Payroll Taxes and Employer Responsibilities

As an employer, understanding the obligations associated with running payroll can be a little daunting.  In this post we will explain what taxes you are responsible for, the returns that need to be filed as well as the associated deadlines.

What are taxes am I responsible for?  An employer’s federal payroll tax responsibilities include withholding income taxes from an employee’s compensation and paying their Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA).  FICA is comprised of the following taxes:

  1. 6.2 percent Social Security tax;
  2. 1.45 percent Medicare tax (the “regular” Medicare tax); and
  3. Since 2013, a 0.9 percent Medicare surtax when the employee earns over $200,000.

You must withhold these amounts from an employee’s wages.  The law also requires you to pay the employer’s portion of two of these taxes:

  1. 6.2 percent Social Security tax
  2. 1.45 percent Medicare tax (the “regular” Medicare tax).

What other things am I responsible for?  The following checklist list provides a brief summary of your basic responsibilities.  Because the individual circumstances for each employer can vary greatly, responsibilities for withholding, depositing, and reporting employment taxes can differ.

New Employees:

  • Verify work eligibility of new employees
  • Record employees’ names and SSNs from social security cards
  • Ask employees for Form W-4

Each Payday:

  • Withhold federal income tax based on each employee’s Form W-4
  • Withhold employee’s share of social security and Medicare taxes
  • Deposit:
    • Withheld income tax
    • Withheld and employer social security taxes
    • Withheld and employer Medicare taxes

Note: Due date of deposit generally depends on your deposit schedule (monthly or  semiweekly).  For more information on deposit schedules, see the following blog post.

Quarterly (By April 30, July 31, October 31, File Form 940 and January 31):

  • Deposit FUTA tax if undeposited amount is over $500
  • File Form 941 (pay tax with return if not required to deposit)

Annually (see below for due dates):

  • File Form 940
  • File Form 944 if required (pay tax with return if not required to deposit)
  • Reconcile Forms 941 (or Form 944) with Forms W-2 and W-3
  • Furnish each employee a Form W-2
  • File Copy A of Forms W-2 and the transmittal Form W-3 with the SSA
  • Furnish each other payee a Form 1099 (for example, Form 1099-MISC)
  • File Forms 1099 and the transmittal Form 1096
  • File Form 945 for any nonpayroll income tax withholding
  • Remind employees to submit a new Form W-4 if they need to change their withholding
  • Ask for a new Form W-4 from employees claiming exemption from income tax withholding

What are the due dates?  The following calendar will tell you what items are due to be filed and their associated deadlines.

By January 31
File Form 941 or Form 944. File Form 941 for the fourth quarter of the previous calendar year and deposit any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 941 if your total tax liability for the quarter is less than $2,500. File Form 944 for the previous calendar year instead of Form 941 if the IRS has notified you in writing to file Form 944 and pay any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 944 if your total tax liability for the year is less than $2,500.

File Form 940. File Form 940 to report any FUTA tax.

Furnish Forms 1099 and W-2. Furnish each employee a completed Form W-2.  Furnish Form 1099-MISC to payees for nonemployee compensation.

File Form W-2. File with the SSA Copy A of all paper and electronic Forms W-2 with Form W-3, Transmittal of Wage and Tax Statements. For more information on reporting Form W-2 information to the SSA electronically, visit the SSA’s Employer W-2 Filing Instructions & Information webpage. If filing electronically, via the SSA’s Form W-2 Online service, the SSA will generate Form W-3 data from the electronic submission of Form(s) W-2.

File Form 1099-MISC reporting nonemployee compensation. File with the IRS Copy A of all paper and electronic Forms 1099-MISC that report nonemployee compensation, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns.

File Form 945. File Form 945 to report any nonpayroll federal income tax withheld.

By February 28
Request a new Form W-4 from exempt employees. Ask for a new Form W-4 from each employee who claimed exemption from income tax withholding last year.

File paper Forms 1099 and 1096. File Copy A of all paper Forms 1099, except Forms 1099-MISC reporting nonemployee compensation, with Form 1096 with the IRS.

File paper Form 8027. File paper Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, with the IRS.

On March 1
Forms W-4 claiming exemption from withholding expire. Any Form W-4 claiming exemption from withholding for the previous year has now expired. Begin withholding for any employee who previously claimed exemption from withholding but hasn’t given you a new Form W-4 for the current year. If the employee doesn’t give you a new Form W-4, withhold tax based on the last valid Form W-4 you have for the employee that doesn’t claim exemption from withholding or, if one doesn’t exist, as if he or she is single with zero withholding allowances. If the employee gives you a new Form W-4 claiming exemption from withholding after February 28, you may apply the exemption to future wages, but don’t refund taxes withheld while the exempt status wasn’t in place.

By March 31
File electronic Forms 1099 and 8027. File electronic Forms 1099, except Forms 1099-MISC reporting nonemployee compensation, and 8027 with the IRS.

