[h=1]Tax Filing Deadline Rapidly Approaching[/h]Just a reminder to those who have not yet filed their 2011 tax return that April 17, 2012 is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due. Normally the deadline is April 15, but when a due date falls on a weekend or holiday, the due date is extended until the next business day. Thus, since April 15 falls on a Sunday and April 16 is a legal holiday in Washington, D.C. (Emancipation Day), the due date for 2011 tax returns is extended until Tuesday, April 17, 2012.
In addition, the April 17, 2012 deadline also applies to the following:
If your returns have not yet been filed, please call right away so that we can schedule an appointment and/or file an extension if necessary.
[h=1]Can’t Pay Your Taxes by the April Due Date?[/h]The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who end up owing?
The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don’t. So if you are unable to pay the tax you owe, it is generally in your best interest to make other arrangements for paying your taxes rather than be subjected to the government’s penalties and interest. Here are a few options to consider.
[h=1]Are You an Employee or an Independent Contractor?[/h]The distinction has significant implications for both the employer and the employee. Employers like to treat individuals as independent contractors because they avoid having to match the employees’ payroll tax, pay benefits, pay unemployment insurance, etc. This results in a significant savings for employers.
When you are an employee, the employer pays you a net amount after making all the required tax withholdings and provides you with a W-2 for tax reporting that shows your taxable wages and details all of the withholding amounts. If you are an independent contractor, the employer will pay you a gross amount without any withholding and will issue you a 1099-MISC.
Independent contractors must pay self-employment (SE) tax instead of having FICA (Social Security and Medicare program contributions) deducted from their wages. The SE tax rate is generally twice the amount of the FICA rate. Independent contractors are generally treated the same as self-employed individuals, so the SE tax and income tax are based on their net earnings after deducting any allowable expenses incurred to earn the income.
The problem here is that employees generally do not have tax-deductible expenses related to their jobs, so employees who are incorrectly classified as independent contractors find themselves essentially paying both the employer’s and their own share of the Social Security and Medicare taxes. To make matters worse, as an independent contractor, no federal or state income tax was withheld, leaving the independent contractor with a sometimes unexpected tax liability.
Classifying a worker as an employee or independent contractor is not discretionary for the employer. The employer must follow federal guidelines when making the determination. Basically, it boils down to whether the employer has direction and control over the individual, which includes, among other guidelines, specifying working hours, how to perform the work tasks, the right to fire, etc. If the employer does have direction and control, the individual is probably an employee.
If you have been treated as an independent contractor and think that you are really an employee, you do have recourse. You can file Form 8919. If the IRS agrees with you, you only have to pay the employee share of FICA/Medicare not the self-employment tax. You still have to pay the income tax. The filing will make life miserable for your presumably former “employer,” so it might turn into a bridge-burning exercise.
If you have questions, wish to explore alternatives, or need assistance filing Form 8919, please give this office a call.
[h=1]Penalty Relief for Financially Distressed Taxpayers[/h]The IRS has new penalty relief for the unemployed and certain self-employed individuals on failure-to-pay penalties, which are one of the biggest factors a financially distressed taxpayer faces on a tax bill.
To assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest, and any other penalties are fully paid by October 15, 2012.
The penalty relief will be available to two categories of taxpayers:
Taxpayers meeting the eligibility criteria will need to request the penalty relief by filing the new Form 1127A on or before the April 17th deadline. Form 1127A is not to be attached to the income tax return, but is filed separately. CAUTION: Form 1127-A does not extend the time to file your 2011 income tax return. To get an extension of time to file, you must file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until October 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.
If you have questions related to deferring your tax payment until October and the financial implications of doing so, please give this office a call.
[h=1]Individual Estimated Tax Payments for 2012 Start Soon[/h]Our tax system is a “pay-as-you-go” system, and if your pre-paid amount is not enough, you become liable for non-deductible interest penalties. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. The primary among these include:
One of the biggest unknowns for 2012 is the alternative minimum tax (AMT). Beginning in 2001, the exemption to the amount of income not subject to AMT was substantially increased and inflation-adjusted in subsequent years. However, the increased exemption amounts are not permanent and must be extended by Congress on a year-by-year basis. So far Congress has not acted for 2012, and if they do not, the AMT exemption will revert to 2000 levels, roughly one-half of the current amount. Without Congressional action an estimated 30 million taxpayers, approximately 20% of all taxpayers, will be hit by the AMT in 2012. Compare this to the roughly 600,000 taxpayers in 1997 (approximately 1% of all 1997 taxpayers) who were affected by the AMT.
