Common IRS Notices & What They Mean

common irs notices and what they mean

While it is not unusual, getting a notice from the Internal Revenue Service (IRS) can be a stressful event. Every year, the IRS sends notices to millions of Americans, and while some of these notices can be purely informational, others might call for prompt action. Each IRS notice has a code assigned to it, which is usually located on the top or bottom right-hand corner of the written notice. Here are some of the most common IRS notices and letters, what they mean, and how to respond. 

IRS Notice CP2000 

IRS Notice CP2000 is sent to taxpayers when the income or payment information the IRS received from third parties does not match what is reported on the taxpayer’s tax return. This is important because it can result in an increase or decrease in the amount of taxes owed. If you get a CP2000 notice, you should respond as soon as possible. The notice will include a response deadline and directions on how to respond. In general, you have 30 days from the notice’s date to reply.  

You have two choices when responding to the notice: accept or deny the suggested changes. You can sign the response form and send it to the IRS along with any additional taxes due if you accept the suggested changes. If you disagree with the changes that have been suggested, you can back up your arguments with evidence and explain why you think the changes are inaccurate. Remember that additional taxes, interest, and penalties may apply if you don’t respond to the CP2000 notice. 

IRS Notice CP90 

IRS Notice CP90 is a formal notice of the intent to levy along with a notice of your right to an appeal. The IRS will send you one final notice before beginning collection efforts against you. The notice advises the taxpayer that the IRS plans to seize their assets, such as bank accounts, property, wages, and other sources of income, in order to pay the back taxes owed.  

It is crucial that you act immediately if you receive a CP90 notice. After receiving the letter, you have 30 days to contact the IRS. You can choose to pay the tax debt in full, set up an installment agreement with the IRS, or request a Collection Due Process (CDP) hearing.  

IRS Notice CP523 

IRS Notice CP523 is a notification of default on an installment agreement by missing one or more monthly payments. The notice will also warn of a potential seizure of your assets because of your default.  

If you receive this notice, you should contact the IRS within 30 days of the date of the notice. You can also restore the installment agreement by making the missed payments, but you may be required to pay a reinstatement fee. If you are unable to make the current payments, you can ask for a modification to the payment plan. This could entail increasing the payment duration or decreasing the monthly payment amount. 

IRS Notice CP14 

IRS Notice CP14 a letter from the IRS informing you that you have unpaid taxes on your federal income tax return. The notice will include the amount of tax owed, plus any penalties and interest that have accrued. If the details in the notice are accurate, you need to repay the debt as quickly as possible. Instructions on how to make the payment, including online payment choices, payment plans, and other payment methods, will be included in the notice. 

You might be able to ask the IRS for a payment plan if you are unable to make the full payment. The notice will outline how to submit a payment plan request. Additionally, you can contest the notice if you think it is incorrect by formally protesting it to the IRS. To substantiate your argument, you must present supporting evidence. 

IRS LTR3172 

IRS Letter 3172 is a notice of federal tax lien filing (NFTL). The IRS files this public document to inform creditors that the government has a claim to your interests in any current and future property and assets. Although NFTLs are no longer included in credit reports, they may still have an impact on your ability to receive credit if a potential creditor finds out about them from other sources, like public databases.  

This letter advises you of your right to appeal the filing of the NFTL. You have 30 days from the letter’s delivery date to ask for a hearing to contest the lien. Alternately, you could also use the “Collections Appeals Program,” which enables you to challenge the lien. Although this approach can be quicker than the Due Process hearing, you are only able to contest the manner of collection rather than the underlying causes of the taxes owing. 

What To Do If You Receive an IRS Notice 

Receiving an IRS notice or letter in the mail can lead you to scramble in worry. However, the most important thing to do when receiving a notice is to check for its validity. Phony letters and notices are sometimes sent to innocent taxpayers in order to obtain personal information or payments. If you receive a suspicious letter or notice claiming to be from the IRS, you should confirm it is not fraudulent by contacting the IRS directly. If the notice turns out to be credible, you should understand the severity of the situation but also know you have options and you do not have to tackle your tax issues alone. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

Contact Us Today for a No-Obligation Free Consultation 

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What You Need to Know About State Tax Audits

what you need to know about state tax audits

We often discuss tax audits conducted by the IRS, but you can just as easily be audited by your state’s Department of Revenue. Like an IRS audit, state tax audits can be stressful and intimidating for taxpayers. But what triggers a state tax audit? Is it less severe than an IRS audit? Would a state tax audit result in an automatic IRS audit? Here’s what you need to know about state tax audits. 