By April 30, July 31, October 31, and January 31
Deposit FUTA taxes. Deposit FUTA tax for the quarter (including any amount carried over from other quarters) if over $500. If $500 or less, carry it over to the next quarter.

File Form 941. File Form 941 and deposit any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 941 if your total tax liability for the quarter is less than $2,500. Don’t file Form 941 for these quarters if you have been notified to file Form 944 and you didn’t request and receive written notice from the IRS to file quarterly Forms 941.

Before December 1
New Forms W-4. Remind employees to submit a new Form W-4 if their marital status or withholding allowances have changed or will change for the next year.

How To Get Caught Up On Payroll Taxes

Sometimes a business will fall behind on paying their payroll taxes to the IRS, the State Department of Revenue or both.  This can happen due to software issues (i.e. believing things are being filed when they are not) or some other reason.  However, a  more common reason is when business owners experience tight cash flow periods and decide to stop paying their payroll taxes.

If you are reading this post and find yourself in the position of owing back payroll taxes, we encourage you to heed this advice:

Read this post in it’s entirety, and IMMEDIATELY do something productive to deal with your matter. Don’t schedule time to work on it later; do it NOW.  Our point is that in order to successfully solve your problem, you MUST confront it.  So, make a phone call to the state, put funds aside for a payment toward your unpaid balance, complete one of the missing returns, and put it in an envelope to mail with a stamp on it, etc. Just DO something, right now.

Consequences when you don’t file or pay your payroll taxes
Here are some things you can expect to happen when you don’t file or pay:

  • Penalties –  If the payroll tax return is filed late, the IRS will fine you a percentage of the balance of the return once it is eventually filed.  Once the return(s) is filed, if you haven’t paid the associated taxes, the IRS will impose a penalty for not paying within the time frame listed on the notices they sent you.  This post on how to  deposit payroll taxes will outline how some of the penalties are calculated.
  • Interest –  The IRS will charge the business interest on all unpaid balances and unpaid penalties until they are paid in full.
  • Tax lien –  If you owe enough, the IRS will eventually file a tax lien to protect the US Government’s interest.  This basically means that the IRS gets first dibs on your assets if you try and sell the business or file bankruptcy.  This is done as a procedural matter, even if you get your act together and set up a payment plan.
  • Tax levy –  If the business is seriously behind and has been avoiding the IRS, they could a random day of the week, take a look at your bank account and seize what you owe them. This is one reason why avoiding the problem is NOT a good idea when it comes to payroll tax problems.
  • State issues –  In addition to what the IRS can do, your state can do that and more.  Because LLCs and corporations are regulated at the state level, the state has a few more weapons in its arsenal. They can dissolve your LLC or corporation, deny your operating licenses, and in extreme cases, show up at your place of business and physically shut it down.

How to fix the problem
Here are the steps that one will want to take to address the problem once and for all:

  • Don’t Ignore It –   The IRS taxes payroll tax issues VERY seriously.  Why?  Because the taxes that you are supposed to send to them are held in “trust” for your employees.  What we mean is that your employees “trusted” you do send them to the IRS.  So when you don’t, the IRS gets really mad and will come after you harder/faster than if it was just an income tax matter.  So if you want your life to stay headache free, deal with this issue now!
  • File any unfiled returns and make current deposits – File all unfiled returns with the IRS and your state tax authorities ASAP.  Also make sure that you are making your current deposits on time.  It goes a long way when you eventually talk to someone at the IRS and they can see that you are paid up on your current returns and are just dealing with older returns/balances.
  • Follow the IRS Deadlines – When the IRS gives you deadlines for completing returns, submitting documentation, making payments, and other matters, it is critical that you do not ignore these dates. Failing to comply with the deadlines could put your business in jeopardy of being shuttered and you being heavily fined.  To protect valuables like company equipment or accounts receivable, you should abide by the deadlines the IRS gives you.
  • Be prepared to complete IRS Form 433-B – IRS Form 433-B is used to obtain current financial information necessary for determining how a business can satisfy an outstanding tax liability.  With that said, you should familiarize yourself with the form as the IRS will probably ask for it once you start to correspond with them.
  • Set up an installment agreement –  Once the Form 433-B is completed, it will indicate how much money the business has left to pay towards the taxes it owes.  At that point it’s just a matter of reaching out to the IRS (call or write them) and setting up the payment plan.  Now we’re sure that some of you will ask “but what about applying for an offer in compromise?”  Well, just know that if your business is still in operation, an OIC will more than likely NOT happen (the IRS doesn’t like to cut “forgiveness” deals with operating businesses).

Do You Have Payroll Tax Issues?
Have you failed to file payroll tax returns, make payroll tax deposits or received an IRS notice that you don’t know how (or want) to deal with?  Give us a call at 844-829-3788 NOW to put us to work for you.  We can help you resolve your payroll tax matters so you can get back to running your business.

