Owe IRS? Make adjustments now for 2014

Kathleen Pender for Chron.com writes: Most people want to forget about taxes after April 15, but it's a good time to fix mistakes that led to surprises on your 2012 return - or could cause surprises this year.  Tax preparers say the most common error clients make is paying too much or too little throughout the year, resulting in a big refund or tax bill when they file their returns.

Some people like getting a refund, but unless it's the only way you can save, it's a bad idea because you are making an interest free loan to Uncle Sam.

Paying too little is a bigger problem. The Internal Revenue Service expects you to pay taxes throughout the year by having them withheld from your pay or pension checks, or by making quarterly estimated tax payments.

If you don't pay enough through these methods, when you file your return you could face an underpayment penalty and a tax bill you can't easily pay.

The reasons people end up with a refund or tax bill include:

Making errors on their W-4 payroll withholding form, such as choosing the wrong filing status or number of allowances.

Not changing their withholding as a result of life changes such as marriage, divorce, death of a spouse, getting a second job, having a baby or having a child no longer qualify as a dependent.

Not making estimated tax payments, or enough payments, on income from a business.

Finding out their employer was treating them as an independent contractor (rather than employee).

Not having enough taxes withheld or paid on other nonwage income, including capital gains, dividends and interest; unemployment benefits, Social Security or pensions.

There are several ways to correct or prevent these problems.

W-4 adjustments

If you are an employee, you can increase or reduce your federal tax withholding by submitting a new W-4 form to your employer. This form tells your employer how much to withhold from your paycheck based on your individual circumstances. To get an accurate estimate, use the instructions that come with the form or an online payroll withholding calculator.

A single person with no dependents, one job and no mortgage generally would check the single box on line 3 and enter two allowances on line 5. The more allowances you claim, the less tax will be withheld.

If your refund or taxes due for 2012 was less than $1,000, you probably don't need to make any adjustment for 2013 unless your circumstances have changed, says Tom Reahard, chief executive of Symmetry Software, which runs Paycheckcity.com.

If your margin of error was $1,000 to $2,500, consider adding or subtracting one allowance. If you were off by $2,500 to $5,000, consider changing your allowances by two. This rule of thumb works for most people, not just singles, he says.

If you adjust your withholding in May, it will only be in effect for two-thirds of the year. If you are making more than about $75,000, you might need to over-correct your withholding to make up for the missing months and revise it again at the beginning of next year, Reahard says.

You can increase payroll withholding to cover the tax due on other sources of income - such as investments, a sideline business or unemployment benefits. Show the additional amount you want withheld on Line 6 of Form W-4.

Estimated tax

If are not an employee or have substantial other income or a full-time business, you generally must make estimated tax payments each quarter. The due dates for 2013 are April 15, June 17, Sept. 16 and Jan. 15, 2014.

You are expected to make four equal payments but if your income is uneven or you get a year-end bonus, you might be able to vary or skip certain payments using the IRS annualization method.

If you have a business, you will need to include self-employment tax in your estimated payments. This covers both the employer's and employee's share of Social Security and Medicare taxes. For 2013, the self-employment tax rate is 15.3 percent on the first $113,700 of net income and 2.9 percent on the amount over that.

You can ask to have federal taxes withheld from your Social Security or unemployment benefits, or to change your original withholding request, by submitting IRS Form W-4V to the payer. To change the amount withheld from pension and annuity payments, submit IRS form W-4P to the payer.

Safe harbors

If you are not sure how much your income will be this year, you can avoid an underpayment penalty for 2013 by paying at least 100 percent of your 2012 tax liability through withholding and/or estimated taxes. (This is 100 percent of what you owed for the whole year, not what you paid with your tax return). If your adjusted gross income is more than $150,000 ($75,000 if married filing separately), you must pay at least 110 percent of last year's tax liability to qualify this so-called safe harbor penalty waiver.

Johnny Yee, a coach/trainer with the IRS Volunteer Income Tax Assistance program, says one of the biggest shocks low- and moderate-income taxpayers get is receiving a 1099-MISC for non-employee compensation. "These taxpayers are considered independent contractors or self-employed. In addition to the income taxes on their earnings, they have to pay (self-employment) taxes, which could result in a very large tax liability if they did not make estimated tax payments. Many thought they were employees until their tax return is done, then the bad news."

That's why it's important for all workers to know at the beginning of the year if they are employees or independent contractors.

Employer Tax Considerations For Supreme Court’s Pending DOMA Decision / High Court considers the constitutionality of DOMA, which may create tax-refund opportunities for employers and employees before April 15.

