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Four Things You Need To Know If You Have Unfiled Tax Returns

February 18, 2015 by admin

Steven A. Leahy
IRS – Four Things You Need To Know If You Have Unfiled Tax Returns

By Steven A Leahy

Many of my IRS clients are “Nonfilers,” they have unfiled tax returns. Some of my clients have not filed for multiple years – some, for many prior years. Sometimes, they take action because they (or a friend) heard my radio show or commercial. Most, however, wait until the IRS sends a Notice of Intent to Levy, or worse, Notice of Levy to their employer or bank. If you have unfiled tax returns there are four things you need to know.

First, you need to know that not filing your tax returns is a crime, punishable by up to one year in prison for each year of unfiled tax return. Fortunately, the IRS doesn’t put a lot of taxpayers in jail for not filing tax returns. But, they do put some in jail. For example, Wesley Snipes was recently released after serving 3 years for failure to file. There is a statute of limitations for unfiled tax returns. The IRS will not be able to bring criminal charges after 6 years from the date the taxes are due. So, 2007 taxes that came due on April 15, 2008 are now beyond the statute, and the IRS can’t bring criminal action against you for unfiled tax returns 2007 and before. But, they still can collect any tax due.

Second, you should know that the IRS may complete your tax returns for you if you fail to file your tax return (it’s a penalty not a service). These are known as Substitute for Returns (SFR). When the IRS prepares your SFR, they will not include any deductions or exemptions. The result will be an inflated tax obligation. Penalties and interest are calculated based on the tax obligation. So, if the tax obligation is greatly inflated, so too will the penalties and interest. Don’t forget, the interest is calculated from the date the tax was due. So, the penalties and interest can add up to amount greater than the inflated tax obligation.

Third, the IRS will only allow you to recover any tax refund for 3 years. So, if you have any refund older than 3 years, the IRS will not refund OR credit your tax obligation for those years. For example, suppose a taxpayer hasn’t filed a return for years 2009 – 2014. Further, suppose, once the returns are complete, the taxpayer is due a refund for the years 2009 – 2011, but incurs an obligation for the most recent years 2012 – 2014. The refunds from the first three years will not be used to set off the tax obligations of the past three years. Those refunds are gone.

Finally, you need to know that, should the IRS levy your bank account or garnish your wages, it will be difficult to stop the levy before real damage is done. This is true because, generally, in order to stop a levy, the taxpayer must be in compliance. Compliance requires the taxpayer to have previous tax returns filed BEFORE the IRS will agree to stop taking your assets. If there are years of unfiled tax returns, it will take some time to get into compliance. Finding the records to prepare older returns can be a real problem.

There is some good news. Because the statute of limitations is six years, a taxpayer may not have to file all of their unfiled tax tax returns. In fact, it may be the worst thing you can do, because you may be creating a greater tax obligation then necessary. Remember, these are the older returns, so if a tax obligation is created, they will bring along a large penalty and interest burden as well.

More good news – if the IRS filed your tax returns for you (SFR) you can file the proper return to decrease you tax obligation. I have helped clients with more than $100,000.00 in tax obligations that disappeared when the corrected tax returns were filed and the SFR’s nullified.

So, if you have unfiled tax returns – Take action today! You should work with a local law firm. Call Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation. (312) 664-6649.

What is a 1099-A?

February 16, 2015 by admin

Steven A. Leahy
What is a 1099-A?

By Steven A Leahy

For the last several weeks we have been discussing 1099-Cs on The IRS Radio Hour. Any discussion of 1099-Cs naturally leads to the question – What is a 1099-A? This post will address that question.

As we discussed, 1099-C is a tax record sent by financial institutions to debtors when the lender forgives or cancels a debt in excess of $600.00. A 1099-A Acquisition or Abandonment of Secured Property is a related document for “[c]ertain lenders who acquire an interest in property that was security for a loan or who have reason to know that such property has been abandoned.” Generally, a taxpayer will receive this form in the mail after losing a property to foreclosure, or an automobile to repossession. Often, a taxpayer will receive both a 1099-A and 1099-C.

