The Treasury Department has a well-earned reputation for being serious about collecting its due. The mere mention of its taxation arm – the IRS, is sufficient to invoke fear into the most honest of taxpayers. One reason for the trepidation generated by the IRS is that it has a potent arsenal of weapons at its disposal to pursue taxpayers who are in arrears, including tax liens and tax levies.
Many people confuse tax liens and tax levies. While neither is desirable, a tax lien poses much less financial danger to taxpayers than a tax levy does. A tax lien represents an initial attempt by the IRS to collect revenues from taxpayers who have failed to either pay their taxes in full or to contact the agency to discuss viable repayment options. By contrast, by the time the IRS gets around to filing a Final Notice of Intent to Levy and Notice of Your Right to A Hearing, otherwise known as a tax levy, taxpayers are in imminent danger of losing valuable assets such as cars or homes to seizure.
It goes without saying that avoiding the dire consequences of a tax levy is desirable whenever possible. Fortunately, taxpayers who take expedient measures can frequently avoid the hammer of the IRS tax levy. Depending on the personal circumstances involved, it may be possible to dodge a tax levy long enough to contact the IRS with alternative arrangements – or even long term.
1. Request a 120-Day Extension
One of the few absolutely guaranteed ways to avoid a tax levy is to repay what you owe to the IRS in full. If you have a reasonable expectation of being able to repay your tax arrears within 120 days, request an extension from the IRS. Once you have made payment, the lien should be released within 30 days, which will automatically cancel the tax levy.
2. Negotiate an Installment Agreement
Back in the day, the IRS was much less flexible about allowing taxpayers to extend payments over time. In recent years, however, the IRS has changed its stance and actively encourages collaboration between agents and taxpayers. So, if you can pay what you owe within a reasonable time frame, generally six years or less, depending on your total balance in arrears, you may be able to avoid a tax levy by negotiating an installment agreement. If so, act quickly to prevent the actual levy from going through.
3. Extend an Offer in Compromise
An Offer in Compromise is a formal arrangement that allows taxpayers to settle their tax obligations by paying less than the full amount due. The Offer in Compromise process requires taxpayers to demonstrate that attempts to collect the full amount owed would present an undue financial burden or would otherwise be unjust. As might be expected, the standard for qualifying for an Offer in Compromise are strict, and taxpayers would be well advised to seek professional advice before pursuing this path.
4. Demonstrate Non-collectible Status
If paying your back taxes – or the execution of a tax levy – would create severe financial hardship, you can seek what the IRS categorizes as “non-collectible status.” Once your tax debt has been designated as non-collectible, all attempts to process tax levies cease. But the tax lien remains on your record, and you must re-apply for “noncollectable status” on an annual basis.
5. File Chapter 7 or 13 Bankruptcy
Under most circumstances, filing either Chapter 7 or Chapter 13 bankruptcy places an immediate halt on all creditor collection actions, including tax levies. But filing a bankruptcy petition only stops a tax levy for as long as the petition is active. And especially if you file Chapter 7 bankruptcy, you may be required to relinquish personal assets anyway to obtain a discharge.
6. Petition for Innocent Spouse Relief
If you filed a joint tax return with your spouse, you are generally jointly liable for any and all tax obligations. But under limited circumstances, it may be possible to escape a tax levy if you can demonstrate that your spouse is individually responsible for being in arrears with the IRS. Qualifying for Innocent Spouse Relief is tough, with strict requirements in place. If you believe you qualify, you would be well advised to seek the services of a professional in preparing your petition.
7. Appeal the Notice of Levy
If you legitimately believe that the IRS has mistakenly imposed a tax levy against you, it is imperative to contact the agency by phone immediately to request an appeal. You must also follow up the phone call with a written petition to appeal the tax levy. It is your legal right to appeal a tax levy, and doing so will stop the process while your appeal is being processed.
8. Allow the Statute of Limitations to Run
The IRS is limited by statute on the amount of time that a tax lien is allowed to stand. If the statute of limitations expires before the IRS imposes a tax levy, you are officially off the hook. But this is a very risky strategy, especially since the IRS may simply impose a new tax lien against your account. On the other hand, if you can demonstrate that the statute of limitations has ALREADY expired, your odds of escaping a tax levy improve significantly. Do not attempt this approach without expert legal advice.