 Mary B. Hevener, Andy R. Anderson, David R. Fuller, Patrick Rehfield for Morgan Lewis & Bockius LLP's Employee Benefits Practice writes:    On March 27, the U.S. Supreme Court heard oral arguments in United States v. Windsor to determine the constitutionality of section 3 of the Defense of Marriage Act (DOMA), which provides that the term "marriage" means only a legal union between one man and one woman as husband and wife and that the term "spouse" refers only to a person of the opposite sex who is a husband or a wife. The U.S. Court of Appeals for the Second Circuit previously held that section 3 was unconstitutional. Although a decision in the case may not be issued until the end of June 2013, employers and employees may want to consider taking steps in advance of the decision with regard to potential tax refunds.

Implications

Currently, the Internal Revenue Code of 1986, as amended (the Code), precludes same-sex spouses from receiving certain health benefits enjoyed by their opposite-sex counterparts on a tax-free basis. Consequently, employers must impute the value of employer-paid healthcare provided to an employee's nondependent same-sex spouse as additional income to an employee. Employees are subject to payroll taxes on this imputed income, commonly referred to as Federal Insurance Contributions Act (FICA) taxes, at the current rate of 7.65%, as well as federal and state income taxes. Employers are also subject to corresponding FICA payroll tax costs associated with this imputed income, at the same current rate of 7.65%. If the U.S. Supreme Court holds that section 3 of DOMA is unconstitutional, it would appear that same-sex spouses would be eligible for certain tax-free employer-paid health benefits and, as a result, employers may be entitled to a refund of their share of any FICA taxes paid and employees may be entitled to a refund of their share of both FICA taxes and income taxes.

Key Considerations

As April 15, 2013 is the deadline for filing a protective refund claim for 2009 calendar year taxpayers, employers may want to consider filing protective FICA tax-refund claims for all open payroll tax periods to cover the FICA taxes paid on this imputed income. While a ruling on the constitutionality of DOMA may not be issued until the end of June 2013, a protective refund claim simply preserves the right to a refund and extends the statute of limitations for a minimum of two years. Similar to FICA refund claims that have been filed for employers as a result of the 

United States v. Quality Stores, Inc. decision,¹ which held that severance payments paid to former employees pursuant to an involuntary reduction in force are not taxable "wages" for FICA tax purposes, the process for filing a protective claim is simple.

The decision to file for a refund will depend upon the extent to which an employer has had to impute income to employees with same-sex partners. In many instances, employers may have insufficient imputed income at issue to warrant spending the resources needed to file a FICA refund claim. Employers may also want to consider informing affected employees that they can file a protective refund claim for 2009.

Review your tax returns for planning opportunities

David T. Mayes for Seacoast Online writes: During tax filing season, our attention tends to focus on accurately reporting income and finding as many tax-reducing deductions as possible.  Once returns are filed, most of us breathe a sigh of relief and proceed to tuck our tax documents away without a second thought. Failure to perform a proper, post-filing review of your tax returns, however, can mean missing important details that can guide your financial plans for the coming year, and well into the future.

For financial planners, tax returns provide a wealth of information about an individual or couple's financial health, helping to pinpoint potential planning opportunities. Thorough review of tax returns can lead to discussions about everything from budgeting and cash flow to investment planning and management, and even estate planning. Below are a few items to look for on your own returns before you put away your files.

From a cash flow perspective, the first thing you want to evaluate is whether your withholding or estimated tax payments will be adequate to cover your tax liability for the coming year. If you received an unpleasant surprise at tax time this year and had to write a check to the IRS or the state, you will want to thoroughly review your expected income and deductions so these payments can be adjusted accordingly to avoid incurring any penalties and interest.

When evaluating your withholding, be sure to factor in major life events like changes in marital status, birth of a child, or a dependent graduating from college, all of which will impact your tax filing status and the number of tax-saving exemptions you can claim. Bonuses and exercise of stock options should also be accounted for. Your employer will withhold taxes on these income sources, but often at a lower rate than is needed to cover your ultimate tax liability. Employers generally withhold from these payments at a 25 percent rate, which may not fully cover your tax bill if your total income lands you in a higher tax bracket.

A change in your tax filing status, whether due to marriage, divorce or death of a spouse, is also a signal that other areas of your financial life need to be reviewed. These significant life events should trigger an evaluation of your insurance needs, particularly life, health and disability coverage, as well as a review of your will, trust and other estate planning documents. Beneficiary designations should also be updated to fit your new circumstances. Adding an exemption due to the birth of a child, adoption, or becoming a guardian brings budgeting for additional expenses and college savings to the forefront in any financial plan.

Expected income from interest, dividends and capital gains is another important area to review. Evaluating your overall portfolio and rebalancing with an eye toward reducing taxes is also a good strategy at this time of year. Look for any capital loss carryovers that can be used in 2013. If you will need cash from your investments, these losses will help reduce the amount of tax you pay on any gains realized in your portfolio. Evaluating your mutual fund holdings for potential capital gains distributions can also provide planning opportunities. Replacing actively-managed mutual funds with more tax-efficient investment vehicles, like index funds or exchange-traded funds, can help avoid this unanticipated income.