What is a state tax audit? 

A state tax audit is an audit performed by your state’s Department of Revenue because they believe there is a discrepancy on your state tax return. It is no less severe than an IRS audit and can result in financial and legal consequences. During the audit, your state will review your state tax return to verify that your reported income and deductions are correct. Typically, your state will send you a written notice in the mail to inform you of the audit. The notice should include the tax years they plan to review, any information you will need to provide, and their contact information. You can opt to have an accountant or tax attorney represent you during the audit or proceed without one. Once the audit is completed, your state will send you a written notice of the results. The results can result in the acceptance of your state tax return with no further action needed, but it can also result in taxes and penalties owed. The taxpayer may be entitled to appeal the judgment if they don’t agree with the audit results. Depending on the state, the appeals procedure may include a hearing before an administrative law judge or an appeals board. 

What triggers a state tax audit? 

You should be aware of frequent errors that can result in a state tax audit. These can include:  

  • Failing to record all income: You are required to report all income, including self-employment, rental, and investment income. Not doing so is one the fastest ways to trigger an audit. 
  • Being a nexus: If your business is a nexus, or a company that has a presence in one or more states, you might be at risk of a state audit. Each state will want to ensure you are complying with their individual tax laws. 
  • Failing to report use tax: If you purchase taxable items in one state and intend to use, store, or consume them in another state, you must pay use tax in your own state. For example, if you purchase a car in a state that does not charge sales tax, but plan to use the car in a state that does, you must pay use tax on the purchase price of the car in your state. 
  • Being a sole proprietor: If you are a sole proprietor and prepare your own tax returns, you may be viewed as more likely to make a mistake when filing. 

Misreporting data, math mistakes, incomplete state tax forms, excessive deductions, and failing to file your state tax return on time are some more common reasons for state audits. 

Will a state tax audit result in an automatic IRS audit? 

Your biggest worry when being audited by your state Department of Revenue is whether you will also trigger an IRS audit. While there is no certainty of this happening, it definitely is a possibility since both state and federal taxing agencies communicate with each other. Large mistakes on your state return will likely result in an IRS audit, but small mathematical errors may not. In some cases, your state might require you to amend your state return, which can impact your federal tax return, thus getting the IRS’s attention. It goes without saying that the best way to avoid a state or federal tax audit is to submit complete and accurate tax returns. Facing an audit can be stressful and intimidating but having audit representation can have a positive impact. Optima Tax Relief has over a decade of experience representing clients during both state and IRS tax audits.  

Contact Us Today for a No-Obligation Free Consultation 

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What is the IRS Negligence Penalty?

what is the irs negligence penalty

Failing to pay, or even underpaying, your taxes can have drastic consequences that can cost a fortune. This is because on top of your unpaid tax balance is a heap of penalties and interest. One of the most common penalties to watch out for is an accuracy-related penalty, which can include a substantial understatement of income tax penalty and a negligence penalty. While a substantial understatement of income tax penalty usually requires an individual to lie about their income, a negligence penalty can result from being careless or reckless with your tax return. Here’s a breakdown of what the IRS negligence penalty is and how to avoid it. 

Negligence or Disregard of the Rules or Regulations Penalty 

The Internal Revenue Service (IRS) may impose the negligence penalty on taxpayers who fail to use reasonable care or who make mistakes on their tax returns. Negligence is the failure to act with the same degree of caution that a reasonably cautious person would in a similar situation. In the context of tax returns, negligence can include the failure to maintain accurate records, to declare all income, or to confirm the validity of a tax deduction or credit. 

How Negligence is Penalized 

The negligence penalty can be up to 20% of the portion of the underpayment of tax resulting from negligence or disregard of the rules or regulations. In addition to this penalty, the IRS also charges interest on the penalty. The current quarterly interest rate for underpayment is 7%.  

Tax Negligence vs. Tax Fraud 

The difference between the negligence penalty and the IRS’s fraud penalty should be noted. The fraud penalty, which can be applied to taxpayers who knowingly and purposefully understate their tax liability, is significantly more severe. On the other hand, taxpayers who make errors or are sloppy in their tax reporting are subject to a less severe penalty known as negligence.   

If the IRS determines that a taxpayer has been negligent in the preparation of their tax return, they will typically send the taxpayer a notice informing them of the penalty. The taxpayer will then have the opportunity to dispute the penalty by providing additional information or arguing that they were not negligent.  

