!

Why Is Your Tax Refund Being Offset?

Instead of receiving that nice tax refund check (or direct deposit) you’ve been expecting, you get a notice in the mail.  It tells you that your tax refund has been offset.  What exactly does this mean?

Well, a refund offset means the government has determined that you owe a debt and has applied your tax refund towards that debt.  Now, tax refunds can be offset for many types of debts through the Treasury Offset Program (TOP).  This post will address some of the questions that one commonly has after an offset occurs.

When is a debt sent to the Treasury Offset Program?

In most cases, your name can be sent to TOP if your debt is more than 90 days delinquent. The government agency must then determine that your debt is valid and legally enforceable. The agency will then send you notices about your debt and provide you with opportunities to resolve or dispute your debt. They must also respond to questions and inquiries regarding your debt. If you have not received a notice about your debt, the first step you should take would be to call the agency to which you owe the debt and talk to them.

How do I determine if I have an offset or who I may owe?

To determine if your Federal tax refund has been, or will be offset, it is best to contact the TOP. They can be reached at 800-304-3107.

What types of debt does an offset cover?

Even if you don’t owe the IRS money, your federal tax refund can still be offset through the TOP. Your refund may be seized to pay the following types of debts:

  • State income tax debt
  • Federal non-tax debt (such as delinquent federal student loans)
  • Past-due child support
  • Certain unemployment compensation debts.  You should receive a notice that tells you which agency is getting the money from your tax refund check.  If you don’t agree with the refund offset or want to work out a payment arrangement, you’ll have to contact the agency listed on the notice.  The IRS won’t be able to help you if your debt is not federal tax debt.

How does an offset for a Federal tax debt work?

If you owe the IRS money, say for a previously unpaid balance on an older year, then know that they they will seize your tax refund check. There’s no way around this. Even while you are making payments as part of an installment agreement, the IRS may continue to seize your tax refunds and apply them towards your outstanding balance.

The IRS has the right, and the ability, to offset all future tax refunds until 1) the balance is paid in full or 2) the tax debt is no longer enforceable. You can read this post from our sister site on just how long the IRS has to collect on unpaid tax debt.

What if the refund offset was for my spouse’s debt?

If you file a joint tax return, your full refund can be seized when your spouse owes any of the debts listed above. However, you generally aren’t legally responsible for debts your spouse incurred prior to your marriage, so it is possible to request relief from part of the refund offset.

In order to do this, you can claim an injured spouse allocation to get the portion of the refund you are entitled to receive. You can either file an injured spouse allocation along with your tax return or after you receive notice that your refund has been offset.

Also note that in the future, you can simply file your return as Married Filing Separately. This will keep your refund separate from that of your spouse, and it will not be used to pay for any of their outstanding debt.