Finally, remember to plan for state income taxes. While interest rates are low, corporate dividend payments have been increasing. If your portfolio is positioned to capture these rising dividends, you may see an increase in your New Hampshire interest and dividends tax bill next year. Be sure your state estimated payments will be adequate to avoid penalties on your 2013 return.

Also, note that rental income and sales of rental property are subject to the New Hampshire business profits tax. Generally, rental income reported on personal tax returns falls short of the filing threshold for this tax to apply. However, when a rental property is sold for a substantial gain, this tax will come into play and the amount due can be significant (8.5 percent of the gain). Be sure to understand the filing requirement for this tax, and how the amount is calculated, before spending any of the property sale proceeds.

Senate poised to back Internet sales tax

Brendan Sasso for The Hill writes: The Senate is expected to pass legislation this week that would empower states to tax online purchases.  Senate Majority Leader Harry Reid (D-Nev.) has filed to end debate on the bill, which is called the "Marketplace Fairness Act." A key procedural vote is scheduled for Monday evening.

Although the bill looks to be on the fast-track for passage through the Senate, it faces a tougher battle in the House, where Judiciary Committee Chairman Bob Goodlatte (R-Va.) says he plans to take his time scrutinizing the legislation. Supporters argue the bill would close an unfair loophole that benefits online retailers over local brick-and-mortar stores.

“The Marketplace Fairness Act is a bill whose time has come in Congress and one that is long overdue for states, local governments and small businesses," Sen. Dick Durbin (D-Ill.), a sponsor of the legislation, said in an emailed statement, adding that he is confident the bill will clear the Senate.

Last month, 75 senators voted for a non-binding budget resolution amendment expressing support for allowing states to tax online retailers. Although the vote had no legal impact, it was an important demonstration of support for the legislation.  Under current law, states can only collect sales taxes from retailers that have a physical presence in their state. People who order items online from another state are supposed to declare the purchases on their tax forms, but few do.

The Marketplace Fairness Act would empower states to tax online purchases but would exempt small businesses that earn less than $1 million annually from out-of-state sales.

Bringing the bill directly to the Senate floor snubs Finance Committee Chairman Max Baucus (D-Mont.), whose panel has jurisdiction over the issue.  Baucus has expressed concern that the legislation would violate the rights of states that have no sales tax, like his home state of Montana.

Last month, Baucus argued in a floor speech that the proposal would "require Montana employers to spend their hard-earned dollars to enforce sales taxes in other states, with absolutely nothing in return."

"This is a clear infringement on states’ rights that we cannot stand for," Baucus declared.

Sens. Kelly Ayotte (R-N.H.) and Ron Wyden (D-Ore.), whose home states also have no sales tax, are rallying opposition to the measure.

But Sens. Mike Enzi (R-Wyo.) and Lamar Alexander (R-Tenn.), the other lead Senate co-sponsors along with Durbin, argue the bill will actually protect states' rights. They note that it would not force any state to collect taxes, and argue that states that choose to tax online purchases could lower other rates.

“Sales tax is the main source of revenue for cities, towns and counties and even the state," Enzi said in a recent statement. "It provides the money for roads, police, fire protection. If we don’t collect that revenue, they’ll have to find a new source.”

The proposal has the support of a host of GOP governors, including Chris Christie of New Jersey, Rick Snyder of Michigan and Bob McDonnell of Virginia.

But the legislation faces a long slog in the House.

In an emailed statement, Goodlatte said he is "open to considering legislation concerning this topic," but said he has concerns that would have to be addressed.

"While it attempts to make tax collection simpler, it still has a long way to go," the GOP chairman said. "There is still not uniformity on definitions and tax rates, so businesses would still be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions."  He also expressed concern that the bill could "open the door for states to tax or even regulate beyond their borders."

The House sponsors are Reps. Steve Womack (R-Ark.), Jackie Speier (D-Calif.), Peter Welch (D-Vt.) and John Conyers (D-Mich.).  A coalition of anti-tax groups, including the Heritage Foundation, Americans for Tax Reform and Americans for Prosperity, sent a letter to members of Congress on Friday, urging them to reject the legislation.

Major retail groups, however, are lobbying intensely for the legislation.

David French, a lobbyist for the National Retail Federation, said the overwhelming Senate vote for the proposal as a non-binding resolution last month has helped to build momentum in both chambers.

"The 75 votes on the budget vote got everyone's attention," French said. "I think the House is a lot more interested in taking this up and passing it than they were before that vote."

He said his group and other supporters plan to work with Goodlatte to address his concerns and said the bill has significant support among the Judiciary Committee lawmakers.

Brian Bieron, a lobbyist for eBay, which opposes the bill, criticized the Senate leaders for bypassing the committee process.

"We're in favor of actual legislative procedure and scrutiny because we think complicated issues ought to actually go through a process where serious questions are asked and maybe things get better," Bieron said.

He also argued that the bill's small business exception is too small.

"A new Internet tax bill should not penalize or harm small businesses," he said. 