The IRS will normally issue the taxpayer a notice advising them of the penalty if they are found to have been careless when preparing their tax return. The taxpayer will then have the chance to contest the penalty by offering more substantiating details or making a case that they weren’t negligent.   

Avoiding the IRS Negligence Penalty 

It is important for taxpayers to take the necessary steps to ensure that their tax returns are accurate and complete. This involves keeping precise records, disclosing all earnings, and only claiming the deductions and credits that they qualify for. The purpose of the IRS negligence penalty is to motivate taxpayers to take the required precautions to guarantee the accuracy and completeness of their tax returns. Additionally, it ensures sure that taxpayers cannot profit from their errors or carelessness at the expense of other taxpayers. If you’ve been hit with IRS penalties, like the negligence penalty, Optima Tax Relief can help.  

Contact Us Today for a No-Obligation Free Consultation 

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IRS Tax Form Library

irs tax forms

Did you know there are hundreds of IRS tax forms? Luckily, you’ll only need to know a handful of them if your tax situation is simple. However, because your tax situation can change year to year, it’s a good idea to learn about other common IRS tax forms you may not have used before. Here is a list of 50+ IRS tax forms you might need to file your taxes. 

Form 1040 and Schedules 

  • Form 1040, U.S. Individual Income Tax Return: used by U.S. taxpayers to file an annual income tax return 
  • Form 1040-SR, U.S. Tax Return for Seniors: an optional alternative to using Form 1040 for taxpayers who are age 65 or older 
  • Form 1040-X, Amended U.S. Individual Income Tax Return: used to amend or fix a submitted tax return 
  • Form 1040-ES, Estimated Tax for Individuals: used to figure and pay your estimated tax 
  • Schedule A, Itemized Deductions: used to figure your itemized deductions 
  • Schedule B, Interest and Ordinary Dividends: used in some scenarios when you’ve earned taxable interest or dividends 
  • Schedule C, Profit or Loss from Business (Sole Proprietorship): used to report income or losses from a business you operated or a profession you practiced as a sole proprietor 
  • Schedule D, Capital Gains and Losses: used to report capital gains and losses for the year 
  • Schedule E, Supplemental Income and Loss: used to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs) 
  • Schedule EIC, Earned Income Credit: used to give the IRS information about your qualifying child(ren) 
  • Schedule F, Profit or Loss From Farming: used to report farm income and expenses 
  • Schedule H, Household Employment Taxes: used to report household employment taxes if you paid cash wages to a household employee and the wages were subject to social security, Medicare, or FUTA taxes, or if you withheld federal income tax 
  • Schedule J, Income Averaging for Farmers and Fishermen used to figure your income tax by averaging, over the previous 3 years, all or some of your taxable income from your farming or fishing business 
  • Schedule R, Credit for the Elderly or the Disabled: used to figure the credit for the elderly or the disabled 
  • Schedule SE, Self-Employment Tax: used to figure the tax due on net earnings from self-employment 
  • Schedule 8812, Credits for Qualifying Children and Other Dependents: used to figure your child tax credits 

Application Forms 

  • Form SS-4, Application for Employer Identification Number: used to apply for an Employer Identification Number (EIN), a nine-digit number assigned to sole proprietors, corporations, partnerships, estates, trusts and other entities for tax filing and reporting purposes 
  • Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return: used to request an automatic extension of time to file a U.S. individual income tax return 
  • Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns: used to request an automatic 6-month extension of time to file certain business income tax, information, and other returns. 
  • Form W-7, Application for IRS Individual Taxpayer Identification Number: used to apply for an IRS individual taxpayer identification number (ITIN) 