9. Claim IRS Procedural Error
In most cases, taxpayers receive multiple warnings before the IRS executes a tax levy. But sometimes mistakes are made. If you can demonstrate that you did not receive sufficient notice of a tax levy, or that the IRS committed some other procedural error in assessing your account, you can request a Collection Due Process hearing, which will halt a tax levy for 30 days after the date of the hearing.
10. File a Request through the Collection Appeals Program
If you are not satisfied by the results of an appeal or a Collection Due Process hearing, you may file a petition for under the Collection Appeals Program before a tax levy has been executed. You may also file a petition to recover assets such as bank accounts or wages that were wrongfully seized by tax liens under the Collection Appeals Program. But if seized assets such as a home or a car have already been sold, you are pretty much out of luck.
Taxes are never going to be popular and when governments implement new taxes it is always controversial. However, when taxes target certain products or services — especially when it involves things people are passionate about — things get really interesting. This is the situation with the so-called sin taxes
: taxes on products and services which are considered dangerous or detrimental, such as alcohol, tobacco, pot, and prostitution.
Effect of Taxes
Usually, the undesired effect of taxing a product or service is that demand for it drops, which obviously hurts businesses and their ability to pay more taxes. That is why tax policymakers try to find the sweet spot that maximizes revenue without hurting production excessively.
Take for example income tax brackets. In 2013, any income between $36,250 and $87,850 was taxed at 25%, but anything between $87,850 and $184,250 was taxed at 28%. Having to pay 28% taxes on your income is not fun, but it probably won’t stop you from working harder or accepting a job with more responsibility and a larger salary. But what if you earned $87,000 and the tax on income over $87,850 were 90%, would it be worth your time to work harder?
Sin Taxes Rationale
When it comes to sin taxes, the rules change completely. Policymakers generally want to either curb demand for the product or service taxed, or their priority is to maximize revenue from the sin tax, which is then put toward alleviating the negative side effects it generates.
Consider the tobacco tax
. In New York City, which has the highest cigarette tax in the United States, smokers pay $5.85 a pack in state and local taxes. Some feel this tax is unfair because smokers are mostly low-income taxpayers who generally don’t reduce their tobacco consumption and higher taxes simply leave them with less income for life essentials. However, supporters of the tobacco tax argue that these taxes do discourage consumption and simply reflect the true cost of smoking. There is no arguing against the fact that smoking is expensive. Every year, $96 billion are spent on the treatment of tobacco-related illnesses according to a 2012 report by the American Cancer Society.
The rationale for taxing wine, beer and hard liquor is similar. According to a 2013 report by the Centers of Disease Control, over drinking cost each state a median of $2.9 billion in 2006. California had the largest economic burden due to excessive drinking: $32 billion. When you calculate the cost of these additional expenses per drink – what an economist would call calculating the consumption externalities of a product — the CDC estimates the median cost per state for each alcoholic consumed at $1.91.
Tobacco and Booze Are Just the Beginning
Governments are not stopping at alcohol and cigarettes. Last week, Mexico, which recently took the United States’ place as the most obese country in the world, passed an 8% tax on candy
, chips and other high-calorie foods.
Last Tuesday Colorado passed proposition AA, a 15% excise tax – which is measured by the amount of business done – and a 10% sales tax on all recreational marijuana sales in the state. The revenue from the new pot tax is estimated at $70 million and will be used to regulate the marijuana industry and educate people about the harmful effects of consuming the ganja.
In Holland, prostitutes are required to charge a 19% sales tax for each transaction. In the United States, Nevada is the only state where prostitution is legalized – albeit only in certain counties. Although legal brothels and prostitutes must pay federal income tax, there isn’t a specific tax on prostitution. According to Dennis Hof, owner of the Nevada Moonlight Bunny Ranch brothel, the federal government is missing out on an $18 billion business, which could generate $6 billion in income tax and $2 billion in licensing fees.
Controversial and Discriminatory
Alcohol, tobacco, high-calorie foods and prostitution can have very real and harmful health effects on the health of consumers. There is an argument for saying that production costs don’t take into consideration the cost of treating their side effects and taxes are simply accounting for these negative externalities and giving a more accurate reflection of their true cost to society.
Sin taxes are controversial because they discriminate certain habits and lifestyles over others. Some consider them an unwarranted encroachment of the government into our personal lives. Others argue they are inefficient and simply add to the woes of the poorest sectors of society.