When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment penalty. This penalty is the short-term federal rate plus 3 percentage points and the penalty is computed on a quarter-by-quarter basis. So, even if you pre-pay the correct amount for the year, if the amounts are not paid evenly you could be subject to a penalty. Interestingly enough, withholding amounts are treated as paid ratably throughout the year, so taxpayers who are underpaid in the earlier part of the year can compensate by bumping up their withholding in the later part of the year.
Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de minimis amount, no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:
This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc.
If you have questions regarding your pre-payments or would like to review and adjust your W-4 payroll withholding, W-4P pension withholding, and estimated tax payments to provide the desired tax result for 2012, please give this office a call.
TAX TIBITS
Passports Could Be Revoked for Delinquent Taxpayers – The U.S. Senate has unanimously approved a provision added to a highway transportation bill that would revoke the passports of people with seriously delinquent tax debts. The provision gives the State Department the right to deny, revoke, or limit a passport for individuals whom the Internal Revenue Service certifies as having a “seriously delinquent tax debt.” A seriously delinquent tax debt is defined as a debt in excess $50,000 (adjusted for inflation in subsequent years) for which a notice of federal lien or levy has been filed. The House of Representatives will take up the bill in the next few weeks. Only time will tell if this potential provision will become law.
Unexpected Result for Charity Volunteering – If an employer fails to pay over its payroll taxes, the IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a “responsible person.” A responsible person is a person who is responsible for collecting, accounting for, and paying over payroll taxes and willfully fails to perform this responsibility.
Payroll taxes withheld from an employee’s salary are monies the employee paid toward his or her tax liability and are not funds that belong to the employer. An employer that uses those funds to pay other expenses is using someone else’s money, and the IRS takes a very dim view of that act, since the government’s only recourse is with the employer and has to credit the employee with the withholding.
Case in point: an individual volunteered (unpaid position) to aid a financially struggling non-profit organization and became actively involved in the financial affairs of the non-profit, including writing the checks for the organization. The organization was behind on its trust fund payments, and the volunteer paid other liabilities ahead of the trust fund deficiency. As a result, the IRS assessed him the penalty of almost $200,000, which he paid and then went to tax court to get back. The tax court ruled in the IRS’ favor.
The case once again demonstrates the perils faced by a taxpayer who becomes involved in running a financially distressed company (for profit or non-profit) and chooses to pay other liabilities ahead of trust fund payments.
Tax Fraud on the Upswing – When a tax return is e-filed, the IRS’s computer will verify that the Social Security number(s) (SSN) on the return have not been previously used on another return for the same year, and will reject the e-file if it has. This most commonly occurs when both of the divorced or separated parents claim their child or children as dependents.
However, recently tax preparers are seeing more and more clients’ returns rejected because the taxpayer or spouse’s SSN has already been used. What is happening is thieves are stealing the taxpayer’s identity and filing phony returns to claim fraudulent refunds, leaving the taxpayer with the task of explaining to the IRS and all the other problems associated with identity theft.
If you believe you have been a victim of identity theft, you should immediately review the guidance provided by the IRS and follow the recommended procedures. If you need assistance, please give this office a call.
Frank’s Tax and Business Service
120 York Rd
Kings Mountain, NC 28086-3151
(704) 739-4039 Fax: (704) 739-3934
e-mail: [email protected]
Web Site: File Your Return Online
Franklin Katz, ATP, PA, PB,
Providing Professional Accounting, Bookkeeping, Payroll and Income Tax Preparation Services
Circular 230 Disclaimer – Any tax advice in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding related penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or tax
related matters addressed herein.
In addition, the April 17, 2012 deadline also applies to the following:
- Tax year 2011 balance-due payments - Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.
- Tax year 2011 contributions to a Roth or traditional IRA - April 17 is the last day contributions for 2011 can be made to either a Roth or traditional IRA, even if an extension is filed.