Income and Payment Reporting Forms 

  • Form W-2, Wage and Tax Statement: used to report wages paid to employees and the taxes withheld from them 
  • Form 1098, Mortgage Interest Statement: used to report mortgage interest of $600 or more received by you during the year 
  • Form 1098-T, Tuition Statement: used to report tuition payments received and payments due from the paying student 
  • Form 1098-E, Student Loan Interest Statement: used to report the amount of interest you paid on student loans in a calendar year 
  • Form 1099-B, Proceeds from Broker and Barter Exchange Transactions: used to report any gains and losses from stock and bond transactions made throughout the tax year 
  • Form 1099-C, Cancellation of Debt: used to report canceled debt, which is generally considered taxable income 
  • Form 1099-DIV, Dividends and Distributions: used to report dividends and other distributions to taxpayers and to the IRS 
  • Form 1099-G, Certain Government Payments: used to report payments received from federal, state, or local governments, such as unemployment benefits, tax refunds, grants, etc. 
  • Form 1099-INT, Interest Income: used to report interest income you received, any taxes withheld, and if any of the interest is tax-exempt 
  • Form 1099-K, Payment Card and Third Party Network Transactions: used to report payments and transactions from online platforms, apps or payment card processors 
  • Form 1099-MISC, Miscellaneous Income: used to report miscellaneous compensation such as rents, prizes, medical payments, and others 
  • Form 1099-NEC, Nonemployee Compensation: used to report self-employment or contract work, such as freelance work or rideshare driving 
  • Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.: used to report distributions from annuities, profit-sharing plans, retirement plans, IRAs, insurance contracts, or pensions 
  • Form 1099-S, Proceeds from Real Estate Transactions: used to report the sale or exchange of real estate 

Business Forms 

  • Form 1120, U.S. Corporation Income Tax Return: used to report income, gains, losses, deductions, credits of domestic corporations. 
  • Form 1120-S, U.S. Income Tax Return for an S Corporation: used to report the income, gains, losses, deductions, credits, etc., of a domestic corporation or other entity for any tax year covered by an election to be an S corporation 
  • Form 2106, Employee Business Expenses: used to deduct ordinary and necessary expenses for your job 
  • Form 4562, Depreciation and Amortization (Including Information on Listed Property): used to record the depreciation and amortization of property you’ve purchased for your business 
  • Form 8829, Expenses for Business Use of Your Home: used to figure the allowable expenses for business use of your home on Schedule C   
  • Form 941, Employer’s Quarterly Federal Tax Return: used to report income taxes, Social Security tax, or Medicare tax withheld from employee’s paychecks 

Tax Resolution Forms 

  • Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship: used to request an extension of time under Internal Revenue Code section 6161 for payment of tax due 
  • Form 11277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien: used to request a tax lien removal. 
  • Form 12153, Request for a Collection Due Process or Equivalent Hearing: used to request a Collection Due Process (CDP) or Equivalent Hearing (EH) with the IRS Independent Office of Appeals 
  • Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals: used to obtain current financial information necessary for determining how a wage earner or self-employed individual can satisfy an outstanding tax liability 
  • Form 433-B, Collection Information Statement for Businesses: used to obtain current financial information necessary for determining how a business can satisfy an outstanding tax liability 
  • Form 656, Offer in Compromise: used to apply for an Offer in Compromise (OIC) 
  • Form 843, Claim for Refund and Request for Abatement: used to claim a refund or request an abatement of certain taxes, interest, penalties, fees, and additions to tax 
  • Form 8857, Request for Innocent Spouse Relief: used to request relief from tax liability, plus related penalties and interest, when you believe only your spouse or former spouse should be held responsible for all or part of the tax 
  • Form 911, Request for Taxpayer Advocate Service Assistance: used to request taxpayer assistance if you have been unable to resolve your tax issues through normal channels 
  • Form 9423, Collection Appeal Request: used to request an appeal of a notice of federal tax lien, levy, seizure, or termination of an installment agreement. 
  • Form 9465, Installment Agreement Request: used to request a monthly installment plan if you cannot pay the full amount you owe shown on your tax return 

Tax forms can be difficult to understand on your own. If you need tax help, the experts at Optima Tax Relief can assist. With over a decade of experience helping taxpayers, Optima is equipped to take on the most complicated tax situations. 

Contact Us Today for a No-Obligation Free Consultation 

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I Lost My W-2. Now What?

i lost my w-2. now what?

Filing your taxes can be challenging, especially if you are missing crucial documents like your W-2 form. A W-2 tax form shows important information about the income you’ve earned from your employer, how much taxes were withheld from your paycheck, benefits provided and other details for the year. You file your federal and state taxes with this form. But what happens if you lose your W-2? If you lose your W-2 form, don’t panic. Here are some options you have if you do not have your W-2 form when filing your taxes. 

Contact Your Employer 

If you lose your W-2, your first reaction should be to contact your employer to request a replacement. You will typically need to contact your Human Resources department to obtain a duplicate. This is also true if you are trying to obtain a W-2 for a previous year or for an employer you no longer work for. Employers are required to keep copies of W-2 forms for four years; however, some may keep them for longer. It’s important to be aware that some employers might charge you a fee for providing a copy of your W-2. You should contact your employer for a copy of your W-2 form if you did not receive one for the year at all. Employers are required by law to distribute W-2s by January 31st of each year. You should note that some employers distribute these forms electronically through email or an employee portal. If you haven’t received one by early February, you might want to contact your employer.  

