While there is no guaranteed method of avoiding tax audits, there are things that could help trigger them. Since the Senate approved nearly $80 billion in IRS funding through the Inflation Reduction Act of 2022, with $45.6 billion specifically for enforcement, the IRS has promised an increase in tax audits. Below are some things that the IRS has historically viewed as “red flags,” which could increase the chances of an audit for taxpayers. But first, let’s review the different types of audits.
Types of IRS Audits
The IRS conducts different types of audits to review and verify taxpayers’ financial information and ensure compliance with tax laws. There are three primary types of IRS audits:
Correspondence Audits: These are the most common and least intrusive type of IRS audit. In a correspondence audit, the IRS requests specific documentation to support claims on their tax return. Typically, these audits are focused on one or a few specific issues, such as income, deductions, or credits. Taxpayers can respond to these audits by mail, providing the requested documentation and explanations.
Office Audits: An office audit, as the name suggests, takes place at an IRS office or a local IRS branch office. The IRS will contact the taxpayer to schedule a face-to-face appointment for the audit. The taxpayer will be required to bring the necessary records and documentation to the IRS office. Office audits are often more comprehensive than correspondence audits as they can cover a wider range of issues on a tax return.
Field Audits: Field audits are the most extensive and thorough type of IRS audit. In a field audit, an IRS agent comes to the taxpayer’s home or business to conduct the audit in person. These audits are usually reserved for more complex or high-risk cases. That said, they can involve a comprehensive review of a taxpayer’s financial records and activities. Field audits are often conducted when there are significant discrepancies or concerns about a taxpayer’s compliance with tax laws. However, note that the IRS has halted most unannounced visits to taxpayers.
Reporting a Business Loss
The IRS will be more inclined to audit a taxpayer who reports a net business loss, even if it’s small. Reporting losses year after year will only increase IRS interest in your tax returns. Remember, it is mandatory to report all earnings in a tax year. However, it might be helpful to reconsider which expenses should be deducted from your tax return. Reporting even a small profit could reduce the chance of being audited by the IRS.
Being Vague About Expenses
When it comes to expenses, the more detail the better. This is especially true when categorizing them on your return. Try to avoid listing expenses under “Other Expenses” as this will lead to more scrutiny from the IRS. It may even be helpful to provide supplemental documentation explaining why certain expenses drastically increased or decreased for that year. Doing so can give potential auditors a valid explanation for such occurrences and possibly avoid a tax audit. Additionally, rounding dollar amounts are red flags for the IRS. You should always use exact dollar amounts on your tax return.
Filing Late
Some taxpayers believe that filing late can actually decrease the risk of being audited. However, filing on time, as well as paying on time, can help establish a history of IRS compliance. This will be far more beneficial in the long run. In addition, not filing by the due date will also result in receiving your tax refund later if you are expecting one. Even worse, if your late filing triggers an audit, it may prompt the IRS to look at older tax returns you’ve filed. If they find any other errors, this can add additional time to their normal processing schedule.
Claiming Excessive Deductions
It is best to avoid any excessive expenses. For example, deducting the cost of your breakfast and lunch each workday may not be acceptable to the IRS. Excessive deductions for your donations to charitable organizations can also increase the chances of being audited. Inflating business expenses can result in being audited, especially if you try to claim large amounts for business entertainment or claim a vehicle that is used for only business purposes 100 percent of the time.
Now that home offices are more common, it’s important to only claim the home office deduction for the portion of your home that is used exclusively for business purposes. When claiming this deduction, you will need to figure out how much square footage in your home is dedicated to your business. For tax year 2023, the rate for the simplified square footage calculation is $5 per square foot, with a maximum of 300 square feet or $1,500. Excessive deductions claimed on your return are fast tracks to being audited by the IRS. That said, it’s best to only claim the deductions you actually qualify for to avoid owing any additional taxes.
Keeping Poor Records
Even the simplest tax situations require adequate records. If your finances are more complicated, then detailed records are necessary. Some taxpayers may feel inclined to estimate their expenses because they did not save receipts or documents, which the IRS views as a red flag. It’s important to make sure you have detailed records for the past three tax years at minimum. Having items like your previous tax returns, medical bills, business receipts, real estate documents, and investment statements can help substantiate your claims and avoid an IRS audit.
