Unlimited above-the-line charitable deduction proposed

New legislation called the “Charitable Giving Tax Deduction Act,” was recently introduced by Rep. Chris Smith (R-NJ) and Rep. Henry Cuellar (D-TX). The bipartisan bill could make tax deductions for charity available to everybody, instead of just those who itemize. The bill is also aimed at addressing concerns that the recent changes brought by the Tax Cuts and Jobs Act (TCJA) would result in fewer people itemizing, and therefore fewer people donating to charity.

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Did you know that the IRS generally has 10 years to collect taxes?

It is called the Collection Statute Expiration Date (CSED). That is the expiration of time period established by law that the IRS has to collect a given tax. Once a CSED expires the IRS will write it off.

Assume that you filed your 2017 form 1040 on time on April 18, 2018. You owed taxes for that return that you did not pay. All things being equal, after April 19, 2028 the IRS can no longer lawfully collect that tax and you are off the hook.

A CSED starts only after a tax return has been filed. The CSED does not start automatically on the due date. If a taxpayer filed their 2017 tax return on June 1 of 2020 that is when their 2017 CSED will start. If there are no tolls on the CSED, on June 2 of 2030 the IRS can no longer legally come after that 2017 tax.

The CSED can be tolled, or stopped, by different collections and legal actions, so it is not always easily defined. Because a serious IRS collections matter will take years to resolve, and the taxpayer and their representatives will try different strategies for relief, it is typical for a CSED to be tolled and re-computed. Some actions that toll a CSED are: Collection Due Process Cases, being in a Disaster Area, Military Postponement, Bankruptcy, Offer-in-Compromise, Installment Payment Agreement, Summons Enforcement, Taxpayer Assistance Order, and Innocent Spouse. When a taxpayer is in any of these situations, the CSED changes and will need to be re-computed.

Sometimes a taxpayer owes more than one type of tax, and for more than one period; businesses have multiple due dates throughout a given year. You can imagine how complicated calculating any CSED can get when a taxpayer falls a couple of years behind. You will need the help of a licensed professional if you plan to use the CSED as part of a larger strategy.

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Did you know that the IRS has a first time automatic penalty abatement?

If you qualify, you can receive administrative relief from penalties for failing to file a tax return, pay on time, and/or to deposit taxes – no questions asked.

The most common IRS penalties are for failing to file (on time), and failing to pay (on time). If you owe federal income tax, your tax return as well as the payment, is due by April 15. You can extend your time to file until October 15, but that is never an extension of time to pay. If you fail to pay by April 15 you will incur the failure to pay penalty. If you do not file by your deadline you will incur the failure to file penalty. It is common for delinquent taxpayers to have both penalties assessed against them.

If you have three years of clean tax history immediately prior to your trouble year, you filed all currently required returns or filed an extension, and you have paid, or arranged to pay, any tax due, you may qualify for automatic administrative relief from the penalties.

If you are usually on time with your tax returns and payments and had this one bad year that is when you need to remember this lesson. As tax returns become more complex, and the amounts of money involved get bigger, there will be a number of elements that need checking. If you are not sure if you qualify, contact our office or other qualified and licensed tax firm for help.

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Trust fund recovery penalty revisited

If an employer fails to properly pay its payroll taxes, the IRS can seek to collect a trust fund penalty equal to 100% of the unpaid taxes from any person who is considered a “responsible person,” (One who is responsible for collecting, accounting for, and paying over payroll taxes); and also willfully fails to perform this responsibility. The IRS will often assess these penalties against any and all persons in the organization who can be considered “responsible persons.”

To determine who a responsible person is, several factors are considered: (1) the duties of the officer as outlined by the corporate by-laws; (2) the ability of the individual to sign checks for the corporation; (3) the identity of the officers, directors, and shareholders; (4) the identity of the individuals who hire and fire employees; and (5), the identity of the individuals who were in control of the financial affairs of the corporation. Other factors include whether the person had access to the company’s books and records, and whether the individual has made personal loans to the company. Other intricacies, and there are many, are beyond the scope of this article.

A responsible person will be found liable under the Code if the IRS can demonstrate that they had either (1) actual knowledge that the trust fund taxes were not paid and the ability to pay the taxes, or (2) recklessly disregarded known risks that the trust fund taxes were not paid. In other words, they knew that the taxes had not been paid, and had access to the funds to pay the taxes, but willfully chose to pay other liabilities instead.

Trust fund taxes are the portion of the payroll tax that is withheld from an employee’s wages; income tax, social security tax, and Medicare tax. Because social security and Medicare are trust funds, an employer has a fiduciary responsibility for properly managing these monies. The portion of payroll taxes that are “matched” by the employer are not trust fund taxes, but are still a tax liability for the company.

For a business having trouble with its cash flows, not paying over these taxes can be the easiest loan to take out, and the hardest loan to pay back. The owners typically figure, “I’m short on money this month, but things will be better next month and I’ll pay the taxes next month.” Next month comes, cash flows are no different, and down the slippery slope the business goes. Maybe the next month is back to normal, but not good enough to pay two months’ worth of payroll tax, so the owner pays last months tax and puts off paying the taxes for the current month. Kiting the payment of payroll taxes is such a common occurrence that the IRS and their algorithms specifically look for these patterns.

If you think that the IRS has no sense of humor when it comes to unpaid income taxes, just wait until you get behind with somebody else’s trust fund monies; especially when those employees have applied for, and received their income tax refunds – of tax money that was never paid in. If you own a company, are behind in your payroll taxes, and take a wage, be careful because if you claim a refund for taxes that were never paid in that is considered fraud. The penalty for civil fraud is 75% of the tax owed. If you are having troubles like this, contact our firm or other competent and licensed tax professional right away so that they can help stop the bleeding and pull you out of this pitfall.