Contact the IRS 

In some rare cases, your employer may not be able to help you obtain another copy of your W-2. In this case, you can contact the IRS for help. During your phone call, you’ll need to verify your identity by providing your name, address, phone number and Social Security number. You will also need to provide your employer’s information and other employment information, including employment dates, estimate of wages and amount of federal taxes withheld last year. The IRS will reach out to your employer on your behalf and request your W-2 be sent to you. Note that the IRS will contact your employer about the current tax year’s W-2. If you’re looking for a previous tax year’s W-2, you’ll need to request a transcript copy from the IRS. The transcript will include federal tax information your employer reported. That said, it will not include any state or local tax information reported by your employer. Transcripts are available for up to 10 years.  

Contact the Social Security Administration 

Since your employer reports your earnings to the Social Security Administration, you can request copies of your W-2s from them if you lose the original. You can request a copy for any W-2 from the years 1978 to the present, however it may cost you. You can get free copies if you need them for a Social Security-related purpose. There is a $126 fee per request for other purposes including: 

  • Federal or state tax filings 
  • Residency establishment 
  • Private pension entitlement 
  • Worker’s compensation income information 

If you are seeking W-2s from multiple tax years, this option can quickly become expensive. In some cases, it might be necessary to find all the relevant information needed to file both federal and state tax returns.  

Tax Help for Those Who Lost Their W-2 

Remember that just because you lost your W-2, or never received it, you still may need to file your taxes if you meet certain income thresholds. Locating a lost W-2 can be tricky and time-consuming, especially if it’s from a previous tax year or from an employer that you no longer work for. If you need help with your tax debt, tax relief is always an option. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

Contact Us Today for a No-Obligation Free Consultation 

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What Happens If You Don’t File Your Taxes?

what happens if you dont file your taxes

The April 18th tax deadline passed, and you did not file your tax return. Now what? First, don’t panic. Not everyone needs to file a tax return. Typically, if you earn less than the standard deduction associated with your filing status, you do not need to file a return. On the other hand, if you did not file a tax return even though you were required to, you might have an issue. Here’s what happens if you don’t file your taxes. 

You will be charged a Failure to File penalty. 

If you did not file a tax return when you were required to, the IRS will charge you a Failure to File penalty. This penalty is currently 5% of the unpaid taxes for each month or partial month that a tax return is late, up to 25% of your total unpaid tax bill. If you are due to receive a tax refund, then you will not receive a penalty for failing to file. However, not filing may result in losing that refund. Keep in mind, a tax refund can be only claimed within 3 years of its due date.  

You will be charged a Failure to Pay penalty. 

If you owe a tax balance and do not file your taxes, you will be penalized for failing to pay your tax bill. In 2023, the Failure to Pay penalty is 0.5% for each month or partial month your tax balance goes unpaid, up to 25% of your total tax bill. If both a Failure to Pay and a Failure to File penalty are applied in the same month, the Failure to File penalty will be reduced by the amount of the Failure to Pay penalty applied in that month. For example, instead of a 5% Failure to File penalty for the month, the IRS would apply a 4.5% Failure to File penalty and a 0.5% Failure to Pay penalty.  

Your tax bill will accrue interest. 

If you do not file your taxes, the IRS will assess interest on your unpaid taxes, even if you do not receive a Failure to File penalty. Even worse, the IRS begins accruing this interest beginning on the date your taxes are due, which is April 18th in 2023. If you do receive the Failure to File penalty, not only will you incur interest on your unpaid taxes, but on the penalty as well. Underpayment interest rates can change each quarter. The interest rate through June 2023 is 7% per year, the highest it has ever been. This essentially means that having a tax balance is more expensive than ever. 

The IRS may file a return on your behalf. 

In some cases, the IRS will file a substitute tax return on your behalf using tax documents that were sent to them from your employers and financial institutions. What they will not do, however, is try to reduce your tax liability with credits and deductions. If you still take no action, the IRS will continue processing the return and charge you any taxes owed.  

The IRS statute of limitations is delayed. 