Depositing Payroll Taxes

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?  Well, read on my friend to learn the answers to your questions.

When To Deposit
There are two schedules for determining when you deposit payroll taxes.  These schedules (monthly and semi-weekly) tell you when a deposit is due after a tax liability arises (for example, when you have a payday).  The deposit schedule you must use is based on the total tax liability you reported on IRS Form 941 during what is known as the  lookback period.  Your deposit schedule isn’t determined by how often you pay your employees.

So what is the lookback period?  If you’re a Form 941 filer, your deposit schedule for a calendar year is determined from the total taxes reported on Forms 941, line 10 (line 12 for quarters beginning after December 31, 2016), in a 4-quarter lookback period. The lookback period begins July 1st and ends June 30th.  If you reported $50,000 or less of taxes for the lookback period, you’re a monthly schedule depositor; if you reported more than $50,000, you’re a semiweekly schedule depositor.

For example, the following would be the lookback period for calendar year 2019:

  • July 1, 2017 – September 30, 2017
  • October 1, 2017 – December 31, 2017
  • January 1, 2018 – March 31, 2018
  • April 1, 2018 – June 30, 2018

Now what if you are a new employer?  Your tax liability for any quarter in the lookback period before you started or acquired your business is considered to be zero.  Therefore, you’re a monthly schedule depositor for the first calendar year of your business.

Monthly Deposit Schedule
Under the monthly deposit schedule, an employer deposits employment taxes for payroll made during a month by the 15th day of the following month.  So for example, the payroll taxes for you August payroll would need to be deposited by September 15th.

Semiweekly Deposit Schedule
Under the semiweekly deposit schedule, deposit employment taxes for payrolls processed on Wednesday, Thursday, and/or Friday by the following Wednesday. Deposit taxes for payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday.

How To Deposit
You must use the Electronic Federal Tax Payment System (EFTPS) to make your deposits.  If you don’t want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make the deposits on your behalf.  FTPS is a free service provided by the Department of Treasury.  To get more information about EFTPS or to enroll, you can visit the EFTPS website or call 1-800-555-4477.

If you’re a new employer that indicated you might have payroll tax liabilities when you requested an EIN, you’ll be pre-enrolled in EFTPS.  You’ll receive information about Express Enrollment in your Employer Identification Number (EIN) Package and an additional mailing containing your EFTPS personal identification number (PIN) and instructions for activating your PIN. Call the toll-free number located in your “How to Activate Your Enrollment” brochure to activate your enrollment and begin making your payroll tax deposits. If you outsource any of your payroll and related tax duties to a third party payer, such as a PSP or reporting agent, be sure to tell them about your EFTPS enrollment.

Deposit Penalties
If you don’t make required deposits on time or if you make deposits for less than the required amount, you might be subject to penalties. The penalties don’t apply if any failure to make a proper and timely deposit was due to  reasonable cause and not to willful neglect.  If you receive a penalty notice, you can provide an explanation of why you believe reasonable cause exists.

For amounts not properly or timely deposited, the following penalty rates apply:

  • 2% – Deposits made 1 to 5 days late.
  • 5% – Deposits made 6 to 15 days late.
  • 10% – Deposits made 16 or more days late, but before 10 days from the date of the first notice the IRS sent asking for the tax due.
  • 10% – Amounts that should have been deposited, but instead were paid directly to the IRS, or paid with your tax return.
  • 15% – Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier.

Do You Have Payroll Tax Issues?
Have you failed to file payroll tax returns, make payroll tax deposits or received an IRS notice that you don’t know how (or want) to deal with?  Give us a call at 844-829-3788 NOW to put us to work for you.  We can help you resolve your payroll tax matters so you can get back to running your business.

IRS Using Private Debt Collection Agencies

Private Debt Collection
In December 2015, Congress passed the Fixing America’s Surface Transportation Act (FAST Act). Section 32102 of the act requires the IRS to use private collection agencies (PCAs) for the collection of outstanding “inactive” tax receivables.  This post will talk about how the program works as well as answer some of the “concerns” people have voiced to us.

How the new program works
Typically, the accounts that are assigned to private collection are those where the unpaid tax obligations are not currently being worked by IRS collection employees and often were assessed by the tax agency several years ago. Taxpayers being assigned to a private firm would have had multiple contacts from the IRS in previous years and still have an unpaid tax bill.

First, the IRS will send you a Notice CP40 with  the name of the PCA, the PCA’s toll-free telephone number, and a ten-digit Taxpayer Authentication Number (TAN).   This mailing will include a copy of Publication 4518, What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency.

Only four private groups are participating in the program:

CBE Group
1309 Technology Pkwy
Cedar Falls, IA 50613

Conserve
200 CrossKeys Office park
Fairport, NY 14450

Performant
333 N Canyons Pkwy
Livermore, CA 94551

Pioneer
325 Daniel Zenker Dr
Horseheads, NY 14845

The taxpayer’s account will only be assigned to one of these agencies, never to all four.  Furthermore, no other private groups are being used or authorized to represent the IRS in these collection efforts.