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What if you missed the tax filing deadline?

There is no penalty for filing a form 1040 after the deadline so long as you are due a refund. Penalties and interest only accrue on unfiled returns if the taxes were not paid by April 18. Anybody who does expect to owe taxes should file and pay as soon as they can to keep the penalty amounts as low as possible.

The late-filing penalty for unpaid taxes is usually 5 percent for each month or part of a month your tax return is late. If you file more than 60 days late, the minimum penalty is either $210 or 100 percent of the unpaid tax, whichever is less.

So get those tax returns filed, and if you think you are going to owe – like you do every year – you can always go online at https://www.irs.gov and make apply a payment toward your 2017 form 1040.

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IRS grants extra day to file

Because of problems yesterday with the IRS’ e-file systems, individuals and businesses whose tax returns and payments were due on April 17 now have until midnight tonight, April 18, 2018 to e-file and pay. Paper filers were not affected. There is nothing you need to do, the extension is automatic.

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Taxes are due today

Today is the due date for your personal Federal tax return. If you can not file today, you should file an extension – and most important, if you owe taxes, you need to make a payment. All extensions are extensions of time to file, not an extension of time to pay. Payments made after today’s due date, both Federal and State, will be subject to late penalties and interest. There are a few exceptions, and if you don’t know about situations like combat zone rules, they do not apply to you.

The Federal Government imposes two separate late penalties for failure to abide; the Failure to File penalty, and the Failure to Pay penalty. These are the most common IRS penalties. If you have to choose between the two penalties, you should at least file your return or the extension on time to avoid the one.

The Federal Form 4868 (extension) is considered to be “Automatic;” meaning that barring a narrow range of legal reasons, it will automatically, and without explanation, be accepted by the IRS. By filing the Federal Form 4868, you are legally changing the due date of your tax return from April 17, 2018 to October 15, 2018.

If you live in a State with an income tax you also need to file your State tax return, or a State extension with a payment. Most states instruct their citizens NOT to file an extension unless they owe tax and are also making a payment. In those states the six-month extension is automatic. You must be familiar with the laws of your state.

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New spending bill stops employers from using workers’ tips

The $1.3 trillion spending bill includes language that would forbid restaurants and other employers from keeping, or using employees’ tips to compensate non-tipped workers.

The provision addresses worker advocates’ concerns that employers could steal tips under a Labor Department proposal that could have allowed businesses to pool tips made by wait staff and other workers and share them with “back-of-the-house” employees like cooks and dishwashers.

This legislative support should come as welcome news to any server who has ever worked under such an arrangement, which is especially prevalent in businesses where patrons sign their checks, and servers are left at the mercy of management for their gratuities.

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April 1 Deadline For First-time Retirement Plan Distributions

April 1 is a deadline for those who turned 70 ½ during 2017 and have an IRA or employer type retirement plan. They have to take their required minimum distribution (RMD). A 50% penalty usually applies to any required amount not received by the April 1 deadline; if your RMD is $1,000 the penalty for not taking it is $500.

If you turned 70 and ½ in 2017 your first RMD has to be taken no later than April 1 of 2018. You still have to take your regular 2018 RMD before December 31 of 2018. So if this is your first year, you have to take 2 RMD’s. The RMD rules apply to traditional IRA’s and IRA-based plans like SEP’s, SARSEP’s, and SIMPLE IRA’s but they do not apply to ROTH IRA’s.

If you turned 70 ½ last year and have not heard a peep out of your plan administrator, contact them for help. If you do not need your IRA money yet, you can ask your administrator about a Qualifying Longevity Annuity Contract (QLAC) which can extend the RMD beyond age 70 ½.

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Time for 2014 Refunds is Running Out

The IRS reminds us that about $1.1 billion in refunds may be lost to an estimated 1 million taxpayers who have not yet filed their 2014 federal income tax returns. That’s because you only have three years from the time your tax return is due to claim that refund. The 2014 was due April 15 of 2015, at that means after April 18, 2018; time’s up, no more refund.

Extensions do count. If your 2014 tax return was extended, you will have until October 15 of 2018 to claim that refund.

There is no penalty for filing a late tax return if it is for a refund. We see a lot of tax returns from part-timers, college students and teens who earn less than their standard deduction. For them, any tax withheld will be refunded. Those refunds are usually worth hundreds of dollars and that can be substantial to those taxpayers.

We have seen cases where people seemed to be intimidated by the IRS, so they just didn’t file their tax returns. Years went by. When the eventual IRS letter came, and we caught up the back tax returns, they lost out on three or four refunds.

Two acquaintances of mine refuse to file their tax returns because they do not want the IRS to know where they live. After looking over their W-2, which is how the IRS knows where you live, I assured them that they would get a refund. I said I’d do it for free. I suggested charity, but nope. Three years and one day after the original due date, that money becomes the property of the U.S. Treasury.

Many low and moderate income earners with children may be entitled to the Earned Income Tax Credit which is refundable; meaning in addition to your withholding. If you fit into this category you should never miss filing your tax returns timely.

If you think you might owe taxes for 2015 or 2016 there’s a chance that the IRS knows that too, and your 2014 refund might be held up until you file the 2015 and 2016 returns. If you are missing tax forms like your W-2, contact your employer, or order an IRS transcript at www.irs.gov using the www.irs.gov/individuals/get-transcript to access the Get Transcript Online Tool.

If you are just not sure, and you work, then it is in your best interest to at least arrange for a consultation from a licensed tax professional.

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