Some may think that they can avoid filing a tax return for many years and the IRS will lose its power to enforce after the 10-year statute of limitations ends. However, the statute of limitations does not begin until a tax return is actually filed. This means that the unfiled tax return will essentially follow you until you file it. If you wait too long though, you risk losing out on refunds and tax credits. 

What Should I Do If I Didn’t File My Taxes? 

The simple answer to this question is to file immediately. The tax deadline has passed, and so has the deadline to request a tax extension. However, penalties and interest will be minimized if you file a tax return now. Some taxpayers do not file because they know they cannot afford to pay taxes they owe, but not filing and not paying only escalates the issue at hand. If you need help with your tax debt, tax relief is always an option. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

Contact Us Today for a No-Obligation Free Consultation 

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How to Report Foreign Income

how to report foreign income

Did you know that foreign income is still taxed by the United States? Millions of Americans who earn money abroad or plan to earn money abroad should be aware of their tax obligations. The United States is currently one of the only countries in the world that taxes based on citizenship, and not residency. However, there are some exclusions and foreign tax credits that can reduce your tax liability. Needless to say, reporting foreign income can be tricky. Here’s an overview of how to report foreign income at tax time. 

What is Foreign Income? 

First, let’s clearly define foreign income. Foreign income is any income you receive overseas. This can include the following:  

  • Foreign wages: Foreign wages are wages paid to you for services rendered or goods sold. This can mean being employed by a foreign company or being self-employed but working abroad. 
  • Foreign interest and dividends: Foreign interest is money earned through foreign bank accounts. Foreign dividends are payouts from foreign-earned stocks.  
  • Foreign real estate: Foreign rental income is income earned on a property you rent out located in a foreign country. Alternatively, if you sell a property that is located outside the United States, you’ll need to report the gains or losses on the sale during tax season.   

How Do I Report Foreign Income on My U.S. Tax Return? 

If you earned foreign income, you would need to report it on Form 1040 when filing your tax return. You may also need to file other tax forms depending on what type of income you earned. For example, if you earned foreign interest and dividends, you’d report these on Schedule B of Form 1040. Foreign business income is reported on Schedule C. Most capital gains are reported on Schedule D. Rental property income is reported on page 1 of Schedule E. In more complicated tax situations, there could be additional forms to file, like Form 8938, Statement of Specified Foreign Financial Assets or Form 114, Report of Bank and Financial Accounts. You should speak to a qualified tax preparer about which forms your specific tax situation requires.  

What is the Foreign Tax Credit? 

Some taxpayers might worry about paying taxes twice on the same income. The Foreign Tax Credit (FTC) is one of two safeguards that help American taxpayers avoid this issue. This credit allows American expats, or U.S. citizens who live abroad, to offset foreign taxes paid abroad dollar-for-dollar. For example, if you’re an American expat who paid income taxes to the foreign country where you reside, the FTC gives you a tax credit to use on your U.S. income tax return. To claim this credit, you must be the following requirements: 

  1. The tax must be imposed on you. This means that if your resident country does not require income taxes to be paid, you do not qualify for the FTC.  
  1. You must be the one who paid or accrued the tax. This means if you have not paid the tax or accrued it, you do not qualify for the FTC.  
  1. The tax must be the legal and actual foreign tax liability. This means that if the tax is not legal, and you are not required to pay it, you do not qualify for the FTC. 
  1. The tax must be an income tax. This means that if the tax is another type of tax besides income tax, you do not qualify for the FTC. The IRS has specific rules on what they deem to be a foreign income tax. Be sure to check with your tax preparer for clarification. 

Calculating your maximum FTC can be tricky, but essentially you can divide your foreign taxable income by your total taxable income (including U.S. income). Then take this quotient and multiply it by your U.S. tax liability. For example, if you earned $50,000 in Spain and another $10,000 in U.S. income, you’d have a total taxable income of $60,000. Let’s also assume you had a U.S. tax liability of $12,000. You would take your foreign income of $50,000 and divide it by your total taxable income of $60,000 to get 0.83. You would then multiply 0.83 by your U.S. tax liability of $12,000 to get your maximum FTC of $10,000.  

Additionally, the FTC can carry over to the next tax year or carry back to a previous tax year. Unused FTC amounts can be carried over for up to 10 years. Taxpayers can claim the FTC by filing Form 1116.  

What is the Foreign Earned Income Exclusion? 