Once the IRS letter is sent, the PCAs will send their own letter to the taxpayer and their representative confirming the account transfer. To protect the taxpayer’s privacy and security, both the IRS letter and the collection firm’s letter will contain information that will help taxpayers identify the tax amount owed and assure taxpayers that future collection agency calls they may receive are legitimate.

How do I know if the company contacting me is a scam?
Before the PCA contacts you, they will send you a letter explaining that your tax debt has been assigned to it and listing the same TAN discussed above.  At the beginning of every phone contact, the PCA must ask you to provide the first five digits of the TAN and must respond by reading you the last five digits of the TAN. This allows the PCA to verify your identify and allows you to verify that that the caller works for the PCA. The PCA cannot continue the conversation with you until your identity has been verified.

“Here’s a simple rule to keep in mind. You won’t get a call from a private collection firm unless you have unpaid tax debts going back several years and you’ve already heard from the IRS multiple times,” said IRS Commissioner John Koskinen. “The people included in the private collection program typically already know they have a tax issue. If you get a call from someone saying they’re from one of these groups and you’ve paid your taxes, that’s a sure sign of a scam.”

If taxpayers are unsure if they have an unpaid tax debt from a previous year – which is what the private collection firms will handle – they can go to IRS.gov and check their account balance via the View Your Tax Account service.  If the account balance says zero, that means nothing is due, and you typically wouldn’t be getting a contact from the IRS or the private firm.

Whether or not a taxpayer’s account is assigned to a private collection agency, the IRS warns taxpayers to beware of scammers pretending to be from the IRS or an IRS contractor. Here are some things the scammers often do but the IRS and its contractors will never do.

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes, and if a case is assigned to a PCA, both the IRS and the authorized collection agency will send the taxpayer a letter. Payment will always be to the United States Treasury.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.

“Unexpected and threatening calls out of the blue from someone saying they’re representing the IRS to collect a tax debt is a warning sign people should watch out for,” Koskinen said.

What if I can’t find my Taxpayer Authentication Number?
You can request that the PCA re-send the letter with the TAN. Alternatively, if you agree, the PCA may verify your identity by using your Social Security Number instead of the TAN, as long as you first provide your full name, address, and date of birth. However, the use of your Social Security Number instead of the TAN does not allow you to verify that the caller works for the PCA, so you should consider carefully before agreeing to this.

What can (and can’t) a private collection agency do?
The private firms are authorized to discuss payment options, including setting up payment agreements with taxpayers.  A PCA may not take collection action (such as file a lien, levy your bank account, or garnish your wages), nor may it issue a summons or report your IRS tax debt to the credit rating agencies.  But as with cases assigned to IRS employees, any tax payment must be made, either electronically or by check, to the IRS. A payment should never be sent to the private firm or anyone besides the IRS or the U.S. Treasury. Checks should only be made payable to the United States Treasury. To find out more about available payment options, www.IRS.gov/Payments.

What if I want to explore other alternatives with the IRS?
You can call the IRS and explain that you do not want to pay in installments, or can’t afford to do so. If you orally advise the PCA you plan to contact IRS about collection alternatives, the PCA will place a 60-day hold on your account. If you have not reached an agreement with IRS within those 60 days, the PCA may resume collection activity on your account. Because many actions take longer than 60 days, you may wish to write to the PCA to request that it stop contacting you by sending them a No Contact Letter.

Do I have to work with the private collection agency?
No. You can send the PCA a written request to stop further communication with you (see No Contact Letter above).

What if I need to make a complaint about a PCA?
To make a complaint about a PCA or report misconduct by its employee, call the TIGTA hotline at 800-366-4484 or visit www.tigta.gov or write to:

Treasury Inspector General for Tax Administration
Post Office Box 589
Ben Franklin Station
Washington, DC 20044-0589

50 Commonly Missed Tax Deductions

When it comes to keeping your money out of the hands of Uncle Sam, things can sometimes be a little challenging.  Did you remember to deduct those charitable contributions that you had taken out directly via payroll deduction at work?  What about your union dues?  The list goes on and on.

Someone once said “that which is not measured, cannot be improved.”  Well, in the tax world we like to say, “that  which is not tracked, cannot be deducted!”  If you make it a habit to just throw things in your “tax file” throughout the year, you can rest assured that you won’t forget it come tax time.  We can’t tell you how many people come to us at the end of the year with their tax support in folders, logs, envelopes, boxes, garbage bags, cereal boxes…we think you get the point.

So if you are filing a tax return for this year or a prior year, take a look at the commonly missed deductions outlined below.  To make things easy, we’ve even grouped them by category and indicated where they are deducted on the return.

