IRS Collections

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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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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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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Should I File a Tax Extension?

should i file a tax extension

The tax filing deadline is just around the corner. If you need more time to prepare your tax return, you can file a tax extension. While a tax extension won’t give you more time to pay your taxes, it will allow a few more months to file your tax return without receiving a failure-to-file penalty. Here’s an overview of how tax extensions work and how to file one.  

What is a Tax Extension? 

The IRS allows taxpayers to file for a tax extension, which gives them more time to prepare their tax returns. If approved for a tax extension, the new tax deadline would be October 16, 2023. You can file for a tax extension for any reason and the IRS will approve it as long as you submit Form 4868 by the April 18th tax deadline. While some states accept federal tax extension forms, others have their own requirements for obtaining an extension. Some states like California, Wisconsin, and Alabama offer automatic extensions, which means you don’t have to file a form. Other states require you to request an extension. You can check with your own state tax authority for more information on this. 

Does a Tax Extension Delay My Tax Payments? 

While a tax extension won’t delay the deadline to pay taxes, it will allow a few more months to file your tax return without receiving a failure-to-file penalty. That said, you might be wondering how much tax to pay if you aren’t sure how much you will owe, if any at all. In this case, you’ll need to estimate the amount of tax you will owe and pay that amount by April 18. If you do not, the IRS will begin to charge you interest on the balance owed, plus penalties. The failure-to-pay penalty is 0.5% of the tax owed after April 18, for every month or part of a month the tax remains unpaid, up to 25%.  

To calculate your estimated tax payment, you’ll need to first calculate your taxable income and then subtract tax deductions, or the standard deduction. The amount leftover should be an estimate of your taxable income for the year. Then you can apply your tax rate determined by your tax bracket, which is based on your taxable income and filing status. This should help you find the amount of tax owed for the year. Tax withholding should cover most, if not all, of this amount. If it does not, you can offset this amount by claiming tax credits you are eligible for. The tax remaining should be paid at the April tax deadline. If you overpay, you will receive a tax refund when you file before the October extension deadline. If you underpay, you will owe the balance, plus an underpayment penalty. The IRS advises taxpayers to pay either 90% of the current year’s tax or 100% of last year’s tax, whichever is less. Doing so should help you avoid the underpayment penalty. 

Should I File a Tax Extension? 

If you are certain that you cannot file your tax return by the April 18 deadline this year, then you should at the very least file a tax extension before the tax deadline. This can immediately save you the trouble of dealing with a failure-to-file penalty. The current failure-to-file penalty can be up to 25% of the tax due. This penalty will not be charged if you file an extension, but it will be if you do not file a return by the extension deadline of October 16. Additionally, you should make sure you pay estimated taxes by the April 18 deadline to avoid the failure-to-pay penalty. Filing a tax extension can be very helpful if you are still awaiting important tax documents, need some documents corrected, or just simply do not have time to file before the deadline. If you are wondering if you should file an extension because you owe taxes and you are unable to pay, filing an extension may not be a good idea. Instead, you might consider getting a payment plan or installment agreement set up with the IRS. We know dealing with the IRS on your own can be intimidating. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt. If you need tax help, we can assist.  

Contact Us Today for a Free Consultation 

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What is the IRS Collection Statute of Limitations?

What is the IRS Collection Statute of Limitations?

They say that death and taxes are the only two certainties in life. However, taxes are only collectible for so long. Did you know there is a statute of limitations for IRS collections? Here’s an overview of how the IRS statute of limitations works. 

How Long is the IRS Collection Statute of Limitations? 

The IRS has a 10-year statute of limitations for tax collections, beginning when the IRS first assesses your tax liabilities. In other words, the IRS cannot collect tax debt that is older than 10 years. You should keep in mind that the first IRS notice you receive is not necessarily when your liabilities are assessed. Specifically, there is a Collection Statute Expiration Date (CSED), which marks the last day the IRS can collect tax debt. After the CSED, the IRS cannot legally collect your tax debt, which means that your tax debt essentially disappears. 

