Showing posts with label IRS tax forms. Show all posts
Showing posts with label IRS tax forms. Show all posts

Friday, February 27, 2015

1099 Trouble? We Can Help

It's not unusual for taxpayers to be surprised-and perhaps more than a little confused-by some of the correspondence that is received from the IRS. Here's a case in point: Many taxpayers have been puzzled by notices they have received related to 1099 forms. For example, problems have arisen in the past surrounding notices related to Forms 1099-K (Payment Card and Third Party Network Transactions) and 1099-C (Cancellation of Debt). Those who received the notices were frequently uncertain what they meant and how they were expected to respond.   




If you have received one of these notices-or any other letter-from the IRS, be sure to contact us. The Service may simply need more information, have additional tax liability or are due a refund. No matter what the situation, we can help you understand the problem and work with you to resolve it.

Monday, October 20, 2014

Do You Have Household Employees?

If you have a household employee, you may need to withold and pay Social Security and Medicare taxes (FICA), pay federal unemployment tax (FUTA), or both.

Workers Who Are Household Employees

A household employee is an employee hired to do household work. The worker is an employee if you can control both what and how work is done. It does not matter whether the work is full time or part time or that the worker was hired through an agency or association. It also does not matter whether the worker is paid on an hourly, daily, or weekly basis, or by the job.
Note: If the worker usually provides his or her own work tools and offers services to the general public, he or she is an independent contractor and not a household employee.

Household Workers

Some examples of workers who do household work include the following.
    Babysitters    • Housekeepers
    Caretakers     • Maids
    Domestic workers       • Nannies
    Drivers          • Private nurses
    Health aides • Yard workers
    House cleaning workers

Workers Who Are Not Household Employees

If only the worker can control how the work is done, the worker is not a household employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public as an independent business. A worker who performs child care services in his or her home generally is not a household employee. If an agency provides the worker and controls what work is done, the worker is not a household employee.

Household Employment Taxes  

Taxpayers with household employees must file Schedule H, Household Employment Taxes, with their Form 1040 to report FICA (Social Security and Medicare) tax, FUTA (federal unemployment) tax, and federal income tax withholding (if any).
Form W-2 must be filed for each household employee who was paid Social Security or Medicare wages of $1,800 or more, or wages of any amount if federal income tax was withheld.
Taxpayers who are required to file Schedule H with their 2013 individual tax returns must obtain an Employer Identification Number (EIN) by January 31, 2014.

FICA

The Social Security tax pays for old-age, survivors, and disability benefits for workers and their families. The Medicare tax pays for hospital insurance. Both the employer and the household employee may owe Social Security and Medicare taxes. For 2013, the employer share is 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax) of the employee’s FICA wages. For 2013, the employee’s share is 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax). The employer is responsible for remitting both the employee’s and employer’s share of the taxes. Typically, the employee’s share is withheld from the employee’s wages and submitted with the employer’s payment.

Figuring FICA taxes

FICA taxes on Social Security and Medicare wages paid to household employees are figured by the employer.
If you pay your household employee cash wages of $1,800 or more in 2013, all cash wages you pay to that employee in 2013, up to $113,700, (regardless of when the wages were earned) are Social Security wages and all cash wages are Medicare wages. However, any noncash wages paid do not count as FICA wages.
If you pay the employee less than $1,800 in cash wages in 2013, none of the wages are FICA wages and neither you nor the employee will owe FICA taxes on those wages.

Cash Wages

Cash wages include wages paid by check, money order, etc. Cash wages do not include the value of food, lodging, clothing, and other noncash items you give your household employee. However, cash you give your employee in place of these items is included in cash wages.

Wages Not Counted

Do not count wages paid to any of the following individuals as FICA wages.
1)  Your spouse.
2)  Your child who is under age 21.
3)  Your parent. Exception: Count these wages if your parent cares for your child who is either under age 18 or has a physical or mental condition that requires personal care by an adult, and your marital status is either divorced, widowed, or living with a spouse whose physical or mental condition prevents him or her from caring for your child.

4)  An employee under age 18 at any time during the year. Exception: Count these wages if providing household services is the employee’s principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.

Thursday, October 9, 2014

Estimated Taxes

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. There are two ways to pay as you go, either by employer withholding or estimated tax payments.    

Employer withholding. If you are an employee, your employer generally withholds income tax from your pay. In addition, tax may be withheld from certain other income such as pensions, bonuses, commissions, and gambling winnings. If all of your income will be subject to income tax withholding, you probably do not need to pay estimated tax. Events during the year may change your marital status or exemptions, adjustments, deductions, or credits you expect to claim on your tax return. When this happens, you should complete a new Form W-4, Employee’s Withholding Allowance Certificate, so that the appropriate amount of tax is withheld.

Estimated tax. Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rents, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Estimated tax is used to pay not only income tax, but selfemployment tax and alternative minimum tax as well. If you do not pay enough by the due date of each quarterly payment period you may be charged a penalty even if you are due a refund when you file your tax return.

