Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses IRS enforcement, including the statute of limitations and how it might affect your credit report.
Did you know the IRS has a certain amount of time to collect your tax debt before it expires? How long? Well, the simple answer is 10 years, but several factors can pause this timeline. For example, filing for bankruptcy, living abroad, applying for an installment agreement, submitting an offer in compromise, applying for innocent spouse relief, applying for a taxpayer assistance order, requesting a collection due process hearing, serving in the military, or being sued by the IRS can all pause the 10-year collections period.
Many also wonder if IRS enforcement can affect your credit. The IRS can file a Notice of Federal Tax Lien, or a priority claim over all of your assets. While this notice does not show up on your credit report directly, it does become public information that creditors can access through supplemental reports. This can affect your access to credit, business opportunities, and even employment.
Join us next Friday as Phil will answer your questions about levies and wage garnishments!
If You Are Being Hit with IRS Enforcement, Contact Us Today for a Free Consultation
Bankruptcy is an exhausting process that individuals and corporations may have to go through when they are overburdened by financial obligations. While it provides the opportunity for a fresh start, it is critical to be mindful of the tax implications. In this blog article, we will discuss the tax implications of bankruptcy, assisting you in understanding the potential penalties and providing guidance to help you navigate this complex scenario.
The Inflation Reduction Act of 2022 has equipped the IRS with more than $80 billion in funding. That means more audits and more enforcement. CEO David King and Lead Tax Attorney Philip Hwang provide helpful tips on what you can expect from the IRS moving forward and how you can resolve your tax burden.
While medical bills can be a significant hardship for many individuals and families, it is critical to understand that certain medical expenses are tax deductible. Understanding the eligibility criteria and documentation requirements will help you in optimizing your deductions and possibly lowering your tax payment. In this post, we will look at medical expenses that are tax deductible.
Withholding too little tax from your paychecks can result in a tax bill during tax time, while withholding too much tax can result in smaller paychecks than necessary. That being said, understanding tax withholding is crucial because it directly affects your income, tax liability, and financial planning. Here is a breakdown of tax withholding.
Buying a house is an exciting milestone in life, representing stability, investment, and the fulfillment of a dream. However, for individuals who owe back taxes, the path to homeownership can seem uncertain. It’s essential to understand the implications and challenges associated with buying a house while having outstanding tax debt. In this article, we will explore the factors to consider and strategies to help you navigate this unique situation.
Understanding Back Taxes
Before diving into the home buying process, it’s crucial to understand what back taxes are. Back taxes are unpaid taxes from previous years, either due to underpayment or non-payment. The IRS may assess penalties, interest, and other charges on the outstanding amount, which can accumulate over time. While it’s not impossible to buy a house while having a tax balance, owing back taxes can potentially hurt your ability to qualify for a mortgage.
Addressing Back Taxes
Addressing your back taxes is crucial before attempting to buy a house, especially since most lenders will not want to approve you for a mortgage if you haven’t made any attempt to resolve your tax debt. This is because if you owe back taxes and own a home, the IRS can place a tax lien on your property, which gives them first dibs at the home if you do not pay your back taxes. In other words, your lender would incur a major financial loss. Here are a few steps to help you address your tax debt:
Evaluate your options: The IRS may offer options for resolving back taxes, such as installment agreements, offers in compromise, or currently not collectible status. Consult a tax professional to determine the best course of action for your situation.
Establish a payment plan: If you can’t pay the entire amount upfront, consider setting up a payment plan with the IRS. This allows you to make monthly payments towards your tax debt over an extended period. Demonstrating a consistent repayment history will show lenders your commitment to resolving your financial obligations.
Consider professional help: If your tax debt is complex or substantial, seek the assistance of a tax professional. These professionals can negotiate with the IRS on your behalf and help you explore potential resolution options.
Prioritize tax debt repayment: Make it a priority to pay down your tax debt as much as possible. Dedicate a portion of your budget to regular payments, aiming to reduce your overall tax liability over time.
Qualifying for a Mortgage While Owing Back Taxes
Once you’ve made significant progress in addressing your back taxes, you can focus on qualifying for a mortgage. Here are a few considerations:
Credit score and history: Your credit score plays a crucial role in the mortgage application process. Maintaining a good credit score and demonstrating responsible financial behavior will enhance your chances of securing a mortgage.
Debt-to-income ratio: Lenders assess your debt-to-income ratio (DTI) to evaluate your ability to manage mortgage payments. Paying down your tax debt and minimizing other outstanding debts can improve your DTI ratio and increase your chances of mortgage approval.
Documentation: Prepare thorough documentation of your financial situation, including proof of income, tax returns, and documentation related to your tax debt repayment. This documentation will help demonstrate your financial stability and responsible approach to resolving your tax obligations.
Qualifying for a mortgage while owing back taxes can depend on the type of loan you are seeking. For example, FHA loans are more desired for buyers because they allow you to buy a home with looser financial requirements. If you are seeking an FHA loan but owe back taxes, you must have made at least three payments to an IRS installment agreement, and meet other conditions, to be approved.
Getting Approved for a Mortgage While Owing Back Taxes
If you do manage to get a lender to approve you for a mortgage while owing back taxes, you should expect your tax bill to have an effect on your monthly payments. Because you will be considered a high-risk borrower, your interest rate will likely be higher than that of a low-risk borrower. You may also be required to put down a much larger down payment if the lender feels this might mitigate the risk that you come with. It goes without saying that these terms are not favorable for buyers, and seeking tax help from a professional can help lower the cost and stress associated with buying a home. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Last week, we discussed the tax benefits of health savings accounts (HSAs). HSAs are tax-advantaged savings accounts specifically designed for individuals with high-deductible health plans (HDHPs). For those who do not have an HDHP, there are other options when it comes to paying for medical expenses. Enter flexible savings accounts, or FSAs. These can help cover the cost of health care expenses, all while saving you money during tax time. Here’s an overview of flexible spending accounts, including what they are, how they work, and their tax benefits that can save you money.
