Perhaps the most feared and least understood document ever published by the IRS is Form 1099-C, Cancellation of Debt. Form 1099-C is sent to people who were so deep in debt, even their creditors agreed to give them a break and either reduce or cancel their debt altogether. Think foreclosures, short sales, credit card debt settlements, and similar debt consolidation methods. The issue is that in the eyes of the IRS the cancelled debt has not disappeared. Instead, it has transformed into a new source of taxable income: debt income.
Why Do You Have to Pay Taxes on Cancelled Debt?
If you have received an IRS Form 1099-C, your first reaction was probably disbelief. It does seem counterintuitive to have to pay taxes on cancelled debt. However, the IRS’s response is that when you borrowed that money you did not have to pay taxes on it because you were bound by contract to pay it back. If you had repaid the debt, it would have been as if you had never really owned the money. However, when a creditor releases you of a liability, you are in effect receiving a payment you did not return, which is a definition of income.
Creditors who cancel a debt of $600 or more are required by law to report the amount of debt discharged to the IRS by filing a 1099-C and sending a copy to the debtor. It’s worth mentioning that these creditors can make errors on these forms. Therefore, if you do not agree with the amount listed on the form, you will need to contact the creditor and request a corrected form. The creditor‘s address and telephone number should be on the top of the form. If it turns out the creditor made a mistake, they can issue a new 1099-C with the correct information.
Discrepancies and Tax Audits
It is worth highlighting that the IRS also receives a copy of the information on your 1099-C. If you fail to report taxable debt income when you file your taxes, you may have to pay an additional negligence penalty, interest on your taxes, as well as other sanctions.
If you do not agree with the debt income amount and you cannot resolve the issue with the creditor, things get tricky. You can make a note in your tax return. However, a word to the wise, discrepancies between your tax return and 1099-C forms, even when accompanied by explanatory notes, are tax audit magnets. Therefore, if you find yourself in this scenario, you should prepare yourself and expect the IRS to want a closer look at your accounts.
Exceptions and Exclusions
Not all types of unpaid debts are taxable. In addition, you may qualify for exclusions that could either reduce or even cancel your tax liability. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals), discusses the subject of debt income exceptions and exclusions in detail. If you qualify for any of these exceptions, you need to fill in and attach IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, to your form 1040.
Some examples of exceptions and exclusions include:
Gifts: Debts canceled as a gift, a bequest or as part of an inheritance are generally not considered income.
Student Loans: Student loans cancelled in exchange for meeting certain requirements, student loan repayment help programs, student loan cancellation from 2021 through 2025.
Bankruptcy: Debts canceled during a title 11 bankruptcy are excluded from gross income. To prove debt income reported in a 1099-C was discharged as part of a bankruptcy, complete and attach Form 982 to your tax return and make sure you check the box on line 1a.
Insolvency: If your debts were cancelled due to insolvency – because your debts were greater than your total assets – some or even all of your cancelled debt may not be taxable. For instance, if your total assets amounted to $10,000 and your total debt was $15,000, you may not have to pay taxes on debt income of $5,000 or less. If you were insolvent when your debt was forgiven, check box 1b in Part 1 of Form 982 and attach it to your tax return. Form 982 includes an insolvency worksheet you can use to determine how much of the debt you can exclude from your debt income.
Principal Residence: If the cancelled debt was on your principal residence, you can exclude up to $750,000 of the debt, or $375,000 if married filing separately. Mind you, this does not apply to investment or vacation homes.
Don’t Panic, You May Be Exempt
If you receive a 1099-C Form, try not to panic. You may be exempt from paying taxes on the debt income, and if not, you probably can exclude a big chunk of it. However, negotiating debt income matters with creditors and the IRS is a complex matter and hiring a tax professional with experience in debt income cases may save you a lot of cash, time and stress. Consider hiring a qualified tax advisor with experience in debt income matters. They might be able to determine whether your cancelled debt is taxable, how much you can exclude, and how to manage negotiations with creditors. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
It can be difficult and frustrating to deal with tax debt. You might be concerned about whether the Internal Revenue Service (IRS) has the right to seize your assets if you owe taxes to them and haven’t taken steps to address the debt. In this article, we will examine the scenarios in which the IRS may lawfully seize your assets to satisfy a tax liability and when they may not.
Can the IRS Seize My Assets?