There is a lot of confusion out there on exactly which tax document a lender should send out. That’s why there isn’t consistency. Some lenders will send out a 1099-A after a foreclosure; others will send out a 1099-C; still, others will send out both forms, just to cover themselves. Some lenders may send a 1099-A first, to report the foreclosure to the IRS, and a 1099-C later, to document the decision to cancel the debt. It is vital that these documents are treated correctly for tax preparation purposes. A mistake may result in tens of thousands of dollars in IRS liabilities.

1099-As contain three important pieces of information, found in Boxes 2, 4 and 5. First, Box 2 reports the principal loan balance. Box 4 reports the fair market value (FMV) of the foreclosed property (generally, the price the house sold for at the foreclosure auction). Finally, Box 5 reports whether the taxpayer is personally liable for repayment: recourse vs. non-recourse. The very same exceptions and exclusions available for 1099-C income, are available for 1099-A income. Notably, Title 11 (bankruptcy), “Insolvency Exclusion,” and the exclusion offered by the Mortgage Forgiveness Debt Relief Act (MFDRA).

Some important information regarding the tax implications are not included on Form 1099-A. If the property that was lost was an investment property, rather than the taxpayers principle residence, the taxpayer will also need to supply the basis for the property ((Cost + improvements) – depreciation) in order to calculate the tax implications. Investment property losses may be fully deductible.

The key to excluding or exempting 1099-C debt forgiveness, and 1099-A property abandonment, from taxable income lies in tax preparation. If a taxpayer qualifies for an exception or exemption and fails to prepare the appropriate IRS forms, the IRS will complete an examination and assess a deficiency for that tax year. In addition to attaching the 1099-A or 1099-C to the taxpayer’s tax return, often IRS Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness is also required. Form 982 is used to determine the amount of discharged indebtedness that can be exempted or excluded from gross income.

If you are considering hiring a tax professional to complete your 2014 tax return, consider giving Opem Tax Resolutions and The Law Office of Steven A. Leahy, PC a call. We prepare old unfiled tax returns, as well as current returns. So, if you are a number of years behind in your filing, we can help get you in compliance with the IRS. Call (312) 664-6649 today and ask Bonnie to set up a time to talk me about your tax returns.

If you have an ongoing IRS problem – installment agreement, recent offer-in-compromise or currently not collectible status I recommend the IRS Protection Plan offered by Opem Tax Resolution and the Law Office of Steven A. Leahy, PC. This program anticipates the tax compliance requirements including, timely tax preparation, on-going IRS monitoring, resolution of IRS actions (cancellation of installment agreements or currently not collectible status and defaulting an offer in compromise). In addition, developing a relationship with a tax team will give you access to tax planning to avoid IRS problems in the future and minimize your tax burden.

What is a 1099-C?

February 9, 2015 by admin

Steven A. Leahy
What is a 1099-C?

By Steven A Leahy

Last week on The IRS Radio Hour, in the question segment, I answered a question about 1099-Cs. I realized that there were a lot more questions about 1099-Cs, so this post will address some of those questions.

A 1099-C is a tax record sent by financial institutions to debtors when the lender forgives or cancels a debt in excess of $600.00. The IRS views the cancelation of debt as a taxable event. That’s right. If a creditor forgives a debt you owed because you could not afford to pay the debt, the IRS may tax you on the forgiven amount. In fact, even if the amount forgiven is less than $600.00, the taxpayer is expected to report that amount as income – even though the financial institution is not required to send a 1099-C.

Generally, taxpayers are to report the 1099-C amount as income. There are, however, certain exceptions and exclusions that often protect the taxpayer from paying additional tax. There are 6 exclusions or exemptions. For example, if a taxpayer has filed for protection under Title 11 (bankruptcy) the discharged debts are not considered taxable income. The “Insolvency Exclusion” is another good example that will protect some taxpayers from 1099-C incomes. To determine if a taxpayer is insolvent at the time the debt is forgiven one looks at assets and liabilities. If liabilities are greater than assets, the taxpayer is technically insolvent. The Insolvency Exclusion only protects a taxpayer to the extent of their insolvency.

In my practice, I see forgiven debt most often in connection to foreclosures or short-sales. After a short-sale or foreclosure sale, the mortgage company often forgives the balance and issues a 1099-C (or a 1099-A, but we will leave that for another blog post). The homeowner is often surprised to receive this tax document and wonders how this will affect them.