Personal Finance: When tax 'help' is just a mirage

Claudia Buck for the SacBee writes: Maria Garcia never dreamed she would land in so much trouble with the IRS. But a few years ago, she found herself owing about $32,000 inback taxes – a situation she says was partly caused by a family member fraudulently using her name and Social Security number for work.

Desperate for help, Garcia turned to TaxMasters, one of the many "tax relief" companies advertising heavily on TV, radio and the Internet.

"I'd run into tax problems, and their advertising was enticing," said the Roseville resident and mother of four adult children. "Needless to say, it was a fiasco. They prey on your fears of the IRS coming and taking what little you have: my car, my wages. …"

After paying about $4,000 in upfront fees – and giving the company power of attorney to represent her before the Internal Revenue Service – Garcia thought her problems were over. Instead, they just got worse.

Months went by without any resolution. Meanwhile, the IRS tax penalties and interest kept climbing. After a year or so, Garcia owed more than $42,000.

"Every time I emailed (TaxMasters), they said: 'We're working on it.' "

In March 2012, the company, Texas-based TaxMasters Inc., filed for bankruptcy, leaving thousands of hapless taxpayers, including Garcia, in worse shape than when they started.

Every year, as the tax season closes, many Americans are unable to pay their full IRS bill or resolve their past-due obligations. These folks are often the target of "tax relief" companies.

As the economy perks up, many of these companies actually drum up more business, said Gary Almond, president of the Northeast California Better Business Bureau. "As the economy improves, some (consumers) want to resolve their past debts. They now may have equity in their home to resolve debt. Or they want to refinance their mortgage and need to settle their tax liens. Or they've become employed again and find that their wages are being garnished."

While plenty of legitimate companies offer tax help to struggling consumers, a number of unethical companies, especially those charging high upfront fees, prey on unsuspecting taxpayers.

On its website, the Federal Trade Commission warns against companies charging upfront fees while claiming they can "reduce or even eliminate" tax debts.

"The truth is that most taxpayers don't qualify for the programs these fraudsters hawk, their companies don't settle the tax debt, and in many cases don't even send the necessary paperwork to the IRS," notes the FTC's website.

In all cases, consumers should be wary of too-good-to-be-true claims.

"Some of these 'effectiveness' claims should be taken with a grain of salt. Everyone's case is different; there are no blanket guarantees," said the BBB's Almond.

In California, state Franchise Tax Board officials say free help is available, particularly for those facing financial hardships.

"Taxpayers seeking help should be aware that the same debt relief options are available, regardless if (they) use a 'tax relief' company or handle it on their own," FTB spokesman Daniel Tahara said in an email.

"When a taxpayer can't pay, we prefer to work with them to resolve the collection issue … as quickly as possible through the method best suited for their situation." (See box for details on IRS and FTB repayment options.)

Among the more notorious tax-resolution empires was run by former Sacramento attorney Roni Deutch, who famously branded herself "The Tax Lady" in late-night cable TV ads. Starting from a solo law practice in the late 1990s, Deutch eventually presided over a $25 million-a-year company with franchises and offices in 23 states.

In 2010, then-state Attorney General Jerry Brown filed a lawsuit accusing Deutch of swindling thousands of customers facing IRS tax woes. The state's lawsuit said she charged individual clients up to $4,700 for tax help but delivered little or no results. As part of the lawsuit, she was ordered to pay $435 million in refunds to unsatisfied clients.

Defiantly maintaining her innocence, Deutch eventually closed her offices and surrendered her law license in May 2011, saying she was broke and unable to keep her company going.

While companies like Deutch's and TaxMaster have been magnets for complaints, other tax-relief firms operate virtually complaint free.

"There are so many bad ones, but the credible companies are making a difference in people's lives," said Kathy Hill, founder and CEO of Tax Tiger in Sacramento, a tax resolution company with franchises in three other states.

Last year, she and others formed the National Association of Tax Resolution Companies, a Washington, D.C.-based group whose mission is to preserve the industry's reputation and protect consumers from "unfair and deceptive" tax-resolution advertising tactics.

"It's an association of the 'good guys,' " says Hill, whose firm has an A-plus rating from the BBB.

With first-time clients, Hill's company typically does a free financial consultation, looking at income, assets and monthly expenses to see what kind of repayment plan is possible.

"If they have little to no assets – no equity in a home, no 401(k), no investments, cars or real estate, they probably qualify for an 'offer in compromise," she said. A so-called OIC is where the IRS or Franchise Tax Board agrees to settle a tax debt for less than what is owed.

"The IRS hates the program because they have to settle for less than what's owed," said Hill. "But it's a blessing for those who can't pay the $50,000 or $60,000 they owe."

But it's not a quick-fix solution. Hill said it can take up to a year to get all the documentation and paperwork – everything from rental receipts to wages to car payments – submitted and approved by the IRS.