The simple answer to this question is yes, the IRS is legally able to seize your assets in order to pay off a tax balance you owe. However, it is crucial to remember that the IRS normally views asset seizure as a last resort. Before initiating asset seizure, they typically prefer to negotiate with taxpayers to identify other options, like installment agreements or offers in compromise. Additionally, the IRS will make multiple attempts to warn you of potential asset seizures. If you do not respond to these warnings, the next step would be to impose a tax lien on your property. Only after this and a final warning will the IRS seize any assets.
Which Assets Can the IRS Seize?
Almost any item that has worth or equity and may be sold for cash can be seized by the IRS. Some of these assets can include:
Property: The IRS can place a lien on your property, such as your house or other real estate, establishing their legal claim to it. In some situations, they may seize and sell the property to recover the debt.
Vehicles and Other Personal Assets: To satisfy your tax burden, the IRS may confiscate and sell your vehicles, boats, jewels, or other personal assets.
Bank Accounts: The IRS has the authority to levy funds from your bank accounts in order to satisfy your tax debt. Bank levies are one-time only, which means the IRS can only take what is in the bank account at the moment. You can deposit and withdraw funds from the account in the future. However, the IRS can always issue more levies in the future.
Retirement Accounts: The IRS has the legal authority to seize your 401(k) and other retirement savings, including self-employed plans. Although these accounts are shielded from creditors, the IRS has the legal right to confiscate funds from your retirement savings in order to recoup back taxes owed.
Life Insurance: In certain cases, the IRS can even seize life insurance benefits. If you are the beneficiary of a life insurance policy and you owe the IRS, the IRS can seize those proceeds. Additionally, if you have a life insurance policy with no beneficiary named and you owe the IRS, the IRS can seize the policy funds before they are distributed to your next of kin.
Wages: The IRS has the authority to issue a wage garnishment, which means that they can legally order your employer to withdraw a percentage of your salary to pay off your tax debt.
Which Assets Can the IRS Not Seize?
In general, any asset that is not necessary for your well-being and shelter (or the survival and shelter of your family) may be confiscated in order to pay the IRS what you owe. This can include:
Worker’s compensation benefits
Work tools needed for your job
Household furniture valued below a certain amount
Some disability payments
Court-ordered child support payments
Some pension or annuity benefits
Clothes and textbooks
Assistance provided by the Job Training Partnership Act
How Can I Protect My Assets from Being Seized by the IRS?
The good news is that an IRS asset seizure will never come as a surprise. Once you are aware that you owe the IRS, you should get to work on resolving the issue. However, we know that sometimes this isn’t always possible. You may have already received multiple IRS notices, and maybe one was an Intent to Levy. It’s not too late to get help from the nation’s leading tax resolution firm. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations.
When dealing with the IRS, it’s easy to feel outnumbered and helpless. However, it is important to know that you have fundamental rights when it comes to tax issues. The Taxpayer Bill of Rights, which was created to guarantee justice, openness, and accountability in the tax system, outlines these rights. Here we’ll examine each of your rights listed in the Taxpayer Bill of Rights.
The Right to Be Informed
You have a right to information about the laws that are relevant to you and your tax obligations. The procedure for filing taxes, possible credits and deductions, and any changes to tax laws that may have an impact on you must all be explained in detail by the IRS. Additionally, you have the right to request written explanations for any IRS actions related to your tax accounts as well as the chance to contest or appeal them.
The Right to Quality Service
The IRS is required by law to provide you with timely, courteous, and expert help. This includes the right to communicate with an informed IRS representative, have your inquiries correctly addressed, and have your issues promptly taken care of. You have the right to be spoken to in a way that is easy to understand. You have the right to file a complaint if you feel that the service was insufficient.
The Right to Pay No More than the Correct Amount of Tax
You have the right to pay only the tax debt that is legitimately owed by you. This includes any interest and penalties applied to your tax account.
The Right to Challenge the IRS’s Position and Be Heard
You have the right to object, provide further information, and challenge any judgments the IRS makes. You have the right to expect that the IRS will consider your objections and documentation promptly and fairly.
The Right to Appeal an IRS Decision in an Independent Forum
You have the right to an impartial and fair administrative appeals procedure and, in some circumstances, the ability to file a lawsuit. The IRS must take into account your arguments and respond in writing with a justification of their choice.
The Right to Finality
You have the right to be aware of the maximum length of time you have to contest the IRS’s claims and to anticipate that once that period of time expires, the IRS won’t pursue further collection efforts. Any deadlines for submitting an appeal or taking other actions must be communicated to you by the IRS as well.