The other safeguard that helps American taxpayers avoid paying taxes twice on the same income is the Foreign Earned Income Exclusion (FEIE). The FEIE allows you to exclude all or some of your foreign earned income on your U.S. tax return, including salaries, wages, bonuses, commissions, and self-employment income. It does not include passive or investment income. The FEIE is available to U.S. expats who meet one of the following requirements: 

  • Work outside the United States as an employee 
  • Work outside the United States in a self-employed or partnership structure 
  • Pass the Bona Fide Residency Test. This requires being overseas for work for longer than one year and having a permanent place of work in the foreign country. 
  • Pass the Physical Presence Test. This requires living outside the United States for 330 full days out of the year.  

U.S. taxpayers must use Form 2555 to claim the FEIE and can exclude up to $112,000 of foreign income for the 2022 tax year. Married couples filing jointly can exclude up to $224,000 as long as both spouses meet either the bona fide residency test or the physical presence test.  

Help Reporting Foreign Income 

Reporting foreign income can get complicated very fast. While this article covers several topics related to foreign income, it really is just the tip of the iceberg and applies to most simple tax situations. American taxpayers who live in the country, as well as expats, who earn foreign income should seek best practices regarding foreign income from reliable and knowledgeable tax professionals. If you need tax help, Optima can assist.  

Contact Us Today for a No-Obligation Free Consultation 

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3 Things to Watch Out for After the Tax Deadline

Owing taxes is more expensive than ever before. Filing an accurate return on time is the best way to avoid penalties, interest, and IRS collections. CEO David King and Lead Tax Attorney Philip Hwang list three things to watch out for after the tax deadline.

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Top Risks of Owing the IRS

tops risks of owing the irs

If you have an unpaid tax bill, you know the stress that comes with owing the IRS. The IRS is a powerful agency with the ability to collect what is owed to them using severe methods, like garnishing your wages or levying your bank accounts. With a 10-year statute of limitations, the agency has plenty of time to forcefully collect tax debts. While some taxpayers might want to ignore their tax bills, doing so comes with many risks. Here are some of the top risks of owing the IRS.  

The IRS will collect. 

The IRS will always warn you of intent to collect or enforce through IRS notices. After these notices have been ignored, the IRS will place you in their Automated Collection System (ACS), which can issue liens, levy your bank accounts, and garnish your wages. Alternatively, the IRS may turn your tax debt over to a debt-collection agency. 

The IRS may file a federal tax lien. 

If a tax balance goes unpaid and notices are ignored, the IRS can file a Notice of Federal Tax Lien, which lets creditors know that you have tax debt. A lien is a legal claim against a property, usually placed because the property owner owes someone money. Liens can not only hinder your ability to access credit, but they can also damage your reputation since they are public information.  

The IRS can seize your assets. 

If a tax balance goes unpaid, the IRS will send you a Notice of Intent to Levy. If they do not hear from you after 30 days, they may proceed with the levy. The IRS is known to levy bank accounts, wages, and more. Wage levies, also called wage garnishments, are when the IRS takes some of your paycheck to put toward your unpaid tax bill. The amount they levy will depend on your filing status and number of dependents.  

The IRS may also levy your bank account. If your tax balance is greater than your bank account balance, they are authorized to levy the entire account. The same goes for joint bank accounts that you have access to. If you own a small business, or do contract work, the IRS can levy these earnings. If you file your taxes and are due a tax refund, the IRS will keep the refund and apply it to your unpaid tax bill. The IRS will stop levying if you arrange a payment agreement or if you pay your tax bill in full. 

The IRS will charge you penalties and interest. 

Your tax bill doesn’t end with your unpaid taxes. The IRS will charge you interest until the balance is paid in full. The current rate for underpayment is 7% annually, at least through June 2023. On top of that interest, the IRS will charge a failure-to-pay penalty on your unpaid taxes. The current rate is about 0.5% per month or partial month the balance remains unpaid, for a maximum of 25% of your unpaid tax. The amount is increased to 1% per month or partial month if you do not pay within 10 days of receiving an IRS Notice of Intent to Levy. However, if you set up a payment plan with the IRS, the rate drops to 0.25% per month or partial month. 

You may lose traveling privileges. 

Under the Fixing America’s Surface Transportation (FAST) Act, the IRS requires your Department of State to deny passport applications and renewals submitted by taxpayers with tax bills of $52,000 or more. The State may also revoke your valid passport or limit your ability to travel outside the U.S.  

How Can I Get Relief from My Tax Debt? 