Choosing the Wrong Filing Status
Your filing status (single, married filing jointly, married filing separately or head of household) determines how you treat many tax decisions, such as what forms you’ll fill out, which deductions and credits you’ll take and how much you will pay (or save) in taxes. Select the wrong status, and it will trigger a cascade of mistakes–maybe even an audit. On top of that, if you decide to file jointly with your spouse, this means you’re responsible for any errors or deliberate falsehoods on your partner’s return, so make sure that you’re comfortable with what it says.
Tax Relief for Those Being Audited
The chances of being audited are low, but those chances increase when the IRS notices any of the above red flags. The audit process can be very stressful. It is a tedious process that requires collecting information regarding your income, expenses, and itemized deductions. Failing an audit can result in a huge, unexpected tax bill. It’s best to seek assistance from experts who can help you avoid an IRS audit. Remember, filing your taxes correctly the first time can help avoid interest, tax penalties, and additional taxes owed. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
As the fourth quarter of 2023 unfolds, taxpayers across the U.S are faced with an important development – an increase in IRS interest rates. The IRS periodically adjusts its interest rates, and these changes can have significant implications for individuals and businesses. In this article, we will explore the reasons behind the IRS interest rate increases, how they impact taxpayers, and what individuals and businesses can do to navigate this change effectively.
About IRS Interest Rates
The IRS sets interest rates to determine the amount of interest that accrues on unpaid taxes, late payments, and overpayments. Interest rates can vary by quarter. They are based on the federal short-term rate plus an additional 0.5 to 5 points, depending on the type of underpayment or overpayment. It’s also crucial to note that IRS interest rates compound daily. This means that the interest charged is based on the previous day’s tax balance, plus the interest.
What are the new IRS interest rates for Q4 2023?
The interest rates imposed by the IRS as of October 1, 2023, are as follows:
Portion of Large Corporation Tax Overpayment Exceeding $10,000: 5.5%
When does underpayment interest begin?
The IRS begins charging interest on balances owed beginning on the due date. Your balance will continue to accrue interest until it is paid in full. It’s important to note that tax extensions are not extensions to pay – only to file. This means that if you file for an extension in April, you will have until October to file your taxes. However, your balance will continue to accrue interest until it’s paid in full. That said, if you don’t file your taxes or don’t pay your balance, you’ll also be subject to failure-to-file or failure-to-pay penalties. You can also be penalized for underpaying estimated tax, making a payment with insufficient funds, or failing to file an accurate return.
When does overpayment interest begin?
Overpayments happen when you paid the IRS more than you owed in taxes. In these cases, the IRS will owe you a tax refund. The IRS generally has 45 days to issue your refund. If they exceed that time frame, they will typically pay overpayment interest. The interest will begin from the later of the following events:
The tax deadline
The date your late tax return was received by the IRS
The date the IRS received your tax return in a sufficient format
The date a payment was made
Impact on Taxpayers
The Q4 2023 increase in IRS interest rates will have several implications for taxpayers:
Increased Costs: Taxpayers who owe money to the IRS will face higher interest costs on unpaid taxes, potentially making it more expensive to resolve their tax liabilities.
More Attractive Savings: On the flip side, taxpayers who are owed refunds or have overpaid their taxes may benefit from higher interest rates on their refunds, making it more attractive to save or invest their tax refunds.
Prompt Payment Encouragement: The higher interest rates can serve as an incentive for taxpayers to pay their taxes promptly, as delaying payments can lead to accruing additional interest charges.
What You Can Do
In light of the IRS interest rate increases in Q4 2023, there are steps that individuals and businesses can take to navigate this change effectively.
Pay Taxes Promptly: To avoid higher interest charges on unpaid taxes, make sure to pay your tax liabilities on time.
Apply for a Payment Plan: If you cannot afford to pay your balance in full when it’s due, you should contact the IRS immediately to set up a payment plan. Doing so can help lower some of your penalties.
Request Penalty Relief: There are a few instances where you may be able to get your penalties waived, such as being a first-time offender, acting with reasonable cause, or other statutory exceptions.
File an Amended Return: You may be able to reduce your tax balance or penalties by filing an amended return.
Tax Help for Those with Tax Balances
Tax laws can be complex, and it’s advisable to consult a tax professional who can provide guidance on tax planning and managing your financial obligations efficiently. It’s essential for taxpayers to stay informed, plan wisely, and consider professional advice to navigate these changes in IRS interest rates effectively. By doing so, individuals and businesses can manage their financial responsibilities in an ever-evolving economic environment. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Taxes are an essential part of a functioning society, providing the government with the necessary funds to provide public services and support various programs. However, when it comes to paying taxes, many individuals and businesses may find themselves making mistakes or underestimating their obligations. This can lead to tax underpayment, a situation that often incurs penalties. In this article, we will delve into tax underpayment penalties, why they exist, and how to avoid them.