What is a Flexible Spending Account (FSA)?
Like a health savings account (HSA), a flexible spending account (FSA) is a tax-advantaged savings account used to pay for qualified medical expenses. In addition, FSA contributions are made with pre-tax dollars. This basically means contributions are not included in your taxable income, thus reducing your tax liability for the year. Unlike an HSA, contributions made to your FSA do not carry over to the next year. Instead, they use a “use it or lose it” policy. This means that anyfunds that are unspent by the end of each plan year are forfeited to your employer. However, your employer may offer some exceptions to this rule. For example, some employers might give you an additional grace period of an extra 2.5 months to use the funds or allow up to $610 to carry over into the following year.
In 2023, the IRS allows you to contribute up to $3,050 to your FSA if you’re a single person. If you are married, your spouse may also contribute the same amount through their own employer. Although they are not required to, your employer may also contribute to your personal FSA. FSAs can cover things like medical deductibles, first aid supplies, eyeglasses, contact lenses, some dental expenses, copayments, some prescriptions drugs, and coinsurance. However, note that all FSA-eligible expenses are determined by the IRS. Unlike HSAs, FSAs are typically owned by the employer or the FSA administrator. When you leave your job, you generally lose access to your FSA.
How Does an FSA Work?
During your employer’s open enrollment, you can sign up for an FSA. You’ll need to decide how much money you want to contribute to the account for the upcoming plan year. Once you’ve enrolled in the FSA, your chosen contribution amount will be deducted from your paycheck on a pre-tax basis. As you incur eligible medical expenses throughout the year, you access your FSA funds to pay for them. Your employer will typically provide you with a payment card, which is similar to a debit card. Alternatively, they may have a reimbursement procedure to access the funds. You are liable for paying back your account if the benefits card is unintentionally or knowingly used for ineligible costs. Any unspent funds in your FSA at the end of the plan year may be forfeited.
Pre-Tax Contributions
While contributions to your FSA are not tax-deductible like those of an HSA, they are deposited pre-tax. So, contributions lower your total tax liability. For example, let’s say your annual salary is $50,000 and you contribute $3,000 to your FSA. Consequently, your gross income would then be $47,000. Any taxes owed, whether they are federal, state, or local, would be based on the gross amount. Because these funds are not taxed, you cannot claim a tax deduction for your contributions. However, FSA participants have an average 30% tax savings on the total amount they contribute to their account.
FSAs vs. HSAs
HSAs and FSAs are both popular tools for managing healthcare expenses, but they have some key differences.
FSAs
Generally available to employees with employers who offer these accounts
FSAs have lower contribution limits, with the maximum annual contribution limit of $2,850 per individual in 2023. This limit applies to each employee and is not based on family coverage.
No rollover, so “use it or lose it” policy, with some exceptions.
Contributions are made with pre-tax dollars, reducing your taxable income.
Contributions are tax-deductible.
Withdrawals for qualified medical expenses are generally tax-free.
HSAs
Designed for individuals with high-deductible health plans (HDHPs)
In 2023, the maximum annual contribution for individuals with self-only HDHP coverage is $3,650, while for family coverage, it’s $7,300. Individuals aged 55 or older can make an additional $1,000 catch-up contribution.
HSAs offer the advantage of rollover.
Contributions are made with pre-tax dollars, reducing your taxable income.
Contributions are tax-deductible.
Withdrawals for qualified medical expenses are generally tax-free.
If you’re thinking about getting an HSA or FSA, you should consider your specific circumstances, healthcare needs, and employer offerings to determine which option is best suited for you.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses penalties and interest, including the most common penalties and how interest rates are calculated.
Failure to File Penalties
Owing the IRS is much more than just owing a tax balance. The IRS also charges penalties and interest, the most common penalties being the Failure to File and Failure to Pay. The Failure to File penalty is charged on tax returns filed after the tax deadline or tax extension deadline without a reasonable cause. It accrues at a rate of 4.5% per month, beginning after taxes are due. For example, if you filed for a tax extension, you have until the usual October 15th deadline to file before penalties and interest begin to accrue. In 2023, the deadline is October 16th. If you did not file an extension, the deadline is April 15th each year before the Failure to File penalty and interest begin to accrue. In 2023, the deadline was April 18th.
Failure to Pay Penalties
The Failure to Pay penalty, on the other hand, accrues at 0.5% per month for every month or partial month that a tax balance remains unpaid. The day the Failure to Pay penalty begins to accrue is dependent on whether you filed a tax extension. If you file a tax extension, the Failure to Pay penalty will begin to accrue after the October tax deadline. If you do not file an extension, it will begin to accrue after the April tax deadline.
IRS Interest Rates
The interest rates on these penalties are calculated based on the federal short-term rate, plus an additional 3%. Interest compounds daily until the balance is paid in full. The interest rates for underpayments in the first quarter of 2024 are as follows:
7% for individual underpayments
9% for large corporate underpayments
Interest rates are determined each quarter. You can find the most up to date news on quarterly interest rates on the IRS website.
Next week, Phil will discuss IRS enforcement. How long does the IRS have to collect back taxes? Can back taxes affect your credit score? Stay tuned for “Ask Phil” next Friday!
If You Are Being Hit with IRS Penalties and Interest, Contact Us Today for a Free Consultation