If you want to find your CSED, you can count 10 years from the date on your Notice of Federal Tax Lien. You can also request a transcript of your IRS account to find the date your liability was assessed and filed. Keep in mind that there are several actions that can delay the statute of limitations, thus pushing out your CSED.  

Which Actions Extend a CSED? 

There are several qualifying events that can extend a CSED, including: 

  • Filing for bankruptcy: The IRS will pause the statute of limitations while your bankruptcy filing is pending, beginning from the filing date until the court makes a decision. The CSED will remain suspended for an additional six months.  
  • Living abroad: The IRS will pause the statute of limitations while you live abroad for six consecutive months or longer. The CSED will remain suspended for six months after you return to the United States. 
  • IRS installment agreement: The IRS will pause the statute of limitations while it reviews your installment agreement application. If the agreement is rejected, the CSED will remain suspended for 30 more days. This is also the case if your installment agreement defaults. If you appeal your rejection, the CSED will remain suspended until a decision is final. 
  • Offer in compromise: The IRS will pause the statute of limitations while it reviews your OIC application. Once a decision is made, the suspension ends. If your offer is rejected, your CSED will remain suspended for 30 more days. 
  • Innocent spouse relief: The IRS will extend the CSED until the 90-day petition expires. If you appeal the tax court decision, the statute of limitations will be suspended until a final decision is made, plus an additional 60 days. 
  • Taxpayer assistance order: The IRS will pause the statute of limitations while it reviews your submitted Form 911, Request for Taxpayer Advocate Service Assistance and Application for Taxpayer Assistance Order.  
  • Collection Due Process (CDP) hearing: The IRS will pause the statute of limitations while it reviews your request to stop a levy or remove a lien until a determination is made or until you withdraw your request.  
  • Military deferment: The IRS will pause the statute of limitations during military service and for an additional 270 days afterward. If you serve in a combat zone the CSED will be suspended for up to 180 days after military service. 
  • Being sued by the IRS: While this event rarely happens, the IRS will pause the statute of limitations during the court proceedings. 

Can I Ignore My Tax Debt Until the IRS Collection Statute Expires? 

You might be enticed to just wait out the IRS collection statute of limitations. However, this strategy is generally not recommended since it would mean ignoring your growing tax bill and IRS notices. Under these circumstances, simple actions like getting a job, purchasing a home, registering a vehicle, and operating a business would be very difficult. Working with the IRS will typically be your best option, but doing so alone can be tedious, intimidating, and stressful. Working with a credible and experienced tax relief company can help save time, money, and stress. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt. If you need tax help, contact us for a free, no-obligation tax consultation today. 

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What You Need to Know About Severance Packages & Taxes

what you need to know about severance packages and taxes

Losing your job is stressful enough as it is. If you are offered a severance package when let go, your first thought might not be on taxes. However, even severance pay is considered income which means it is taxable. Here we will discuss what you need to know about severance packages and how they affect your taxes. 

What Is a Severance Package? 

A severance package is a combination of pay and benefits offered to employees after being laid off from an employer. To receive the package, an employee will typically need to sign a severance agreement that details the amount of pay to be received, as well as any benefits that will be offered. The agreement may also list terms that the employee must abide by to receive the package. For example, accepting a severance package could mean that you are not eligible to file a wrongful termination lawsuit or collect unemployment benefits. Severance packages are offered at the employer’s discretion. In other words, employers are not legally obligated to offer a laid off employee any severance pay.  

Is Severance Pay Taxable? 

Severance pay is taxable, similar to any regular wages or salary income you earned prior to being laid off. Severance pay is taxed in the year of payment and most employers will include your severance pay on your W-2, along with any unused accrued vacation or sick time. Employers will typically withhold federal and state taxes for you, including: 

  • Social Security tax 
  • Medicare tax 
  • Federal income tax withholding 
  • State income tax withholding (if applicable) 
  • Federal unemployment tax (FUTA) 

Are There Any Tax Deductions for Job Hunting? 

As of the 2017 Tax Cuts and Jobs Act, taxpayers may no longer write off job hunting or moving expenses. 

How Does Severance Pay Affect My Taxes? 