Monday, September 15, 2014

Six Tips for People Who Owe Taxes


While most people get a refund from the IRS when they file their taxes, some do not. If you owe federal taxes, the IRS has several ways for you to pay. Here are six tips for people who owe taxes:
1. Pay your tax bill.  If you get a bill from the IRS, you’ll save money by paying it as soon as you can. If you can’t pay it in full, you should pay as much as you can. That will reduce the interest and penalties charged for late payment. You should think about using a credit card or getting a loan to pay the amount you owe. 
2. Use IRS Direct Pay.  The best way to pay your taxes is with the IRS Direct Pay tool. It’s the safe, easy and free way to pay from your checking or savings account. The tool walks you through five simple steps to pay your tax in one online session. Just click on the ‘Pay Your Tax Bill’ icon on the IRS home page.
3. Get a short-term extension to pay.  You may qualify for extra time to pay your taxes if you can pay in full in 120 days or less. You can apply online at IRS.gov. If you received a bill from the IRS you can also call the phone number listed on it. If you don’t have a bill, call 800-829-1040 for help. There is usually no set-up fee for a short-term extension.
4. Apply for a monthly payment plan.  If you owe $50,000 or less and need more time to pay, you can apply for an Online Payment Agreement on IRS.gov. A direct debit payment plan is your best option. This plan is the lower-cost, hassle-free way to pay. The set-up fee is less than other plans. There are no reminders, no missed payments and no checks to write and mail. You can also use Form 9465, Installment Agreement Request, to apply. For more about payment plan options visit IRS.gov.
5. Consider an Offer in Compromise.  An Offer in Compromise lets you settle your tax debt for less than the full amount that you owe. An OIC may be an option if you can’t pay your tax in full. It may also apply if full payment will cause a financial hardship. You can use the OIC Pre-Qualifier tool to see if you qualify. It will also tell you what a reasonable offer might be.
6. Change your withholding or estimated tax.  You may be able to avoid owing the IRS in the future by having more taxes withheld from your pay. Do this by filing a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. The IRSWithholding Calculator on IRS.gov can help you fill out a new W-4. If you have income that’s not subject to withholding you may need to make estimated taxpayments. See Form 1040-ES, Estimated Tax for Individuals for more on this topic.
To find out more see Publication 594, The IRS Collection Process. You can get this booklet on IRS.gov. You may also call 800-TAX-FORM to get it by mail.

Monday, September 1, 2014

Audits and Representation

Representation

Individual taxpayers who are under audit by the IRS may attend the audit in person without any assistance from a tax professional. However, this can be a dangerous mistake. Although not officially stated, it is the job of an IRS Revenue Agents to conduct an audit with an eye toward finding additional tax owed. With so many gray areas in tax law, and considering the tax code’s complexity, an individual who chooses to go it alone is a sitting duck. Without extensive tax education and experience, the examiner can (and sometimes will) say anything to find additional tax due on the return. Without the necessary knowledge, the taxpayer is powerless to refute the agent’s rationale.

Selection of Returns for Examination  

Search for Unreported Income

The IRS performs matching functions to reconcile information reported on Forms 1099 and W-2 with information reported on the taxpayer’s return. If income reported by the taxpayer does not meet or exceed amounts reported to the IRS, the taxpayer will receive either a bill for tax on the difference or an audit notice.

Worker Reclassification Efforts

The IRS conducts joint employment audits with state tax agencies to determine whether workers classified as independent contractors are in fact employees. One initiative looks at employers who issue both Forms 1099 and W-2 to the same employee in the same year, while a second examines employers issuing more than five 1099-MISC forms exceeding $25,000 each to contractors with no other source of income.

Schedule C, Profit or Loss From Business
Issues associated with sole proprietorships are common audit triggers. The IRS has several approaches to achieve an increase in income tax, as well as the assessment of self-employment tax.
    Unreported income. There is a relatively high potential for unreported income from cash transactions with sole proprietorships. The IRS will examine the taxpayer’s bank records to detect deposits that are unaccounted for, compare revenue and expenses of similar businesses, and in some cases will perform a “lifestyle” audit to reconstruct income based on changes in the sole proprietor’s net worth based on valuation of assets.
    Losses. Significant losses reported on Schedule C, or losses continuing over two or more years, may increase the chance of audit. If the IRS is successful in reclassifying an activity as a hobby instead of a forprofit business, losses will be disallowed.
Bartering. The fair market value of products and services received through bartering can be considered business income if the products or services rendered are associated   with the sole proprietorship. If the sole proprietor trades through a barter exchange program, the program will issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions.

Audit Procedures

Soft Notice

The IRS uses the Automated Underreporter (AUR) Soft Notice to encourage taxpayers to self-correct income reporting with minimal burden and resources. Notice CP 2057 is issued to certain taxpayers with apparent underreported income. The form informs the taxpayer that there appears to be a discrepancy with the income types listed but does not provide them with any type of calculations. It instructs the taxpayer to file a Form 1040X to correct their return if the information shown on the notice is correct. The IRS does not directly follow up these notices but taxpayers that repeat their behavior will be identified in the following tax year.