What could be better than winning $8.3 million at the World Series of Poker next week?
Not paying taxes on all $8.3 million.
Since a federal court ruling two years ago, there are tax deductions for professional gamblers similar to those for self-employed contractors and small businesses. Expenses like travel, meals, and lodging can be cut from their total income.
This means that if a professional player won $1 million and showed business expenses of $100,000 million during the year – he would only pay taxes on $900,000.
Are You a Professional Gambler?
So how do you prove to the IRS that you’re a professional gambler? Show that you treat the game like a business all year long; that you play to make a profit, not to have fun with your friends.
The federal tax code uses nine guidelines to determine what qualifies as professional gambling, and what doesn’t. Here are a few of those guidelines adapted from an article last year in the Journal of Accountancy.
Don’t have an entourage. Since gambling is usually for fun, you have to show that you are not playing for pleasure, but for a living. It is better to go by yourself. If you want family and friends to keep you company, don’t include them in your business expenses.
“Like most tax issues, accurate and proper tax planning is key. With a sensitive issue, such as professional gambling, having your tax strategy be IRS ready will be vital in keeping your winnings in your pocket. Winning against the Internal Revenue Service is possible, as long as you hold the right cards in your hand.” –Andrew Park, Enrolled Agent at Optima Tax Relief.
How to Report Gambling Winnings?
Gambling winnings are reported through IRS Form W-2G. Depending on how much you win and the type of gambling you undertake, you may receive this form directly from the “payer” or organization from which you won the money. If the payer withholds federal income tax from your winnings, you will receive a Form W-2G. This form, according to Robert W. Wood of Forbes.com, works just like a 1099 Interest Form that you receive as part of tax time preparation forms. He reminds everyone the IRS also receives a copy of the Form W-2G and reminds winners to keep it handy for tax time to ensure full compliance!
If gambling winnings do not meet the following thresholds set by the IRS for the respective type of gambling, it must be reported as “Other income.”
Bingo or slot machines: $1,200
Poker Tournament: $5,000 (excluding wager or buy-in amounts)
“Other” gambling winnings: $600
“Other” gambling winnings are those that do not include poker tournaments, slot machines, bingo, and keno – and the payout is at least 300 times the wager amount).
What if My Winnings don’t Meet the Above Thresholds?
No matter how much income is generated from gambling, it must be reported if you receive a Form W-2G or not. If your winnings do not meet the threshold, you must report your income under the “Other Income” line on the Form 1040 U.S. Individual Income Tax Return.
What do I Do if I Lose Money From Gambling?
Gambling losses may be deducted. Deductions are permitted up to the winning amount. Losses must be reported, as an Itemized Deduction, on Schedule A, separately from any winnings.
How are Winnings and Losses Substantiated?
The IRS requires proof of losses and winnings. In case of an audit and to maintain the integrity of your income tax return, the IRS recommends keeping all records related to winnings and losses. Items to substantiate gambling transactions include tickets, receipts, checks, and IRS Form W-2G (if given). Maintaining a notebook or other written documentation is highly suggested to keep winnings and losses separate and organized.
What Expenses Can Be Deducted?
Like most small businesses, professional gamblers can deduct expenses that the IRS considers “ordinary and necessary” to “carrying on any trade or business.” The website ProfessionalGamblerStatus.com provides a long list of tax deductions for professional gamblers you can deduct, ranging from internet connections (if you play online), to flights, car trips, and meals when you travel to tournaments.
List of Possible Deductions
- Internet Costs, if you regularly play online
- Home office expenses
- Tax advice
- Subscriptions to gambling magazines and newspapers
- Gaming fees, chat room fees
- Club membership fees and dues
- Clerical and record-keeping expenses
- Travel and meal costs during tournaments
- Wages paid to relatives or employees for their assistance
You can also deduct money used to hire a poker coach or someone to keep track of your results. The payment just needs to be “a reasonable allowance for salaries or other compensation for personal services actually rendered,” according to the IRS.
To comply with the laws, make sure you don’t look like you’re trying to take advantage of the system. For instance, taking a taxi and flying coach would arouse less suspicion than renting a private jet and a stretched limo. That also applies for high rollers, who are often offered complimentary hotel rooms, buffets, and rides by casinos. Don’t try to pass those off freebies as expenses.