Medical Deductions (Schedule A)

  • Medical transportation expenses such as tolls, parking, and mileage for trips to health facilities, doctor’s offices, laboratories, etc.
  • Hospital fees for services such as nursing, physical therapy, lab tests, and x-rays
  • Nursing home expenses related to medical care
  • Medical aids such as canes, crutches, canes, orthopedic shoes, etc.
  • Hearing aids, eye glasses, and contact lenses
  • Equipment for disabled or handicapped individuals
  • Portion of retirement home fee that is related to life-care fee designated for medical care
  • The cost of alcohol and drug abuse programs, and certain smoking-cessation treatments
  • Wages and amounts paid for in home nursing services
  • Seeing-eye dogs for the handicapped

Work/Job Deductions (Schedule A)

  • Education expenses paid to maintain or improve job skills
  • Professional journals, magazines, and newspapers that are job-related
  • Required uniforms and work clothes not suitable for street wear
  • Union dues
  • Home office expenses, if for your primary place of business
  • Job-seeking expenses within your present field of employment
  • Dues to professional organizations
  • Business gifts up to $25 per customer or client
  • Business expenses including travel, meals, lodging, and entertainment not reimbursed by your employer
  • Cleaning and laundering services while traveling for business
  • Tools for use at your job
  • Cellular phones required for business

Home Related Deductions (Schedule A)

  • Commission to brokers or agents for the sale of property
  • Mortgage or loan interest paid on a second home (e.g. summer home, time share, boat, RV, etc.)
  • Property taxes paid on all buildings and parcels of land owned
  • Personal property taxes on cars, boats, etc.
  • Mortgage insurance premiums
  • General casualty and theft losses in excess of $100 and totaling more than 10% of adjusted gross income

Rental Property Related Deductions (Schedule E)

  • Property management fees
  • Hazard insurance
  • Interest paid to third parties (e.g. private investors, private businesses, crowdfunding platforms, etc.)
  • Operating expense carryovers
  • Suspended passive activity losses
  • Office expenses
  • Other expenses such as postage, bank fees, education, HOA fees, subscriptions, cost of books, meals and entertainment, and gifts to clients or tenants.

Miscellaneous Deductions
Deducted on Schedule A

  • Taxes paid to the state for a balance associated with last years tax return
  • Sales taxes paid in connection with large purchases (e.g. cars, boats, etc)
  • Out of pocket charitable contributions (cash and goods)
  • Cost of safe deposit box used for investments
  • Investment and brokerage fees
  • Fees for tax preparation or advice
  • Legal fees associated with settlements, tax advice or to collect taxable alimony or Social Security
  • Hobby expenses to the extent of hobby income you included in gross income

Deducted on Schedule D

  • Worthless stock or securities

Deducted on the face of Form 1040

  • Student loan interest
  • Half of the self-employment tax paid if you report income on Schedule C
  • Self-employed health insurance premiums if you report income on Schedule C
  • Moving expenses
  • Child care expenses paid to allow you to go to work (e.g. day care, babysitter, summer camp)
  • Educator expenses (i.e. out-of-pocket expenses associated with a teacher’s classroom or school)

What Is An IRS Substitute For Return (SFR)?

Sometimes, when a person does not file a tax return on their own, the IRS will prepare one based on the information they have available.  This is called a substitute for a tax return or SFR. The IRS does this so they can assess tax and begin collection activities.  But just how does a SFR get filed and what are the ramifications?  Read on to find out.

Situations where the IRS will file a SFR
A SFR is typically filed when the IRS notices that a person hasn’t filed for a few years, but that person has income documents on file with them (e.g. W-2, 1099-MISC). The IRS will then file SFRs for all the unfiled years based on the information on those tax documents.

How does the IRS calculate the tax on a SFR?
The SFR is always prepared in the best interest of the government.  What this means is that they will use the filing status of Single and they will not include any deductions or credits.  Typically this can result in the taxpayer having a balance owed.  Now let’s think about that for a second.   If a tax return is prepared without any deductions, without any tax credits, it’s quite likely that the IRS’s calculation of tax is much higher than it should be.  Thus, in most cases, that’s just what happens. There are even instances that had the taxpayer filed the return themselves, the IRS would owe them a refund.

Does the IRS have the authority to file a return on your behalf?
The short answer is yes.  Congress authorizes the IRS to prepare tax returns based on information available to it in situations where a person has not filed a return (Internal Revenue Code 6020).

What happens after the SFR is filed?
The IRS will send you a Notice of Deficiency CP3219N (90-day letter) proposing a tax assessment.  You then will have 90 days to file your past due tax return or file a petition in Tax Court.  If you do neither, the IRS will proceed with their proposed assessment.