Examination by Mail

The taxpayer receives Notice CP 2000 from the IRS disclosing proposed changes. The taxpayer typically has 30 days to respond and has three options to the IRS proposals.
  To agree with all the proposals.
  To partially agree with the changes.
  To dispute all the changes proposed by the IRS.
The taxpayer is allowed to sign an authorization that enables another party to represent him or her in connection with the Notice CP 2000. The authorization is part of Notice CP 2000, and a separate power of attorney is not required.

Field Audit

The revenue agent will send a letter to the taxpayer requesting that the taxpayer phone the agent. At that time, the date, location, and agenda for the first meeting will be set. The taxpayer has the right to request that the examination take place at a reasonable time and place that is convenient for both the taxpayer and the IRS.

Audit Strategy

The best way to prepare for an audit is to put oneself into the auditor’s shoes. Take the perspective that you are looking for anything possible to increase the tax liability on the return. This is an area where a qualified tax preparer can be invaluable.
Pose tough questions and “throw out” any questionable deductions. Make sure any issue raised during an audit is something that has already been considered. If the pre-audit function is performed properly, the actual audit will be more comfortable, and you will be prepared for any negative adjustments.

Audit Video

The IRS has created a video web page to assist taxpayers preparing for a small business audit. Go to the IRS website at www.irsvideos.gov/audit.

Requesting a Different Auditor

A taxpayer or taxpayer’s representative has the right to request a different auditor if the current one seems uncooperative, too busy, or too inexperienced to properly consider the issues under examination. The request should be made to the auditor’s supervisor by phone or in writing and should include a detailed explanation of the reasons for the request.

Take It Seriously

Any comments made to an IRS employee that could be interpreted as a threat against the employee will be taken seriously and fully investigated. Advise clients not to joke around with IRS employees during an examination.

Repeat Examinations

If a return was examined for the same items in either of the two previous years, and no change was proposed to the tax liability, contact the IRS immediately and the examination will likely be discontinued. This policy is in accordance with IRC section 7605(b), which states that no taxpayer shall be subjected to “unnecessary examinations.”

Thursday, August 21, 2014

About the Alternative Minimum Tax

The alternative minimum tax was originally enacted to ensure that high-income taxpayers pay at least a minimum amount of tax if they benefit from certain deductions and other tax preference items.
The AMT tax computation is a parallel system to the regular tax system with its own definitions of income and expenses, rules for income recognition and timing, and exemptions and tax rates. Although every taxpayer is subject to AMT rules, the additional tax is paid only if the tax computation under AMT rules is higher than the tax computed under regular rules.

Even though the AMT was originally targeted toward high-income taxpayers, factors, including inflation and treatment of certain tax credits, can sometimes push lower-income taxpayers into an AMT situation.

How AMT Works

Certain items called “adjustments and preferences” are added to federal gross income. Personal exemptions that reduce taxable income for regular tax purposes are not allowed for AMT purposes and are added back to taxable income. A separate AMT exemption amount is allowed, depending on the taxpayer’s filing status. After the AMT adjustments and preferences are added to income, and the AMT exemption amount is subtracted, an AMT tax rate of 26% to 28% is applied. If the resulting tax is greater than regular tax, the difference is added to regular tax on line 45, Form 1040.

Example #1: When computed under regular rules, John’s income tax is $4,700. When computed under AMT rules, the tax amount is $3,900. Since his tax computed under AMT rules is less than his tax computed under regular rules, John will not pay any additional amount for AMT.
Example #2: Assume the same facts as Example #1, except when computed under AMT rules, John’s tax amount is $5,100. Since his tax computed under AMT rules is higher than his tax computed under regular rules, John must pay the difference in additional tax. John must report additional AMT tax on line 45, Form 1040, in the amount of $400.

AMT Triggers

Items that commonly trigger AMT include high deductions for state income tax, dependent exemptions, exercise of incentive stock options, and large miscellaneous itemized deductions reported on Schedule A, Form 1040. Other AMT adjustments and preferences include:

    Medical and dental expenses. A portion of these deductions may need to be added back for AMT purposes.
    Taxes from Schedule A, Form 1040.
    Certain mortgage interest deductions.
    Tax refunds reported on Form 1040.
    Certain investment interest expense.
    Certain depletion expense.
    Net operating losses.
    Interest from specified private activity bonds.
    A portion of gain from section 1202 small business stock.
    Certain gains from dispositions of property.
    Certain depreciation adjustments.
    AMT loss limitations.
    Certain circulation costs.
    Long-term contracts.
    Certain mining costs. 
    Certain research and experimental costs.
    Pre-1987 installment sale income.
    Intangible drilling cost preferences.

AMT “Patch”

Because the original AMT law did not include a provision to index the exemption amount for inflation, over the years, a growing number of middle-income taxpayers have become subject to AMT. Historically, Congress limited the impact of the AMT by passing temporary legislation, often referred to as “patches,” to provide relief for millions of middle-income taxpayers who might otherwise be affected by AMT. Congress has patched the AMT every year for the past several years.
The “fiscal cliff” tax law that was passed on January 2, 2013, included a provision making the AMT patch permanent. Exemption amounts were retroactively increased for 2012 and will be indexed for inflation in future years. Under the new legislation, personal credits will also be allowed against the AMT on a permanent basis.