She typically charges a flat fee, anywhere from $1,000 to negotiate an IRS or FTB installment plan to $4,800 for more time-consuming offer-in-compromise settlements. Rather than an upfront fee, clients make an initial down payment, then pay the rest within 10 to 12 months.

One Tax Tiger customer, Roseville resident Jennifer Dunn, discovered a year or so ago that she was on the hook for nearly $70,000 owed to the IRS by her estranged husband's concrete business. Amid her divorce, "I tried resolving it on my own with the IRS but wasn't getting anywhere," said Dunn, who said the IRS payment plan was more than she could afford on her schoolteacher salary.

She turned to Hill, who arranged an IRS compromise settlement of $871. As part of the 2012 agreement, Dunn must file her taxes on time for the next six years, or the deal is off.

Dunn said the relief of resolving her situation is huge. "She (Hill) was a savior, I tell you."

To avoid getting defrauded by an unsavory company, do your homework, say state and local officials. Check with the Better Business Bureau or appropriate state agency for a company's record.

"With anybody who requires an upfront fee for a service they can't guarantee, run," said Mark Leyes, spokesman for the state Department of Corporations.

Currently, the IRS and its Taxpayer Advocate Service are working to resolve tax debts of former TaxMasters clients such as Maria Garcia.

Garcia, who works full time at a warehouse store, says she now wishes she had gone directly to the IRS for help. Her recent 2012 tax refund – $300 – went straight to the IRS for repayment.

Looking back, "I made mistakes," Garcia said. "I thought I could fix it on my own. And I couldn't."

NEED TAX RELIEF? HERE'S HOW TO GET IT

INTERNAL REVENUE SERVICE

Under its "Fresh Start" program, delinquent taxpayers can request installment payments or an "offer-in-compromise" plan to wipe out existing tax debts. The IRS expanded its program in 2010, making it easier for more people to qualify.

Installment payments are generally available for individuals with up to $50,000 to repay. If approved, you repay in regular monthly payments, starting as low as $25.

For OICs, taxpayers must show they have no way of repaying their debt in a reasonable amount of time, based on their income and assets. In most cases, the tax debt must be $50,000 or less. Taxpayers offer a settlement amount, which is reviewed by the IRS.

The IRS has also raised the debt amount – to $10,000 – that triggers a lien for unpaid back taxesbeing placed on a person's home or property.

For details on resolving IRS debts, go to: www.irs.gov. Or call (800) 829-1040 (individuals) or (800) 829-4933 (businesses).

Maria Garcia never dreamed she would land in so much trouble with the IRS. But a few years ago, she found herself owing about $32,000 inback taxes – a situation she says was partly caused by a family member fraudulently using her name and Social Security number for work.

Desperate for help, Garcia turned to TaxMasters, one of the many "tax relief" companies advertising heavily on TV, radio and the Internet.

"I'd run into tax problems, and their advertising was enticing," said the Roseville resident and mother of four adult children. "Needless to say, it was a fiasco. They prey on your fears of the IRS coming and taking what little you have: my car, my wages. …"

After paying about $4,000 in upfront fees – and giving the company power of attorney to represent her before the Internal Revenue Service – Garcia thought her problems were over. Instead, they just got worse.

Months went by without any resolution. Meanwhile, the IRS tax penalties and interest kept climbing. After a year or so, Garcia owed more than $42,000.

"Every time I emailed (TaxMasters), they said: 'We're working on it.' "

In March 2012, the company, Texas-based TaxMasters Inc., filed for bankruptcy, leaving thousands of hapless taxpayers, including Garcia, in worse shape than when they started.

Every year, as the tax season closes, many Americans are unable to pay their full IRS bill or resolve their past-due obligations. These folks are often the target of "tax relief" companies.

As the economy perks up, many of these companies actually drum up more business, said Gary Almond, president of the Northeast California Better Business Bureau. "As the economy improves, some (consumers) want to resolve their past debts. They now may have equity in their home to resolve debt. Or they want to refinance their mortgage and need to settle their tax liens. Or they've become employed again and find that their wages are being garnished."

While plenty of legitimate companies offer tax help to struggling consumers, a number of unethical companies, especially those charging high upfront fees, prey on unsuspecting taxpayers.

On its website, the Federal Trade Commission warns against companies charging upfront fees while claiming they can "reduce or even eliminate" tax debts.

"The truth is that most taxpayers don't qualify for the programs these fraudsters hawk, their companies don't settle the tax debt, and in many cases don't even send the necessary paperwork to the IRS," notes the FTC's website.

In all cases, consumers should be wary of too-good-to-be-true claims.

"Some of these 'effectiveness' claims should be taken with a grain of salt. Everyone's case is different; there are no blanket guarantees," said the BBB's Almond.

In California, state Franchise Tax Board officials say free help is available, particularly for those facing financial hardships.

"Taxpayers seeking help should be aware that the same debt relief options are available, regardless if (they) use a 'tax relief' company or handle it on their own," FTB spokesman Daniel Tahara said in an email.