What is Tax Underpayment?
Tax underpayment occurs when an individual or business fails to pay the full amount of taxes they owe by the due date. This can happen for various reasons, such as underestimating income, miscalculating deductions, or failing to make estimated tax payments. When you fail to meet your tax obligations fully, you may be subject to penalties.
Why Do Tax Underpayment Penalties Exist?
Tax underpayment penalties exist for several reasons:
Revenue Generation: One of the primary reasons for these penalties is to generate revenue for the government. While penalties act as a financial disincentive for underpayment, they also help to recoup some of the lost tax revenue.
Fairness: Tax underpayment penalties aim to create a level playing field. Those who accurately and timely pay their taxes should not be disadvantaged by those who do not. Basically, penalties encourage compliance and reduce the burden on law-abiding taxpayers.
Deterrence: The threat of penalties serves as a deterrent to discourage taxpayers from underpaying their taxes intentionally or negligently.
How Do Tax Underpayments Work?
Remember the IRS requires you to pay taxes as you’re earning income. If it’s not, underpayment penalties will likely apply. The rule of thumb is that if your adjusted gross income (AGI) is $150,000 or less, then you must pay the lesser of 90% of this year’s tax or 100% of last year’s. You can do this by figuring out how much taxes are being withheld from your paychecks. From here, you’d pay the remainder in estimated tax payments if necessary. If you earn more than $150,000, then you must pay the lesserof 90% of this year’s tax or 110% of last year’s.
In general, if you owe more than $1,000 when you calculate your taxes, you will likely pay an underpayment penalty. Here’s how tax underpayment penalties typically work:
Assessment of Underpayment
Tax underpayment penalties are assessed when the taxpayer either doesn’t pay the full amount of taxes owed by the due date. It also happens when a taxpayer fails to make accurate estimated tax payments throughout the year. This can result from underreporting income, not withholding enough taxes throughout the year, overstating deductions, or simply not paying the required amount.
Calculation of Penalties
Penalties are usually calculated based on the amount of the underpayment, the length of the underpayment period, and the applicable interest rates. Tax underpayments are subject to a failure to pay penalty. At this time, this is 0.5% of the tax owed and is paid each month or partial month that the tax goes unpaid. However, the failure to pay penalty will not exceed 25% of your total unpaid tax balance. In addition to penalties, you will also pay interest on your balance owed. While interest rates can change, the current rate for Q4 of 2023 is 8% for individuals and 10% for corporations.
Example of How Underpayment Penalty is Calculated
Let’s say you owe $4,000 in taxes this year, but only had $2,000 withheld and did not make any estimated tax payments. Your taxes would be considered underpaid by $2,000. Since you did not pay at least 90% of your total tax owed, and it’s more than $1,000 owed, you will likely owe an underpayment penalty. The penalty would be 8%, for a total of $160. If you fail to pay, interest will accrue on your tax balance until it’s paid in full.
Avoiding Tax Underpayment Penalties
To avoid tax underpayment penalties, follow these best practices:
Maintain Accurate Records: Keep thorough records of your income, expenses, and deductions to ensure accurate tax calculations.
Estimate Taxes Correctly:Make accurate quarterly estimated tax payments if you’re self-employed or have irregular income.
Consult a Tax Professional: Seek the adviceof a qualified tax professional to help you navigate complex tax issues and ensure compliance.
File On Time: Always file your tax returns by the due date, even if you can’t pay the full amount. Filing on time can reduce late filing penalties.
Communicate with Tax Authorities: If you’re facing financial difficulties and can’t meet your tax obligations, contact the tax authority to explore payment plans or alternative solutions.
Conclusion
Tax underpayment penalties are designed to encourage compliance with tax laws, promote fairness, and generate revenue for the government. However, these penalties can be avoided by accurately estimating and paying your taxes, maintaining good financial records, and seeking professional advice when necessary. By following these steps, you can navigate the complex world of taxes and minimize the risk of tax underpayment penalties. Remember, staying informed and proactive is the key to a trouble-free tax season. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Tax evasion and tax fraud are federal crimes. Both involve the willful attempt to either evade the assessment or the payment of taxes. But at what point does the IRS pursue criminal charges for these actions? What consequences are included in the criminal charges? How does one prevent these charges from being brought upon them? Here’s what you need to know about how and when the IRS pursues criminal charges against a taxpayer.