The Right to Privacy
You have the right to anticipate that the IRS will keep your information private and use it solely for legal tax purposes. Except in some limited instances, the IRS is not permitted to disclose your tax information to unapproved people or businesses without your approval.
The Right to Confidentiality
You have the right to assume that the IRS won’t share any information you give them unless you give permission, or it’s required by law. You have the right to anticipate that anybody using or disclosing your return information improperly, including workers, return preparers, and others, will face the appropriate consequences.
The Right to Retain Representation
You have the right to appoint a qualified representative, such as a tax expert, to act on your behalf when interacting with the IRS. Your representative can present your case, advocate on your behalf, and assist in making sure that your rights are upheld.
The Right to a Fair and Just Tax System
You are entitled to a just and equitable tax system that takes into account all pertinent information. This includes the freedom to contest the IRS’s application of the tax laws and to ask the Taxpayer Advocate Service, an impartial division of the IRS that aids people in resolving disputes with the agency, for support.
The Taxpayer Bill of Rights is a crucial document that gives taxpayers power and guarantees that the IRS will treat them fairly. You can navigate the tax system with confidence and hold the IRS accountable by being aware of and defending your rights. Consult with a knowledgeable tax expert if you’re having problems or think your rights have been infringed. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Renting out your property as an Airbnb can be a good way to secure residual income. While Airbnb may send you a tax form at the end of the year, it’s important to understand your tax responsibilities to check for errors and in the event you aren’t issued a form.
Reporting your Airbnb or vacation rental as income
The IRS requires that all payment processing companies (including Venmo, PayPal, and Airbnb) report gross earnings for all users within the US. If you earn $600 or more, and/or have 200 or more transactions for the year, Airbnb will issue Form 1099-K.
If you are not a US citizen but earned money from a vacation rental in the US, you will be provided Form W-8.
Withholding taxes from Airbnb payouts
You do have the option to withhold taxes from your Airbnb earnings, which is always recommended to avoid a large tax bill at the end of the year. You can also use a tax calculator to get an estimate of your earnings to save money for taxes.
Vacation home, rental, or personal use
To determine if your vacation property is a rental residence or being used for personal gain, you must identify how often the property is rented versus how often you reside there. Renting your property to someone that pays the fair market value while using the home as their primary residence would make it a rental property.
If you do not reside in the home and rent it frequently for short-term periods, it would be considered a vacation rental.
Should you find yourself residing in the home more frequently than you rent it, then you are using the home for personal use. The IRS requires that you still pay taxes on the money you earn from renting your property for 15 days or more out of the year.
Tax debt relief and filing assistance for Airbnb hosts
As a host, you may qualify for tax debt relief. Our tax professionals will review your case to determine the best course of action for your compliance. For a free consultation, you can call Optima at 800-536-0734.
The world of investments can be intimidating, especially for young adults and college students. However, it is known that one of the best ways to build long-term wealth is to start investing early. Doing so will allow your money to compound interest for a longer period of time, and knowing additional investment tips will help you get started.
Invest in a High-Yield Savings Account
This investment tip is great for those who are just getting started and may be a bit hesitant to jump into stock trading. Like a traditional savings account, a high-yield savings account pays interest on your account balance. The main difference is that the rates of a high-yield savings account are far higher than those of a traditional account. In fact, the rates are 20-25 times the national average of traditional accounts. This investment is ideal for building an emergency fund or safety net because it is money that is not meant to be touched but is still easily accessible when needed.
Open an Individual Retirement Account (IRA)
College days may seem early to begin thinking about retirement, but the sooner you start saving the better. One of the best ways to begin retirement savings is through an IRA account.
Traditional IRA accounts allow tax-deductible contributions on state and federal tax returns for the year the contribution was made. When you withdraw the money for retirement (beginning at 59 ½ years old), you will be taxed at that income tax rate. This is important to consider as some people will be in a higher tax bracket when they retire because of Social Security benefits, investment income, and more.
Roth IRAs are usually more popular with young adults because the earnings and contributions to the account compound tax-free. In other words, you pay taxes on the money before you contribute so you don’t have to pay it at withdrawal. However, your contributions do not qualify as tax deductions. This option is also better for those who anticipate being in a higher tax bracket at retirement age.