"When a taxpayer can't pay, we prefer to work with them to resolve the collection issue … as quickly as possible through the method best suited for their situation." (See box for details on IRS and FTB repayment options.)

Among the more notorious tax-resolution empires was run by former Sacramento attorney Roni Deutch, who famously branded herself "The Tax Lady" in late-night cable TV ads. Starting from a solo law practice in the late 1990s, Deutch eventually presided over a $25 million-a-year company with franchises and offices in 23 states.

In 2010, then-state Attorney General Jerry Brown filed a lawsuit accusing Deutch of swindling thousands of customers facing IRS tax woes. The state's lawsuit said she charged individual clients up to $4,700 for tax help but delivered little or no results. As part of the lawsuit, she was ordered to pay $435 million in refunds to unsatisfied clients.

Defiantly maintaining her innocence, Deutch eventually closed her offices and surrendered her law license in May 2011, saying she was broke and unable to keep her company going.

While companies like Deutch's and TaxMaster have been magnets for complaints, other tax-relief firms operate virtually complaint free.

"There are so many bad ones, but the credible companies are making a difference in people's lives," said Kathy Hill, founder and CEO of Tax Tiger in Sacramento, a tax resolution company with franchises in three other states.

Last year, she and others formed the National Association of Tax Resolution Companies, a Washington, D.C.-based group whose mission is to preserve the industry's reputation and protect consumers from "unfair and deceptive" tax-resolution advertising tactics.

"It's an association of the 'good guys,' " says Hill, whose firm has an A-plus rating from the BBB.

With first-time clients, Hill's company typically does a free financial consultation, looking at income, assets and monthly expenses to see what kind of repayment plan is possible.

"If they have little to no assets – no equity in a home, no 401(k), no investments, cars or real estate, they probably qualify for an 'offer in compromise," she said. A so-called OIC is where the IRS or Franchise Tax Board agrees to settle a tax debt for less than what is owed.

"The IRS hates the program because they have to settle for less than what's owed," said Hill. "But it's a blessing for those who can't pay the $50,000 or $60,000 they owe."

But it's not a quick-fix solution. Hill said it can take up to a year to get all the documentation and paperwork – everything from rental receipts to wages to car payments – submitted and approved by the IRS.

She typically charges a flat fee, anywhere from $1,000 to negotiate an IRS or FTB installment plan to $4,800 for more time-consuming offer-in-compromise settlements. Rather than an upfront fee, clients make an initial down payment, then pay the rest within 10 to 12 months.

One Tax Tiger customer, Roseville resident Jennifer Dunn, discovered a year or so ago that she was on the hook for nearly $70,000 owed to the IRS by her estranged husband's concrete business. Amid her divorce, "I tried resolving it on my own with the IRS but wasn't getting anywhere," said Dunn, who said the IRS payment plan was more than she could afford on her schoolteacher salary.

She turned to Hill, who arranged an IRS compromise settlement of $871. As part of the 2012 agreement, Dunn must file her taxes on time for the next six years, or the deal is off.

Dunn said the relief of resolving her situation is huge. "She (Hill) was a savior, I tell you."

To avoid getting defrauded by an unsavory company, do your homework, say state and local officials. Check with the Better Business Bureau or appropriate state agency for a company's record.

"With anybody who requires an upfront fee for a service they can't guarantee, run," said Mark Leyes, spokesman for the state Department of Corporations.

Currently, the IRS and its Taxpayer Advocate Service are working to resolve tax debts of former TaxMasters clients such as Maria Garcia.

Garcia, who works full time at a warehouse store, says she now wishes she had gone directly to the IRS for help. Her recent 2012 tax refund – $300 – went straight to the IRS for repayment.

Looking back, "I made mistakes," Garcia said. "I thought I could fix it on my own. And I couldn't."

NEED TAX RELIEF? HERE'S HOW TO GET IT

INTERNAL REVENUE SERVICE

Under its "Fresh Start" program, delinquent taxpayers can request installment payments or an "offer-in-compromise" plan to wipe out existing tax debts. The IRS expanded its program in 2010, making it easier for more people to qualify.

Installment payments are generally available for individuals with up to $50,000 to repay. If approved, you repay in regular monthly payments, starting as low as $25.

For OICs, taxpayers must show they have no way of repaying their debt in a reasonable amount of time, based on their income and assets. In most cases, the tax debt must be $50,000 or less. Taxpayers offer a settlement amount, which is reviewed by the IRS.

The IRS has also raised the debt amount – to $10,000 – that triggers a lien for unpaid back taxesbeing placed on a person's home or property.

For details on resolving IRS debts, go to: www.irs.gov. Or call (800) 829-1040 (individuals) or (800) 829-4933 (businesses).