Technical implications of having a SFR filed on your behalf
It’s important to know that a SFR is not an “original” return (i.e. filed by the taxpayer).  As such, the IRS treats them differently when it comes to several things.  A SFR that is not signed by the taxpayer:

  • Does not start the collections statute of limitations
  • Does not start the audit statute of limitations
  • Has no effect on the refund statute of limitations

Per the Internal Revenue Manual 25.6.1.9.4.5, “the assessment date will start the period for the statute of limitations for collection per IRC Section 6502(a)(1), but does not start the period of limitations for assessment.”  However, if a person agrees with the SFR, then signing it does start the audit statute of limitations.  From the same section of the Internal Revenue Manual, “If the taxpayer signs a SFR return prepared from income information received from the taxpayer, it becomes the taxpayer’s return per IRC Section 6020(a) and starts the assessment period of limitations.”

Should a person file an original return after the IRS files a SFR?
If a taxpayer didn’t file an original return, they always have the opportunity to do so.  Filing the original return after an SFR has been filed allows the taxpayer to possibly choose a more advantageous filing status if applicable (e.g. Head of Household, Married Filing Jointly, etc.) as well as include any deductions and credits they are entitled to.  This may reduce or eliminate the tax that the IRS says the taxpayer owes.

The IRS has temporarily suspended the ASFR case selection
In September of 2018, a Treasury Inspector General for Tax Administration (TIGTA) official  announced suspension of the automated substitute for return (ASFR) program.  As such, selection of new cases (i.e. the IRS filing SFRs on a taxpayers behalf) is not occurring at the moment.  This is due to “resource limitations” which can be construed as the series of IRS budget reductions that have taken place in recent years.  Furthermore, the IRS has stated that they remain committed to taking many actions in 2018 to improve methods of allocating nonfiler cases across their potential compliance treatment streams, and this includes the ASFR program.

So while the IRS is not “currently” filing SFR returns for taxpayers, don’t expect it to last forever.  It’s also important to note that the IRS said it is continuing to work on active ASFR cases and ASFR reconsiderations.

How Do I File a Deceased Person’s Tax Return?

When a loved one or spouse passes away, your immediate attention is usually directed towards dealing with putting them to rest.  But once that is done and the task of dealing with the person’s affairs begins, an important question typically arises; what do we do about their taxes?  This post will walk you through the process of filing the needed tax returns as well as outline some additional considerations.

Who Must File (Filing Requirements)?
Generally speaking, whether a person has to file a tax return or not is determined by their gross income, age and filing status. However, when a person has passed away, it is generally a good idea to file a tax return even if there is no obligation to do so. Why you may ask? Because this serves as notice to the IRS and other government agencies that this person is no longer alive. This aids them in closing that person’s SSN account so that someone doesn’t fraudulently use it. It also helps other agencies begin the process of notifying beneficiaries of assets that the deceased had or was entitled to (e.g. survivor benefits).

Personal Representative
So who’s job is it to file the last return for a person who has passed away?  Simple, the personal representative!  The personal representative is generally defined as one of either two people; an executor or an administrator.  An executor is named in a decedent’s will to administer the estate and distribute properties as the decedent has directed.  An administrator is usually appointed by the court if no will exists, if no executor was named in the will, or if the executor cannot (or will not) serve.  In general, an executor and an administrator perform the same duties and have the same responsibilities.

After the court has approved the personal representative, you should obtain an employer identification number (EIN) for the estate.  Next, you use Form 56 – Notice Concerning Fiduciary Relationship to notify the Internal Revenue Service that you have been appointed executor of the estate.

Final Return
So once the personal representative has been appointed, one can then move on to filing the actual return.  The first thing to consider is if this is the “final” return or just an interim one.  For example, if a person died on March 24, 2017, but had not yet filed their tax year (TY) 2016 return (i.e. the one due April 15th 2017), then the TY2016 return is not the “final” one.  The TY2017 return that is due April 15th, 2018 is the final return.  From there, one then needs to follow the process listed below for the final return:

  • Name & Address – Write the word “DECEASED,” the decedent’s name, and the date of death across the top of the tax return.  If a joint return is being filed, write the name and address of the decedent and the surviving spouse in the name and address fields.  If a joint return isn’t being filed, write the decedent’s name in the name field and the personal representative’s name and address in the address field.
  • Income To Include – The decedent’s income shown on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death. The method of accounting used by the decedent before death also determines the income included on the final return (i.e. cash basis vs. accrual basis).  The income earned (if any) after the date of death is reported on the tax return of the person’s estate (Form 1041)
  • Third Party Designee – You can check the “Yes” box in the Third Party Designee area on page 2 of Form 1040 to authorize the IRS to discuss the return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as the designee to answer any questions that may arise during the processing of the return.
  • Signature – If a personal representative has been appointed, that person must sign the return. If it is a joint return, the surviving spouse must also sign it. If no personal representative has been appointed, the surviving spouse (on a joint return) signs the return and writes in the signature area “Filing as surviving spouse.” If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent’s property must file and sign the return as “personal representative.”