- Individual estimated tax payments for the first quarter of 2012 - Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2012 estimated taxes are due on April 17. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. Please call this office for any questions.
- Individual refund claims for tax year 2008 - The regular three-year statute of limitations expires on April 17 for the 2008 tax return. Thus, no refund will be granted for a 2008 original or amended return that is filed after April 17. Caution: The statute does not apply to balances due for unfiled 2008 returns.
If your returns have not yet been filed, please call right away so that we can schedule an appointment and/or file an extension if necessary.
[h=1]Can’t Pay Your Taxes by the April Due Date?[/h]The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who end up owing?
The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don’t. So if you are unable to pay the tax you owe, it is generally in your best interest to make other arrangements for paying your taxes rather than be subjected to the government’s penalties and interest. Here are a few options to consider.
- Family Loan - Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
- Credit Card - Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates.
- Installment Agreement - If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, and there is a user fee to set up the payment plan. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
- Tap a Retirement Account - This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.
[h=1]Are You an Employee or an Independent Contractor?[/h]The distinction has significant implications for both the employer and the employee. Employers like to treat individuals as independent contractors because they avoid having to match the employees’ payroll tax, pay benefits, pay unemployment insurance, etc. This results in a significant savings for employers.
When you are an employee, the employer pays you a net amount after making all the required tax withholdings and provides you with a W-2 for tax reporting that shows your taxable wages and details all of the withholding amounts. If you are an independent contractor, the employer will pay you a gross amount without any withholding and will issue you a 1099-MISC.
Independent contractors must pay self-employment (SE) tax instead of having FICA (Social Security and Medicare program contributions) deducted from their wages. The SE tax rate is generally twice the amount of the FICA rate. Independent contractors are generally treated the same as self-employed individuals, so the SE tax and income tax are based on their net earnings after deducting any allowable expenses incurred to earn the income.
The problem here is that employees generally do not have tax-deductible expenses related to their jobs, so employees who are incorrectly classified as independent contractors find themselves essentially paying both the employer’s and their own share of the Social Security and Medicare taxes. To make matters worse, as an independent contractor, no federal or state income tax was withheld, leaving the independent contractor with a sometimes unexpected tax liability.
Classifying a worker as an employee or independent contractor is not discretionary for the employer. The employer must follow federal guidelines when making the determination. Basically, it boils down to whether the employer has direction and control over the individual, which includes, among other guidelines, specifying working hours, how to perform the work tasks, the right to fire, etc. If the employer does have direction and control, the individual is probably an employee.
If you have been treated as an independent contractor and think that you are really an employee, you do have recourse. You can file Form 8919. If the IRS agrees with you, you only have to pay the employee share of FICA/Medicare not the self-employment tax. You still have to pay the income tax. The filing will make life miserable for your presumably former “employer,” so it might turn into a bridge-burning exercise.
If you have questions, wish to explore alternatives, or need assistance filing Form 8919, please give this office a call.
[h=1]Penalty Relief for Financially Distressed Taxpayers[/h]The IRS has new penalty relief for the unemployed and certain self-employed individuals on failure-to-pay penalties, which are one of the biggest factors a financially distressed taxpayer faces on a tax bill.
To assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest, and any other penalties are fully paid by October 15, 2012.
The penalty relief will be available to two categories of taxpayers:
- Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
- Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.
Taxpayers meeting the eligibility criteria will need to request the penalty relief by filing the new Form 1127A on or before the April 17th deadline. Form 1127A is not to be attached to the income tax return, but is filed separately. CAUTION: Form 1127-A does not extend the time to file your 2011 income tax return. To get an extension of time to file, you must file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until October 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.
If you have questions related to deferring your tax payment until October and the financial implications of doing so, please give this office a call.
[h=1]Individual Estimated Tax Payments for 2012 Start Soon[/h]Our tax system is a “pay-as-you-go” system, and if your pre-paid amount is not enough, you become liable for non-deductible interest penalties. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. The primary among these include:
- Payroll withholding for employees;
- Pension withholding for retirees; and
- Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.