Clearly, the risks of owing the IRS are extreme and affect all facets of life. If you’ve been ignoring IRS notices coming through your mail, it may not be long before these risks apply to you. Ignoring your tax issues will certainly not make them disappear. Your best bet is to find a way to work with the IRS to see what your options for repayment are. We know how stressful this process can be, but Optima is here to help you with all of your tax issues.  

Contact Us Today for a Free Consultation 

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How to Fill Out a W-4

how to fill out a w-4

Many taxpayers are reporting smaller refunds this year. While many cases can be credited to tax credits returning to pre-pandemic levels, several others could be because of an outdated Form W-4. Unbeknownst to some, a W-4 needs to be updated whenever certain life changes occur. If it is not updated, you may not have enough tax withheld during the year, resulting in a smaller refund at tax time. However, the recent 2020 changes to the W-4 form have confused some taxpayers. Here’s a breakdown of how to fill out a W-4. 

What is a W-4? 

Formally known as the Employee’s Withholding Certificate, a W-4 is an IRS tax form that helps employers calculate how much tax to withhold from an employee’s paycheck. While the form is most commonly filled out by an employee upon starting a new job, it can be submitted at any time of the year. An accurate W-4 will help you avoid overpaying or underpaying your taxes during the year.  

When Should I Fill Out a W-4? 

You should fill out a W-4 each time you start a new job. This is true even when the new job is a second job or gig work, meaning you will have multiple W-4s if you have multiple jobs. You should also fill out a new W-4 when you experience a life change that can trigger a tax liability. For example, getting married or divorced should result in a new W-4 being submitted to your employer. Having a child, claiming a new dependent or removing a dependent are other scenarios in which you might want to adjust your withholding.  

How To Fill Out a W-4 

Step 1: First, you’ll enter your personal information, such as your full name, address, Social Security number (SSN), and tax-filing status. Your tax-filing status is very important here as it will determine which tax credits and deductions you might qualify for during tax time. Technically, you can stop at this step and sign the W-4. Your employer will withhold at a default rate. However, this may not result in the right balance of a decent-sized paycheck and tax refund. 

Step 2: For most, this is the trickiest section of the W-4. If you need clarification, you should seek help from your Human Resources department at work. Here you’ll need to choose your tax withholding according to the number of jobs and combined income you have, including self-employment. This also includes your spouse if you file jointly. 

  • If you have multiple jobs, the W-4 for the highest paying job should have Steps 2 through 4(b) filled out. The W-4s for all other jobs can have Steps 2 through 4(b) blank. This will ensure accurate tax withholding. 
  • If you have multiple jobs, and the earnings for both are roughly equal, you can choose to check box 2(c). You will need to make sure the W-4s for both jobs have this box checked.  
  • If you want to omit the fact that you have a second job, you can choose to withhold a certain amount of tax from your paycheck on line 4(c). If you do not want to have additional tax withheld, you can opt to make estimated payments to the IRS instead. 

Step 3: If you earn under $200,000, or $400,000 for married couples filing jointly, you can claim your dependents by following Step 3 on the W-4. If you are filing jointly, make sure only one of you claims these child-related tax credits through withholding. If you try to claim this credit on both forms, too little tax will be withheld, and you could have a tax bill at tax time. In general, it is recommended that the highest-earning job claims the child-related tax credits on Form W-4. Taxpayers should note that they are not required to claim dependents here if they would rather have more taxes withheld from their paychecks to reduce their tax bill. 

Step 4: Here you will make other adjustments, including other income you receive outside of work, deductions other than the standard deduction, and extra withholding. You might want extra tax withholding if you are self-employed and want taxes withheld from these earnings.  

Step 5: Sign and date the complete W-4. This step is required for the form to be accepted.  

Additional Help With a W-4 

These steps should help you successfully fill out a W-4, resulting in the appropriate amount of tax withheld from your earnings. Some taxpayers might be interested in altering their W-4 in order to have more taxes taken out of their paycheck to receive a larger tax refund at tax time. To do this, you can reduce the number of dependents on your W-4 or add extra withholding on line 4(c). Alternatively, if you want fewer taxes withheld, you can increase the number of dependents, reduce the number on line 4(a) or 4(c), or increase the number on line 4(b). Beware though, as this can result in a tax bill at tax time. Taxpayers should always ensure that they are adjusting their W-4 when necessary to avoid unwelcome surprises at tax time. If you need tax help, Optima Tax Relief and our team of knowledgeable tax professionals are here to assist you. 

Contact Us Today for a Free Consultation 

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