Request For Refund
If the decedent was owed a refund for the return in question, just how does one go about requesting it?  Well, the personal representative would file Form 1310 – Statement of Person Claiming Refund Due a Deceased Taxpayer.  Just keep in mind that  Form 1310 doesn’t need to be filed if you are claiming a refund and you are:

  • A surviving spouse filing an original or amended joint return with the decedent
  • A court-appointed or certified personal representative filing the decedent’s original return and a copy of the court certificate showing your appointment is attached to the return

Additional Things To Keep In Mind

  • A surviving spouse, under certain circumstances, may have to file the returns for the decedent (i.e. if a joint return is being filed).
  • When filing the decedent’s final income tax return, don’t attach the death certificate or other proof of death to the final return.  Instead, keep it for your records and provide it only if requested
  • Generally, deductions for a decedent are handled the same way as for living individuals (i.e. itemized or standard deduction)
  • Similar to the above bullet, the same goes for credits
  • A final can return can be electronically filed by a surviving spouse or the personal representative
  • IRS Publication 559 has additional information should you need further information or assistance

Why People Fall Behind On Their Taxes

According to the latest Internal Revenue Service Data Book, there were approximately 14 million delinquent tax accounts at the end of 2016.  The total associated tax balances for those accounts, including the assessed balance, penalties and interest equaled a staggering $138.2 billion!  So why do so many people fall behind on their taxes?  We’ve probably heard every reason under the sun from “I got scared” to “I just forgot to file.”  However, most reasons will typically fall into 4 broad categories.

Underwitholding
When you work a job, you’ll typically tell the employer to withhold taxes from your paycheck. However, if enough taxes aren’t withheld from your paycheck throughout the year, you, the employee, will likely owe the IRS when you file your tax return. The IRS refers to this phenomenon as “underwithholding.” It’s usually triggered when an employee claims excessive exemptions on his or her IRS Form W-4 that results in not having enough income tax withheld throughout the year. We sometimes also see this when an employee tries to get too much money in their check by claiming “exempt” on their W4 and either 1) becoming too accustomed to those nice take home checks or 2) they forget to switch it back before the year ends.

The main takeaway with underwitholding is to know that you can file a new W-4 at any time. What’s even better is that if you find that you’ve given too much to the government, you’ll get the money back when you file your income tax return!

Not Making Estimated Tax Payments
In this post, we talk about the groups of people that tend to have the most IRS debt. Essentially, those who are self-employed do not have an employer to withhold taxes from their paycheck. Thus, they are responsible for paying their own taxes on a quarterly basis via the estimated tax payment process. But if you fail to make your estimated tax payments throughout the year (or contribute enough), you’ll likely incur a large tax liability at the end of the year. All it takes is one or two years of not paying enough on your taxes as a “sole-proprietor” and your tax debt can very quickly get out of control.

Life Events or Disruption
Sometimes life simply gets in the way of one filing their taxes. A death in the family, illness, cancer, divorce, or a loss of job can all keep a person from performing their normal compliance requirements. The main thing to remember is that once that disruption has passed, it is best for one to get compliant and file their missing returns as soon as possible.

Other
This is pretty much the catch all for everything else ranging from “fear” to thinking that one did not have a filing requirement.  We’ve seen instances where a taxpayer falls behind with filing a year or two.  Then because of “fear” they decide to not file going forward.  We’ve seen people who sometimes have not filed for 5, 10 even 20 years!  Conversely, some taxpayers don’t file a return because they didn’t think they needed to when it turns out they did.  For example, we had one taxpayer who knew they didn’t have to file a tax return with the state because their sole source of income was from retirment sources (which weren’t taxed by the state).  But unfortunately, they took this to mean that they did’t have to file with the IRS as well.  So they didn’t…for 8 years.  Needless to say, this turned into a $60K+ tax debt.  It was eventually resolved, but not without a lot of work and we’re sure some very sleepless nights!

Bottom Line
People fall behind on their taxes. If the IRS thinks you owe them money, they will try and get your attention with a few letters, maybe a phone call or possibly a visit to your job or home. If those things don’t work, then they will take enforced collection action which can include liens, levies, garnishments and the like.

Our suggestion? Try your best to not owe the IRS in the first place. Focus on being self-motivated/proactive and educate yourself on your tax reporting and payment obligations. If you are unsure about them, get a hold of a tax attorney, CPA, Enrolled Agent, professional tax preparer or even the IRS itself.

What if it’s too late and you already owe the IRS? Reach out to the same folks listed above (including us of course) and ask them how you can become compliant ASAP!

The Truth About Settling Tax Debt For “Pennies On The Dollar”

The most overused, deceptive, tax relief advertising catch phrase!

The most overused, deceptive, tax relief advertising catch phrase ever!

It is not uncommon for taxpayers to contact us and tell us that they want to apply for “that program” where they can settle their debt for a fraction of what they owe.  They will often tell us that they saw some ad, web site, or a salesmen told them that they could settle their tax debt for some fixed percentage or a fraction of what they owe. However, this is blatantly incorrect. There is no (absolutely no) provision in the tax code for allowing a taxpayer to pay some set percentage of their tax liability and just calling it good. It has never existed, and most likely never will.