Comment

Daniel CohenCollapse

Perhaps more of Kathy HIll's quotes were edited out, but what she said about qualifying for an Offer in Compromise is very misleading. She said, "If they have little to no assets – no equity in a home, no 401(k), no
investments, cars or real estate, they probably qualify for an 'offer in
compromise." That is simply not true.

The IRS looks at the taxpayer's income and allowable monthly expenses (many expenses you or I would think are reasonable are not allowable by IRS rules). If the taxpayer has income in excess of the allowable expenses, the taxpayer may very well not qualify for an OIC or have an OIC accepted that he/she can't afford to pay. For example, if the IRS is willing to accept a settlement of $20,000 on a tax debt of $80,000, that is a big savings, but the taxpayer has to have the $20,000 to satisfy the debt.
Read more here: http://www.sacbee.com/2013/04/...

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Never throw away your tax returns / Why you may need those old 1040s someday

Eva Rosenberg for MarketWatch.com writes: “Man forced to put off retirement for two years due to lost tax records.” Could that happen to you? Yes, it could. Or worse.  One of the most frequent questions that comes to TaxMama is — Can I throw out my tax records? Really, how long must I keep them? Being a pack rat, TaxMama’s preferred response is, hold on to everything forever. But were you to follow that advice, you’d be living with a mountain of paperwork, files and junk, like Monk’s hoarder brother. Clearly, this is not a good solution.

What are reasonable guidelines to avoid hoarding, while protecting yourself?

According to the IRS, individual taxpayers should keep returns for three to six years. Non-filers and fraudsters should keep their records forever. (See the IRS guidelines on record retention.)

The IRS is wrong about this.

Let’s look at the case of David, a teacher. He is a responsible and ethical person who always files his tax returns on time — and correctly. He should be in that three-to-six-year category. Or so he thought.

Recently, David decided to clean out his old files and shred all his un-needed records. He kept the last decade’s worth. No problem, right?

Right. Until he pulled his Social Security record to look up his retirement benefits. He found they didn’t show enough quarters of work. David was short two years. The Social Security Administration (SSA) was missing data from years when he had a job outside the school district.

David started working in his teens. Surely, he has 40 credits (or 10 years) in the system? Yes, he does. But having gotten rid of his older tax returns, he can no longer prove it. David asked the IRS for copies of certain missing years, dating back to about 20 years ago. Not only did the IRS not have copies, but they didn’t even have electronic transcripts going that far back.

What can David do? Not a thing. He accepted this philosophically, knowing he must work two more years to build up his benefits.

How can you avoid this problem? It’s easy. Never, ever throw out a tax return. The tax returns themselves don’t take up much space. If you need to thin out the files, you could probably shred the back up — but hold on to the W-2s and 1099s. They may turn out to be valuable.

This lesson is especially important to teachers and school or college administrators. Although your district or union may have opted out of the Social Security system in favor of its own retirement system, you may have worked for other employers or operated your own business to build up Social Security benefits. Pull your own SSA records immediately and make sure they are correct — or to see how many quarters you still need in order to collect benefits.

So, reason No. 1 to keep your tax returns forever is — to protect your Social Security or retirement benefits.

Reason No. 2 — You bought things. Whether investments or assets and equipment for your business, keep those purchase documents for at least six years after you sell those assets, or finish rolling them over (for those indulging in tax-free exchanges). If you’re ever audited during the time you own those assets, the IRS can request the original purchase documents — even if the purchase was 10 years ago. Why? It’s still on your tax return as a depreciable asset; or you reported the basis when you sold the asset.

Reason No. 3 — You move around often, or have had income in other states — either via a job or an investment that issues a K-1. A heart-wrenching problem TaxMama® often hears about is people who suddenly find their IRS refunds being grabbed by other states (via the IRS collection system) with no apparent warning. The taxpayer had no idea they owed any money. In some cases, the tax debt might be 10 or 20 years old.

How can the state get away with this? As with the IRS, the state tax system has no statute of limitations on audit or collections for tax returns never filed. If you don’t file and tell them that you don’t owe money, they will assume you do. The state then creates an assessment, which can sit on the books for years waiting for you to respond (if they know where to send correspondence). Suddenly, someone clever looking to raise easy money for the state turns all those delinquent balances over to the IRS — and your refund gets hit.

In fact, we’re at the beginning of one of these fights right now. Steve just got a notice from an eastern state claiming that he owes tax on about $4,000 worth of income from a 2010 K-1. The state saw $4,000 worth of investment income on a K-1 and ignored the $8,000 worth of business losses on the same page. This will be resolved easily — because we have the records to prove his losses. Without them? He’d have to pay taxes, a variety of penalties, and interest on the whole shebang.

If a state comes after you, you may be able to prove you don’t owe them money, too. How? By using your tax return copy for the year in question, you can prepare a tax return for the state collecting from you. You probably have enough deductions or write-offs to wipe out the taxes the state thinks you owe. You may also be able to get the benefit of a tax credit for taxes paid to another state. (Though that may only be available if you file a resident tax return.)