One of the biggest unknowns for 2012 is the alternative minimum tax (AMT). Beginning in 2001, the exemption to the amount of income not subject to AMT was substantially increased and inflation-adjusted in subsequent years. However, the increased exemption amounts are not permanent and must be extended by Congress on a year-by-year basis. So far Congress has not acted for 2012, and if they do not, the AMT exemption will revert to 2000 levels, roughly one-half of the current amount. Without Congressional action an estimated 30 million taxpayers, approximately 20% of all taxpayers, will be hit by the AMT in 2012. Compare this to the roughly 600,000 taxpayers in 1997 (approximately 1% of all 1997 taxpayers) who were affected by the AMT.
When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment penalty. This penalty is the short-term federal rate plus 3 percentage points and the penalty is computed on a quarter-by-quarter basis. So, even if you pre-pay the correct amount for the year, if the amounts are not paid evenly you could be subject to a penalty. Interestingly enough, withholding amounts are treated as paid ratably throughout the year, so taxpayers who are underpaid in the earlier part of the year can compensate by bumping up their withholding in the later part of the year.
Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de minimis amount, no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:
- The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
- The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for a higher income taxpayer whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.
Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.
However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.
This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc.
If you have questions regarding your pre-payments or would like to review and adjust your W-4 payroll withholding, W-4P pension withholding, and estimated tax payments to provide the desired tax result for 2012, please give this office a call.
TAX TIBITS
Passports Could Be Revoked for Delinquent Taxpayers – The U.S. Senate has unanimously approved a provision added to a highway transportation bill that would revoke the passports of people with seriously delinquent tax debts. The provision gives the State Department the right to deny, revoke, or limit a passport for individuals whom the Internal Revenue Service certifies as having a “seriously delinquent tax debt.” A seriously delinquent tax debt is defined as a debt in excess $50,000 (adjusted for inflation in subsequent years) for which a notice of federal lien or levy has been filed. The House of Representatives will take up the bill in the next few weeks. Only time will tell if this potential provision will become law.
Unexpected Result for Charity Volunteering – If an employer fails to pay over its payroll taxes, the IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a “responsible person.” A responsible person is a person who is responsible for collecting, accounting for, and paying over payroll taxes and willfully fails to perform this responsibility.
Payroll taxes withheld from an employee’s salary are monies the employee paid toward his or her tax liability and are not funds that belong to the employer. An employer that uses those funds to pay other expenses is using someone else’s money, and the IRS takes a very dim view of that act, since the government’s only recourse is with the employer and has to credit the employee with the withholding.
Case in point: an individual volunteered (unpaid position) to aid a financially struggling non-profit organization and became actively involved in the financial affairs of the non-profit, including writing the checks for the organization. The organization was behind on its trust fund payments, and the volunteer paid other liabilities ahead of the trust fund deficiency. As a result, the IRS assessed him the penalty of almost $200,000, which he paid and then went to tax court to get back. The tax court ruled in the IRS’ favor.
The case once again demonstrates the perils faced by a taxpayer who becomes involved in running a financially distressed company (for profit or non-profit) and chooses to pay other liabilities ahead of trust fund payments.
Tax Fraud on the Upswing – When a tax return is e-filed, the IRS’s computer will verify that the Social Security number(s) (SSN) on the return have not been previously used on another return for the same year, and will reject the e-file if it has. This most commonly occurs when both of the divorced or separated parents claim their child or children as dependents.
However, recently tax preparers are seeing more and more clients’ returns rejected because the taxpayer or spouse’s SSN has already been used. What is happening is thieves are stealing the taxpayer’s identity and filing phony returns to claim fraudulent refunds, leaving the taxpayer with the task of explaining to the IRS and all the other problems associated with identity theft.
If you believe you have been a victim of identity theft, you should immediately review the guidance provided by the IRS and follow the recommended procedures. If you need assistance, please give this office a call.
Frank’s Tax and Business Service
120 York Rd
Kings Mountain, NC 28086-3151
(704) 739-4039 Fax: (704) 739-3934
e-mail: [email protected]
Web Site: File Your Return Online
Franklin Katz, ATP, PA, PB,
Providing Professional Accounting, Bookkeeping, Payroll and Income Tax Preparation Services
Circular 230 Disclaimer – Any tax advice in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding related penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or tax
related matters addressed herein.