So what exactly does “pennies on the dollar” refer to? It is a reference to the IRS Offer in Compromise (OIC) program, which allows eligible tax debtors to pay the IRS an amount of money that is less than what they owe in order to wipe out their entire tax liability.

The phrase “pennies on the dollar” was actually determined several years ago by the IRS to be a form of deceptive advertising, and they explicitly instruct licensed practitioners that the use of this phrase is a violation of Circular 230, which is the practitioner behavior handbook for working with the IRS. However, since the IRS doesn’t have jurisdiction over firms that just market these services, it comes into the FTC’s purview to look out for these deceptive marketing practices.

In advertising, you’ll hear companies talk about settling for 20%, 10%, or even less. These ads, and the sales people you talk to on the phone, are trying to sell you an OIC service package. Many of their web sites even have little interactive calculators where you type in how much you owe the IRS, and it’ll spit out a, “You may only have to pay $xxx” message.

Instead, the amount of your OIC settlement is calculated using a very, very strict formula… and that formula is NOT secret — it’s available on a worksheet in IRS publication 656B.

Based on this formula, if you have equity in assets that exceeds your tax debt, you simply don’t qualify. Period. End of story. For most individuals, the common thing is going to be equity in your house or rental properties, or perhaps equity in a collection of classic cars, stamps, coins, guns, art, etc. If the value of ANY of that stuff is greater than your tax debt, you do not qualify for the OIC program  – there is no way around this.

In the same vein, if you are a high income earner, it’s also highly unlikely you will qualify for the OIC program. The reason for this is that the IRS only allows certain amounts of money every month as “eligible expenses” for housing, cars, food, etc. If your lifestyle exceeds these amounts, the IRS doesn’t care — they will only allow you to claim the National Standard expenses. Any monthly income over those amounts gets multiplied by either 12 or 24, and THAT number goes into your offer amount.

In these circumstances, you may qualify for a period of up to 12 months to make a “lifestyle adjustment,” and reduce your living expenses to come into line with IRS standards. This will often involve selling luxury homes and getting rid of toys such as cars and boats. Keep in mind that these items are all covered by your tax lien, so any proceeds from the sale of these items technically is owned by the IRS, and should be paid over to them. A good tax representative can assist you with structuring these sales so that both you and the IRS get something out of it.

Beware of anybody promising that your tax debt can be settled for some fixed percentage of the debt. That’s not the way it works, and never has. Anybody trying to sell you on that idea is OUTRIGHT LYING TO YOU, and you should seek assistance elsewhere.

Do you need help with a back tax matter?  Visit our Got IRS Debt page and enter your information in the box on the left for a FREE 30 minute Tax Debt Settlement Analysis.  This analysis, valued at $197, will look at your situation and tell you what IRS programs you qualify for to settle your IRS headaches once and for all. Alternatively, you can simply call us at the number in the upper right portion of this page and we’d be happy to schedule an appointment time for you.

Filing A Late Tax Return With A Refund Due?

If you have not filed your tax return, and you are entitled to a refund, did you know that the deadline for you to claim the refund is 3 years from its due date (excluding extensions)?  For example, if you were due a refund on your 2013 Income Tax Return (which was due April 15th 2014), you have until April 15th 2017 to claim it.  If you don’t file a claim for a refund within three years, the money becomes property of the U.S. Treasury.

Note, there are no interest and penalties for failing to file a return in which a refund was owed.  However, if you have a balance due, those items can be pretty stiff as outlined in this post.

Here are some of the facts you need to know about filing a late tax return in which there is an unclaimed refund:

  • Some people, such as students, part-time workers or seasonal employees may not have filed because they thought they had too little income to require filing a tax return. However, if you did not have a filing requirement, you may still have a refund waiting if you had taxes withheld from your wages.  A refund could also apply if a taxpayer qualified for certain tax credits, such as the Earned Income Tax Credit.
  • The law requires that you properly address, mail and postmark your tax return within 3 years of the due date  to claim your refund.
  • The IRS may hold your refund if you have not filed tax returns that were due at a later date.
  • The U.S. Treasury will apply the refund to any federal or state tax you owe. It also may use your refund to offset unpaid child support or past due federal debts such as student loans.
  • If you’re missing Forms W-2, 1098, 1099 or 5498 for 2012, you should ask for copies from your employer, bank or other payer. If you can’t get copies, get a free transcript showing that information by going to IRS.gov. You can also file Form 4506-T to get a transcript.

This post here will provide the instructions on how to file the return either via paper or using an authorized E-File provider.  If you would like us to assist you, give us a call or visit the main page of our site.  We have the software to file tax returns going all the way back to 2004 so we’re sure we can help you out with any of your old returns.