Invest with a Robo-Advisor
This investment tip is ideal for those who want to invest through a brokerage account for cheap without doing a ton of research. Robo-advisors use artificial intelligence to create one-of-a-kind investment portfolios based on your goals, such as amount of time left before retirement and risk level. This option usually does not require paying fees for small accounts, so there is not much risk involved in getting started. However, you may be required to pay a small percentage of your assets each year once you reach a certain account balance.
Tax Relief for Investors
The best investment tip is to always ensure you are compliant with tax laws and to report your investment earnings each year. Reach out to us at 800-536-0734 for a free consultation today.
Tax Evasion, Fraud & the Statute of Limitations on Tax Crimes
Tax evasion and fraud is not just a problem for white-collar crime criminals. Filing your taxes, particularly if you have considerable assets or run your own business, can be terribly complex. This means that the line between an aggressive – but legal – tax planning strategy and fraud is thinner than you might think.
Perfectly innocent mistakes may be interpreted by an IRS investigator as suspect. Therefore, even if you are a law-abiding taxpayer it pays to know the difference between tax evasion and tax fraud, the penalties, and what the IRS’ statute of limitations is when prosecuting tax crimes.
Tax Evasion vs. Tax Fraud
Although often used interchangeably, there are important differences between tax evasion and tax fraud. Tax evasion refers to the use of illegal means to avoid paying your taxes. This includes felonies, such as refusing to pay your taxes once they have been assessed, and misdemeanors; such as failing to file a return. Tax fraud, on the other hand, refers to lying on your tax return and falsifying tax documents- which is always a felony charge. This can extend to tax scammers will pose as a tax preparers and then rip off customers through refund fraud or identity theft. These phony accountants are committing Accountant Fraud and will tell you that they can get you a large tax refund and typically prey on low-income and non-English speaking taxpayers.
Take for example celebrity-convict Wesley Snipes, who was charged with three counts of failing to file a return. Snipes was convicted for three misdemeanor charges and received the maximum one-year sentence for each count. If he had been found guilty of a felony evasion charge or of tax fraud, he could have received up to five years for each count.
Statute of Limitations for Tax Evasion or Tax Fraud
The statute of limitations of a crime is the amount of time a prosecutor or a plaintiff has to file charges. In the case of taxes, it represents how long you should be looking over your shoulder after – willfully or otherwise – lying on your tax return.
The general rule of thumb is that the IRS has three years to audit your tax returns. If an investigation of your tax return reveals you concealed over 25% of your income, the IRS gets twice the time, six years, to file charges. However, this time period can be extended for a variety of reasons.
How can the Statute of Limitations be extended?
There are some stipulations that can make those ten years spread out to an even longer period of time. Here are some reasons you may have an extended tax statute of limitations:
If you agree to an extension, your statute is placed on hold until that extension time is up.
If you file bankruptcy, your statute is placed on hold until six months after the bankruptcy and court proceedings have been finished.
If you leave the country for at least six months, the statute is placed on hold until you decide to return.
If you are making payment installment arrangements or request innocent spouse relief, the statute is placed on hold until the final decisions are made.
For instance, if you are not in the United States or you become a fugitive, the statute of limitations may be “tolled” – or stop running – until you are found or return home. Another matter to consider is when the 6-year period starts. The IRS could prosecute a series of fraudulent tax returns as a single charge and only start counting the six-year period from your last act of tax evasion or fraud.
It gets worse. Although the IRS is limited to how far back it can look when filing charges in criminal court, there is no statute of limitations for civil tax fraud. This means the IRS can look back as far as it wants when suing for civil fraud. In practice the IRS rarely goes back more than six years because it has a high enough burden of proof to meet in fraud cases without having to deal with the added difficulties of proving older charges.
Tax Crime Statistics
Let’s end with the good news. Although the law grants extensive powers to the IRS, the chances of you being charged — never mind convicted — of tax fraud are minimal. According to IRS statistics, of the approximately 240.2 million tax returns filed, less than 2,000 people were investigated for fraud in 2020. Of those who were investigated, only half were actually charged with a criminal offense. However, once the IRS charges a taxpayer, the conviction rate is high: around 93%. Tax prosecutors have a high burden of proof to meet and their resources are limited; so they tend to focus their efforts on clear-cut cases.
Another positive tidbit is that the IRS rarely brings up an original return in audits or criminal prosecutions, if you came forward and tried to correct mistakes through an amended return. This means that if you avoid blatant abuses and correct filing errors when they come up in an audit, your chances of staying on the right side of a prison cell are excellent.