In addition to the exclusions mentioned above, Congress passed the Mortgage Forgiveness Debt Relief Act (MFDRA) in 2007. MFDRA has been extended a number of times, most recently on December 16, 2014. MFDRA expired at the end of 2013, so the most recent extension came at the 11th hour and was retroactive – but does not extend beyond the 2014 tax year. That means it will take another act of Congress to extend the Act into 2015 and beyond. Generally, the MFDRA allows a taxpayer to exclude the 1099-C forgiven debts from income if the forgiven debt (up to $2 million) relates to the taxpayers principal residence, regardless of insolvency.

The key to excluding or exempting 1099-C debt forgiveness from taxable income lies in tax preparation. If a taxpayer qualifies for an exception or exemption and fails to prepare the appropriate IRS forms, the IRS will complete an examination and assess a deficiency for that tax year. I have a client that received a 1099-C for a foreclosed property. She used one of the big chain tax preparation companies. The 1099-C was not properly accounted for and they failed to file Form 982 – Reduction of Tax Attributes Due to Discharge of Indebtedness. The IRS conducted an examination (audit) and assessed more than $100,000.00 in additional taxes, penalties and interest. All of this could have been avoided if she had sought advice from a tax professional versed in these matters.

If you have a ongoing IRS problem – installment agreement, recent offer-in-compromise or currently not collectible status I recommend the IRS Protection Plan offered by Opem Tax Resolution and the Law Office of Steven A. Leahy, PC. This program anticipates the tax compliance requirements including, timely tax preparation, on-going IRS monitoring, resolution of IRS actions (cancellation of installment agreements or currently not collectible status and defaulting an offer in compromise). In addition, developing a relationship with a tax team will give you access to tax planning to avoid IRS problems in the future and minimize your tax burden.

Three Tax Preparer Scams

February 4, 2015 by admin

Steven A. Leahy
Three Tax Preparer Scams

By Steven A Leahy

My last several posts addressed who should and shouldn’t prepare their own tax returns. Remember, for the majority of people, preparing your own return makes sense; it may save you money, allows you to maintain control and may increase your understanding of your financial situation. But preparing a return isn’t right for everyone.

In my office we have run into three common tax preparer scams that can raise red flags with the IRS. First, the most common: promises of large refunds. Second, the 1099 OID scam and finally, the ID theft scam.

The most popular tax preparation scam involves the tax preparer promising larger returns than other tax preparers. Many of these preparers charge a very high fee, or a percentage of the refund. Both of these fee structures should alert you that something is amiss. They achieve these high refunds by playing with your tax return numbers. They may include income that was never earned, claiming expenses you did not pay, or otherwise manipulating the tax return to qualify for earned income tax credits you are not qualified for.

The second scam involves filing false 1099 OID (Original Issue Discount) forms. The scam artist convinces the taxpayer that there is a secret fund held by the Treasury Account for an amount equal to the face amount of any debt they hold, including credit card and mortgage debt. To lend legitimacy to the scam, the scammer contends the government went bankrupt in 1933 and made all Americans chattel of the government’s creditors at birth, evidenced by their birth certificate. The scammer alleges that the government guarantees all your debts and the taxpayer need only apply through their tax return to access the hidden account.

By completing their tax returns and including 1099 OID for the full amount of all debt, including tax debt, sometimes amounting to hundreds of thousands of dollars. The real problem with this scam is – it works! The IRS sends the taxpayer a large refund check. The check tends to confirm the legitimacy of the scam. After much of the funds have been spent, the IRS comes looking to the taxpayer and the funds received from the fraudulent scheme.

Taxpayers will be on the hook for these first two scams, because they sign the return under penalty of perjury. These scams can lead to significant penalties and interest, and the possibility of criminal prosecution. So, before you sign a return, review your tax return, ask questions about entries you don’t understand – and NEVER sign a blank return. A reputable tax preparer will sign the tax return and provide you a copy.

Finally, let’s review identity theft and tax return preparation. There are two forms of identity theft to worry about: tax fraud through the use of identity theft and the tax return preparer using your personal information after preparing your tax return. Tax fraud through the use of identity theft tops the IRS’s list of top tax scams. This type of fraud occurs when someone uses a taxpayer’s personal information to fraudulently file a tax return and claim a refund.

The second type of identity theft is when your tax preparer uses your personal information to obtain credit in the taxpayer’s name, after the taxpayer willing provided the tax preparer with all the information they need to commit fraud. The IRS has more than 3,000 employees working on identity related cases.