So what if you’re not a professional but you drive 60 miles, eat lunch, and have a great day at the track? Since you’re not a professional gambler, you can’t deduct any expenses. But you still have to pay taxes on your winnings.
Photo: Play Among Friends
You’re self-employed, which means that you no longer have to punch a clock or make that daily commute to spend the day in a cubicle. However, along with the freedom to set your own schedule comes the responsibility to make sure Uncle Sam gets his cut – and receives what you owe in a timely fashion.
That means either setting aside funds from your earnings to cover your tax obligation next April, or paying quarterly estimated taxes. Regardless of which strategy you take, the IRS has developed a worksheet to use to calculate how much you should set aside – IRS Form 1040-ES: Estimated Tax for Individuals.
Using IRS Form 1040-ES: Estimated Tax for Individuals
The IRS makes it easy (or at least as easy as paying taxes can be) to satisfy your federal income tax obligations by making quarterly estimated income tax payments. To begin making estimated payments, first download IRS Form 1040-ES, Estimated Tax for Individuals from the IRS website. For more details on how to complete the form, download Publication 505, Tax Withholding and Estimated Tax. The form is a PDF document that you can fill in and save with your information at any point.
To calculate your expected wages for the coming year, obtain a copy of your prior year’s tax returns and locate the figure for your adjusted gross income to use as a starting point to estimate your income for the coming year. Subtract either your itemized deductions from your return or the standard deduction (whichever is larger) from your adjusted gross income. If the resulting amount is negative, adjust the total to zero. The result is an estimate of your wages for the coming year.
Calculate Estimated Tax
Once you’ve finished this calculation, use the included Tax Rate Schedule to calculate your estimated tax and enter the figure on the appropriate line of IRS Form 1040-ES. If you are subject to Alternative Minimum Tax (AMT), include the amount generated from IRS Form 6251 on IRS Form 1040-ES as additional tax. Subtract any credits you’re entitled to, such as the Earned Income Credit or deductions for use of your vehicle for business, medical or charitable purposes. The result is your estimated tax.
Use the resulting figure as the starting point to estimate your self-employment taxes. First, multiply your expected wages for the coming year by 92.35%, or .9235, and enter the result on line 3 of IRS Form 1040-ES. Multiply the figure on line 3 by 2.9% or .029 and enter the result on line 4 of IRS Form 1040-ES. Subtract your expected wages for the coming year from $113.700 (the maximum income subject to Social Security taxes). If the result is zero or less, enter 0 on line 9 of IRS Form 1040-ES, and skip to line 10 on the form. If the result is zero or greater, compare this figure to the figure on line 3, and multiply the smaller result by 12.4% or .124 and enter the result on line 9 of Form 1040-ES. Add the figures from line 4 and line 9 together and enter the result on line 10. Multiply the figure on line 10 by 50% or .50 to obtain your estimated self-employment tax.
After you’ve completed all these calculations, add the estimated tax to the estimated self-employment tax. If the result is $1,000 or more, divide the total by four to determine your quarterly estimated payments. If the figure is less than $1,000, the IRS does not require you to make quarterly estimated payments. But before you throw your calculator across the room in frustration for having wasted so much time, consider this: you’ve generated a good estimate of how much you should set aside to cover your tax obligations.
Set Aside Funds
Whether or not you are obliged to make quarterly tax payments, you will still need to set aside funds to cover your income tax obligations. If you have a paid-wage job in addition to self-employment, you can ask your employer to deduct more from each paycheck to make the process automatic. If not, set up a “pay yourself first” account with your financial institutions, and commit to making regular deposits into the account until you collect the funds you need for each quarter.
By following this strategy, you’ll be far less stressed when you file next year’s federal income tax returns. If you still need assistance, feel free to give us a call.
Photo: Philip Taylor PT
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Every now and then you hear about state and local governments wanting to tax certain items which weren’t previously taxed, based on use. For example, some areas tax a five pound block of ice sold at a grocery store, but they don’t tax a five pound bag of ice cubes. The reasoning is, the block is refrigeration, but the cubes become part of a drink.
Other tax agencies see an individual snack (such as a cupcake) as taxable, the same item in a multi-pack is not. Sure, government at all levels seems to be cash-strapped. But sometimes these proposed rules make you wonder if government officials just have too much time on their hands. Take Iowa’s attempt to pass a pumpkin tax, a few years back.