In some cases, not enough taxes are withheld from severance pay. If this happens, you might owe during tax time. To avoid this, you can confirm your withholding is correct or make an estimated tax payment on the IRS website.  

Another scenario can involve a large severance package bumping you up into a higher tax bracket. This could happen because your income is taxed the year it is received. For example, if you receive six months of severance pay at the end of the year, you will essentially receive 18 months’ worth of pay, which could be a drastic increase in income compared to the previous year. This could cause a change in your tax rate and disqualify you from certain credits and deductions.  

If you find yourself in the above scenario, there are ways to minimize your tax bill. For example, you can contribute to a tax-deferred retirement account, add funds to a health savings account (HSA), or open a 529 plan for your child’s college fund. You can also ask your employer to have the severance payments spread out to avoid a large tax bill. 

Tax Help for Those Who Received Severance Pay 

If you were recently laid off and received a severance package, you should make sure enough taxes were withheld. If it’s clear that is not the case, you can still avoid a large tax bill. Your best bet is to speak to a trusted tax professional to avoid a stressful tax issue. If you need tax help, call Optima at 800-536-0734 for a free consultation. 

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I Amended My Tax Return – Now What?

i amended my tax return now what

If all goes well during tax season, you file your tax return, get a decent tax refund and wait to do it all again next year. But what happens if you file a return but then notice an error? Do you let it be or file an amended return? If there are simple math errors, the IRS should be able to correct those on their own. However, if you noticed you made an error in your filing status, income, dependents, or credits, you should amend your return through Form 1040-X. Here we will take a look at what happens after you amend your tax return.  

How Long Does It Take Amended Returns to Process? 

The IRS processes amended returns in the order they are received. Because of the backlog of unprocessed returns, this could mean waiting longer than usual processing times. According to the IRS website, your amended tax return can take up to 3 weeks after you mail it to show up in the IRS system. From there, it can take more than 20 weeks, instead of up to 16 weeks, to process amended returns. You should not attempt to file a second tax return or call the IRS during this wait period. 

You can use the Where’s My Amended Return? (WMAR) IRS online tool to check the status of your return and confirm the IRS has received it. You can also call the toll-free telephone number 866-464-2050. These tools should not be utilized until three weeks after filing the return since that is when status updates may become available.  

How to Use the Where’s My Amended Return? Tool 

To check the status of your amended tax return, you’ll need your social security number, date of birth, and zip code that is currently on file with the IRS. Once you proceed, you will see one of the following statuses of your return. 

Status: Received 

Your amended return was received and is being processed by the IRS. It currently takes more than 20 weeks to complete processing. 

Status: Adjusted 

An adjustment was made to your IRS account. The adjustment will result in a refund, balance owed or in no tax change. Payments can be made by mail, online, or through the IRS Direct Pay system. 

Status: Completed 

Your amended return has been processed by the IRS. You will receive all the information connected to its processing by mail.

Why Hasn’t My Amended Return Been Processed Yet? 

In some cases, the IRS still may not have processed your amended return, even after the 20-week timeline. This can happen for several reasons including:  

  • It has errors 
  • It is incomplete 
  • It is not signed 
  • It is returned to you requesting more information 
  • It includes a Form 8379, Injured Spouse Allocation 
  • It is affected by identity theft or fraud 
  • It is routing to a specialized area 
  • It requires clearance by the bankruptcy area within the IRS 
  • It needs to be reviewed and approved by a revenue officer 
  • It needs a review of an appeal or a requested reconsideration of an IRS decision 

In any case, the IRS will contact you if it needs more information to get your amended return processed. 

Tax Help for Those Who Amended a Return 

You should always ensure that you are filing a complete and accurate tax return so you can avoid filing an amended return. Sometimes amending a return could potentially trigger an audit or other examination by the IRS. If you find that you cannot avoid amending your tax return, make sure to follow the correct steps, provide all necessary information, and be patient while waiting for the IRS to process your return. When in doubt, you can also contact a qualified tax professional for assistance. If you need tax help, call Optima at 800-536-0734 for a free consultation. 

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