What causes the IRS to consider pursuing criminal charges?
The IRS typically does not pursue criminal charges unless you exhibit a pattern of intentionally breaking tax laws. This can include non-filing, filing fraudulent returns, falsifying information on your return, not paying taxes, and more. The IRS statute of limitations could trigger charges to be filed. Currently, the IRS has six years from the return filing date to pursue criminal charges that relate to failing to file and underreporting income. Finally, if you are ever audited, do not attempt to falsify records or omit information. This is a sure way to be implicated in a tax crime.
If the IRS opens a case against you, they will refer it to the Department of Justice for prosecution. In order for the IRS to be successful in convicting someone for tax evasion, they must prove without reasonable doubt that the accused taxpayer (or nonpayer) acted in a deliberate and willful manner to avoid paying their taxes.
What consequences are included in the criminal charges?
While these charges are not as common as others, the penalties are very harshand can have life-altering consequences. Being guilty of tax fraud can result in heavy fines, interest, penalties, and even jail time. The average jail sentence for tax evasion varies between three to five years. The sentence will depend on the severity of the case. In addition, you can be fined up to $100,000, or up to $500,000 for corporations. If you are found guilty of filing false tax returns, you can be fined up to $100,000 and up to three years in prison. Even misdemeanors, like failing to file, have harsh consequences. For example, you could owe up to $25,000 for each year of non-filing, and up to one year in jail.
On the more extreme side, willfully hiding offshore bank accounts can result in up to $500,000 in fees and up to ten years in jail. Even if the action was not willful it will result in penalties.
How do I prevent IRS criminal charges?
The answer is simple: always remain tax compliant. Avoid committing tax evasion or tax fraud, and always file and pay your taxes. If you’re unable to pay, contact the IRS immediately to see what options you have. If you find yourself stuck in a tax dispute with the IRS, consider hiring an attorney to fix the issue while it’s at the civil level to avoid the charge becoming criminal.
Remember, you are guilty even if you are only helping someone else evade their taxes, according to Section 7201 of the U.S. Internal Revenue Code. In any case, working with the IRS can help avoid criminal charges being filed against you. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
A passport is an essential travel document that allows individuals to explore new horizons, visit foreign lands, and experience diverse cultures. However, the privilege of holding a passport comes with certain responsibilities, one of which is fulfilling your financial obligations to the government. In this blog article, we will explore the question of whether you can obtain or renew a passport if you owe back taxes.
Understanding Passports and Tax Obligations Most people are quite shocked to learn that back taxes can affect your ability to obtain or renew a passport. The IRS’s control over this privilege is just another method they use to encourage taxpayers to remain compliant. If the IRS deems your tax debt “seriously delinquent,” they have the authority to notify the State Department, who can then revoke your passport, or deny your passport application or renewal. This action will not come as a surprise. If the IRS plans to contact the State Department about your back taxes, they will let you know with IRS Notice CP508C. The Department of State will also notify you in writing of their plans to revoke your passport or deny your passport application.
“Seriously Delinquent”
According to the IRS, any tax debt that totals more than $55,000, including interest and penalties, is considered seriously delinquent. By this point, an individual likely has been levied and a notice of federal tax lien has been filed.
How can I get this action reversed?
Like many other consequences of not paying your taxes, the fastest and easiest way to reverse this action is to pay your tax debt. However, even paying your debt down so it falls below the “seriously delinquent” threshold can help resolve the issue. For those who cannot afford to pay, there are other options available to them including:
Getting approved for an installment agreement with the IRS
Getting approved for an offer in compromise
Request innocent spouse relief
Request a collection due process hearing
Settle the debt with the U.S. Department of Justice
On the other hand, there are some scenarios in which the seriously delinquent status can be removed. These include:
Being impacted by a federally declared disaster area
Requesting an installment agreement
Submitting an offer in compromise
Having an IRS-accepted adjustment that can pay off the full debt
If you manage to fall into one of the above scenarios, it typically takes the IRS 30 days to reverse their action and notify the Department of State. In any case, it is crucial to take proactive steps to resolve the matter. Seek assistance from tax professionals, explore repayment options, and communicate with the relevant government agencies to find a suitable solution. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
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.