A few years back, someone in the Iowa Department of Revenue (DOR) figured out that about 750 million pumpkins are carved into jack-o-lanterns each year for Halloween. Just like a jack-o-lantern lit from within by a candle, the eyes of Iowa taxing authorities lit up with possibilities. A new source of tax revenue!
That’s why someone at the DOR drew up a notice to send to retailers across the state, instructing them thusly: You cannot simply sell a pumpkin. You must first put on your Sherlock Holmes cap and dig till you find out the true intent of the purchaser. Will this pumpkin be food? If so, no problem. But if the orange ball with a green stem will become a decoration… cha-ching! Tax that bad boy!
According to the DOR notice, pumpkins are taxable if:
- They are advertised as decorations or jack-o-lanterns.
- If it is understood they will be used as decorations or jack- o-lanterns.
They are exempt if a buyer completes a sales tax exemption statement, claiming the pumpkin will be used as food. They will also be exempt if:
- The pumpkin is a specific variety used to make pumpkin pies and is advertised for that purpose.
- It is purchased with food stamps.
When one tax expert highlighted the silliness of tax based on intent, the blogosphere picked up on the idea, and soon the Iowa DOR dropped their efforts and rescinded the taxes, and maybe found better uses for their time.
Iowa is Not Alone
Iowa DOR may have needed a push from the blogosphere to come to common sense. But at least they did relent. Washington state, on the other hand, still taxes certain candy, while not taxing other very similar candy. The difference it seems boils down to whether or not the confection is made with flour “Candy does not include any preparation containing flour and does not require refrigeration.”
By this definition, Kit Kat, Twizzler Strawberry Twist, Milk Way Bars, and Hershey Powdered Cocoa for baking are all exempt from tax. But Brach’s Milk Chocolate Covered Raisins, Milky Way Midnight Bar, and Kraft Bakers Chocolate, unsweetened, all are taxable. Go figure!
Does it Matter?
Yes, most areas are cash strapped. But maybe they could save money by sending some tax authorities home, instead of having them waste time and taxpayer money working out the taxability of candy and pumpkins.
Photo: Wildcat Dunny
Think only celebrities and big corporations get away with outrageous tax deductions? We’ve put together a few reasonable ones you can take advantage of next year, and a few of the more outrageous tax deductions for fun.
1. Put your pup to work! Employing man’s best friend to protect your company grounds can offer some leeway with the IRS. Since the animal is considered part of the “protection” or security system for your place of business, some of your pooch’s care costs may be written off come tax time.
2. Enlarging your deduction — taken to the next level. In 1988 a stripper wrote off her breast enlargement surgery as a business expense. At first the tax courts denied her the deduction. Immediately she appealed the decision and sure enough, her implants were considered a business expense allowing her the tax deduction.
3. Getting a prescription for cash. Does your doctor feel you need to drastically improve your health in order to stay alive? Well the IRS wants you alive and kicking in order to keep up with your tax payments. If your doctor signs off on the purchase of remedies in order to drop some weight, you may be able to write the concoctions off as an expense on next year’s tax return.
4. Stick ’em up! No one escapes the IRS when there’s cash involved. Even criminals in the pen must pay tax on their bounty; ironically, they may be able to write off lawyer expenses as a tax deduction. Who are the real criminals here?
5. Smoke and mirrors. Lately, everyone seems to be trying to live a healthier lifestyle. Many smokers have decided to quit, if not for health reasons, then for the steep increase on cigarette taxes. Smoking cessation devices, patches, or other quit-smoking aids can indeed be written off at tax time. Take advantage of this and you may see some payback for cigarette taxes you paid last year.
6. Music to your ears. Signing junior up for clarinet lessons may not be such a bad idea after all. If your child has an over-bite it is scientifically proven that playing certain wind instruments can correct the problem. Junior practicing clarinet may keep you up at night, but writing off that lesson can help you sleep like a baby during tax time.
7. Moving on up. You made it. You finally got that big promotion and are moving to the city to rake in the dough and live the high life. As many people already know, you can write off your moving expenses when relocating for a job. If you have pets, moving can become a bit more costly especially if there is a plane ride in your pup’s future. Since this is considered a moving expense, you pet’s airfare is a write off as well.
At Optima Tax Relief we can help you take advantage of some of these legal, but outrageous tax deductions. Contact us for more information on how to keep more cash in your pocket and out of the IRS’s hands.