There’s inexpensive tax software back through 2000 at TaxACT. Anything older than that — you must do manually or find a nice, gray-haired tax professional who’s been in business for 20 or 30 years and still keeps the discs (and possibly a DOS computer) to run the software.

Reason No. 4 — Insurance records. The policy may be paid in full, so you’ve forgotten about it. But should you get hurt, disabled or die, it would be really valuable to your family. Companies change hands and their policy rules change. If you have the original documents, you can prove they owe you more than they would currently pay out.

Reason No. 5 — IRA and retirement plan contributions. You get two benefits for keeping these records. First, your state may have had a lower deduction for your contributions. That means, part of your distribution won’t be taxable for state purposes. Second, you may have made non-deductible contributions for federal (and state) purposes in some years. So part of your distribution won’t be taxable for the IRS either.

And of course, there is that universal law — the minute you throw something out that you haven’t looked at or touched in decades — you will need it desperately.

Americans in Canada: Tax problems grow

Jamie Golombek for the Financial Post writes:  If you’re one of the estimated one million U.S. citizens living in Canada, you may have been warned by your U.S. tax advisor not to buy Canadian mutual funds. Of course, this assumes that you are filing a U.S. tax return each year.

The United States is the only country that requires its citizens to file a tax return and report their worldwide income, no matter where in the world they might live or how many other citizenships they might hold. This differs from most other countries, like Canada, which bases its taxation system primarily on residency.

The problem with Canadian mutual funds for U.S. tax filers is that under U.S. tax law, they are considered to be Passive Foreign Investment Companies (PFICs) and as such, are governed by draconian U.S. tax rules and convoluted and complex annual reporting.

For example, under the PFIC rules, investors who dispose of Canadian mutual funds or who receive certain types of distributions from these funds are taxed on their U.S. returns at the rates that apply to earned income as opposed to the preferential tax rates that apply to capital gains. In addition, depending on the timing of the distributions and/or dispositions, punitive interest charges can also be imposed.

The PFIC rules themselves are extremely complex and require specialized U.S. tax reporting including the filing of Form 8621, “Information Return by a Shareholder of a Passive Foreign Investment Company” for each PFIC owned. The form is three pages long and has six parts. According to the form’s instructions, the estimated time to properly comply with the PFIC rules is over 31 hours, which includes: 11 hours to learn about the law or form, 15 hours or recordkeeping and just over 20 hours to prepare and send in the form. And that’s just for one PFIC.

It’s therefore no wonder U.S tax preparers are discouraging their clients from owning Canadian mutual fund in the first place, since it’s challenging for them to recoup the fees they would have to charge their clients for the professional time involved to do the recordkeeping and fill out the forms necessary to comply with the U.S. laws.

This past week, the Investment Funds Institute of Canada (IFIC) which represents a large segment of Canada’s investment funds industry, called on the U.S. government to exclude Canadian mutual funds from the PFIC Rules.

Its submission was made to two Congressional committees: the Financial Services Working Group Committee on Ways & Means and the International Tax Reform Working Group.

In its submission, IFIC suggested that an administrative solution could be negotiated to exclude Canadian mutual funds from the PFIC Rules through “exchanging letters of understanding” between the Canada Revenue Agency and the Internal Revenue Service.

As IFIC president and CEO Joanne De Laurentiis stated, “There is sufficient similarity between the treatment (for income tax purposes) of mutual funds in Canada and the U.S. to support the exclusion of Canadian mutual funds from the PFIC rules.”

It's Not Too Late to Claim Credit

Tom Herman for the Wall St. Journal writes: If you aren't required to file a federal income-tax return, why bother?  Answer: You might be missing out on a valuable federal program designed to help the working poor.

Welcome to the earned income tax credit, or EITC. It's known as a "refundable" credit because, unlike many other tax breaks, you can get money from Uncle Sam even if you don't owe a penny in tax.

But to collect, you have to file a tax return. Even though April 15 has come and gone, it isn't too late to act.

The amount of the credit varies depending on your income, family size and "filing status" (such as single or married filing jointly). The average credit amount last year was around $2,200, the Internal Revenue Service says.

More than 27 million workers and families received a total of nearly $62 billion for the 2011 tax year. Even so, about one in five of those eligible miss out on this credit, according to IRS estimates.

Some people may have overlooked the credit when they filed because they weren't aware of its existence or couldn't understand the rules. Or perhaps they didn't think of it because they weren't obligated to file. For help in checking on eligibility, go to the IRS website (www.irs.gov) and look for "EITC Assistant."

When checking to see whether you might be eligible, don't focus only on last year. You might also have time to file for a prior year that you overlooked. To file an "amended" return, use Form 1040X. Generally, you have to file Form 1040X to claim a refund within three years of the date you filed your original return.

The IRS site also has details on free-filing options. Look for "Free File," free tax preparation sites (or call 800-906-9887), or IRS taxpayer assistance centers.