The lesson here is to know your tax return preparer. If you are considering hiring a tax professional to complete your 2014 tax return, consider giving Opem Tax Resolutions and The Law Office of Steven A. Leahy, PC a call. We prepare old unfiled tax returns, as well as current returns. So, if you are a number of years behind in your filing, we can help get you in compliance with the IRS. Call (312) 664-6649 today and ask Bonnie to set up a time to talk me about your tax returns.

Foreclosure Defense – Deficiency Protection II

January 15, 2015 by admin

Steven A. Leahy
Foreclosure Defense – Deficiency Protection II

By Steven A Leahy

Foreclosure is the process necessary for a mortgage lender (i.e. mortgagee) to take possession of a property because the borrower (i.e. mortgagor, homeowner) defaults on a contractual obligation to the mortgage lender, usually a default in payments. In Illinois, Mortgage foreclosures are governed by the Illinois Mortgage Foreclosure Law (IMFL) 735 ILCS 5/15-1101 et seq. (2013).

Illinois is a recourse state. The IMFL allows the public sale of property to pay a debt. If the public sale of the property does not generate enough money to pay off the borrower’s obligation to the mortgage company, the remaining balance is defined as a deficiency. Recourse loans allow the mortgage company to hold the homeowner (borrower) personally liable should the sale result in a deficiency.

If the homeowner is unable, or unwilling, to resolve the foreclosure case through reinstatement, redemption, litigation, loan modification, or Chapter 13 bankruptcy, the homeowner should concentrate on protecting themselves from a deficiency. There are at least six (6) ways to avoid a deficiency: Short Sales, Deed-in-lieu of foreclosure, consent foreclosure, shortened redemption, In rem judgment, & bankruptcy. This article will discuss consent foreclosures, shortened redemption and In rem judgments.

These three options are addressed in the IMFL: consent foreclosure, shortened redemption, and In Rem Judgment. Each protects the homeowner from a deficiency judgment. First, a consent foreclosure is an agreement between the parties to end the litigation by agreement. The homeowner agrees to a judgment and IMFL provides in return the mortgage company will “waive any and all rights to a personal judgment for deficiency against the mortgagor and against all other persons liable for the indebtedness or other obligations secured by the mortgage.”

Second, a shortened redemption period may be a remedy to protect the homeowner. The parties can agree that “the value of the mortgaged real estate as of the date of the judgment is less than 90% of the amount specified” and shorten the redemption period to 60 days rather than 3 months. If this order is entered, again, the mortgage company “waives any and all rights to a personal judgment for a deficiency against the mortgagor and against all other persons liable for the indebtedness or other obligations secured by the mortgage.”

Finally, an In Rem judgment is a judgment against the property, rather than the individual. “In rem” is a Latin term that means “against or about a thing.” So the judgment is directed toward the property, rather than toward a particular person (in personam – directed toward a particular person). If the judgment does not name a particular person, the mortgage company can’t collect the deficiency from the homeowner.

There are several reasons why one of these options may be used rather than a short sale or deed-in-lieu. First, if there are additional liens on the property, the mortgage company must go through with the foreclosure process in order to remove those liens from title. Because all parties are named in a foreclosure action, a judgment would be effective against all lien holders, thereby giving the buyer at auction (often the mortgage company) a clear title. In a short sale or deed-in-lieu, the lien holders can hold up the transfer and seek compensation for releasing the lien.

Another reason why one of these options may be desirable from the homeowner’s perspective is because the homeowner can avoid an investigation into their finances. If the homeowner has some assets that they prefer not to disclose, these judgments allow them to escape the deficiency to the mortgage company and maintain their privacy.

If you are facing foreclosure, you should take action. You need an attorney to help you sort through your options and choose the best remedy. Never hire a firm to help you with your foreclosure unless the firm is experienced in helping homeowners with all the possible remedies, loan modification, short-sales, deed-in-lieu, consent foreclosures, and bankruptcy. Before you do anything, you should give me a call. We can discuss all your options. Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.

Four Things You Need To Know If You Have Unfiled Tax Returns

What is a 1099-A?

What is a 1099-C?

Three Tax Preparer Scams

Foreclosure Defense – Deficiency Protection II

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