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Who Should Not Prepare Their Own 2014 Tax Returns

by

Steven A. Leahy
Who Should Not Prepare Their Own Tax Returns

By Steven A Leahy

My last post was directed to those who should prepare their own 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.

For those who own property or investments, own a business, are recently married, divorced or had a child, or if you aren’t a “numbers” person, aren’t interested in keeping up with changes in tax law, don’t understand the tax jargon on irs.gov, and prefer not to spend your free time working for the IRS, it makes sense to hire a tax professional to help you with your annual tax return.

Preparing your own taxes costs less up-front. According to the IRS, the average taxpayer filing a 1040 form (68% of all filiers) will spend 22 hours filing their taxes. It breaks down like this: form completion (4 hours), record keeping (10 hours), tax planning (3 hours), form submission (1 hour), “other” (3 hours). The average cost to hire a tax professional to prepare 1040 tax return is around $250.

Generally, I recommend tax preparation to avoid a tax audit. Having a professional prepare your tax return is not a guarantee you will not be audited – but it does cut down the odds. The IRS looks for “red flags.” Tax professionals can reduce, or eliminate red flags. Also, having a professional prepare your tax returns insulates you from the IRS. We prepare tax returns, but I always have a independent third party prepare my personal tax return and the business tax returns.

Those who are in an ongoing installment agreement, currently not collectible or were recently granted an offer-in-compromise should do all they can to ensure that there tax returns are prepared and filed on time. If the filing the return is delayed for ANY reason, you may find the agreement cancelled. Yes, the IRS can even rescind an accepted offer-in-compromise after the fact.

When the IRS accepts an offer in compromise, part of the agreement requires the taxpayer to remain in compliance for at least the next five years. That means the taxpayer must file all tax returns and pay all taxes due on time for the next five years. If the IRS calls an offer in compromise in default, the IRS will begin collecting what was originally owed.

Many who fall behind on their taxes are procrastinators at heart. Therefore, those who have a history of IRS problems should not wait until April to begin thinking about preparing their tax returns. The consequences are just too great. Get in front of the problem.

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.

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.

Should I Prepare My Own 2014 Tax Return

by

Steven A. Leahy
Should I Prepare My Own 2014 Tax Return

By Steven A Leahy

Filing your own returns sound simple enough. There are plenty of software packages out there to help – some are even free. If you are a W-2 employee without deductions, who generally receives a refund from the IRS each year, preparing your own tax return probably makes sense. The three best reasons to prepare your own taxes are; 1. Saves money; 2. Control; 3. Understanding.

First, preparing your own tax returns will save you money. Traditional software and online tax programs make doing your own taxes much easier. The IRS “freefile” program is also available. The IRS freefile program partners with software companies to provide free tax preparation software and e-filing to those who earn less than $60,000.00. Those you make more than $60,000.00 can use Free File Fillable Forms. However, taxpayers should know how to prepare their own tax returns in order to use Free File Fillable Forms. Free File doesn’t include state tax returns. But 7 States don’t have a state income tax, and 21 states and Washington D.C. have their own Free File program. Nearly 43 Million people have used Free File. Not all forms and schedules are available through Free File, so it isn’t right for everyone.

Software packages like TurboTax and TaxAct are also available, at a price. These programs walk taxpayers through the process of tax preparation. They both present typical scenarios and answer common questions. But, taxpayers should be familiar with their filing status, whether they are eligible to claim tax breaks and are comfortable doing research to answer any tax questions that are raised during preparation. It also helps if you are organized and keep complete records.

Second, preparing your own tax returns give the taxpayer more control. Without a tax preparer, how your return is prepared is up to you. Many have trust issues with others handling such an important aspect of their life – will they file the return on time? Did they take advantage of all the available deductions? Will they share my information with others? Etc. . If these questions haunt you, it is probably better you prepare your own tax return.

The final reason you should file your own tax return is the understanding you will acquire. Preparing your own return will force you to become familiar with your own finances, and you will gain financial insight. You may even learn about ways to reduce your tax obligations, simply by reviewing the tax code each year.

Often, however, hiring a tax professional is the best option. For example, if you own property or investments, own a business, are recently married, divorced or had a child, or if you aren’t a “numbers” person, aren’t interested in keeping up with changes in tax law, don’t understand the tax jargon on irs.gov, and prefer not to spend your free time working for the IRS, it makes sense to hire a tax professional to help you with your annual tax return.

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.

IRS – Taxpayer Bill of Rights

by

Steven A. Leahy
IRS – Taxpayer Bill of Rights

By Steven A Leahy

In June of 2014 the National Taxpayer Advocate, Nina Olson, announced the new “Taxpayer Bill of Rights.” Turns out, this initiative was merely a list of already existing rights – The right to be informed, the right to be assisted, the right to be heard, etc. Ms. Olson thought it important that this list of existing rights be supplied to taxpayers because “taxpayers overwhelmingly do not believe they have any rights.”

The “real” Taxpayer Bill of Rights (TBOR) are three pieces of legislation creating never before existing rights. Known as Taxpayer Bill of Rights I, II and III, these new laws were passed between 1988 and 1998, after nearly 20 years of Congressional Hearings. These changes to the tax are “[p]erhaps the most significant tax legislation in the history of tax administration.” This article will review those three historic pieces of legislation and the changes to the tax law each implemented.

Before 1988, the IRS pretty much had free reign for seizures and liens. “Without a court order, the tax code allows them the power to completely wipe out a bank account, attach almost an entire paycheck, and seize almost anything of value.” For example, the IRS only had to provide a 10 day notice before seizing property. The 10 day period didn’t give taxpayers enough time to raise money to pay the IRS. The result was – lots of seizures. Also, the only way to appeal an IRS decision was after you paid the tax the IRS insisted you owed – even if it turned out they were wrong.

The 1988 Congress passed the Technical and Miscellaneous Act of 1988, now known as the Taxpayer Bill of Rights 1 (TBOR 1). TBOR 1 was a modest first step. Senator Mark Prior, then chairman of the Senate Sub-Committee on Oversight of the IRS, introduced TBOR 1 and strongly supported it passage. He said “[this law] will stem the abuse of taxpayers by the IRS and provide redress when abuse does occur. It marks a victory for the little taxpayer. It levels the playing field.”

There are some Highlights of TBOR 1. It created the position of ombudsman, with the authority to stop certain IRS actions against taxpayers. Created an installment agreement option. But only required the IRS to “fairly consider the request.” The taxpayer was granted the right to assistance of a tax professional – an attorney, CPA or enrolled agent. Also permitted the taxpayer to stop an interview or audit to get advise of a tax professional. TBOR 1 also increased the time of Notice of Levy from 10 days to 30 days and created the right to audio record most meetings with the IRS.

Taxpayer Bill of Rights 2, or T2, was signed into law on July 30, 1996. T2 did not replace TBOR1, it merely supplemented it. T2 created a process to formally appeal liens, levies and seizures through the IRS Appeals Office, created to be totally independent of the collections department. The appeals office can stop these actions if the IRS collectors did not follow the correct procedures. T2 also created additional notice requirements for IRS actions relating to the Trust Fund Recovery Penalty, joint liabilities of married and divorced persons, and how the IRS applies credits. Finally, T2 made it easier for a court to award attorney fees and court costs to taxpayers who battle the IRS in court.

The biggest changes happened with the Internal Revenue Service Restructuring and Reform Act of 1998, better known as the Taxpayer Bill of Rights 3 (TBOR 3). The biggest changes involved IRS collections activities and the individual rights of each taxpayer. TBOR 3 created Innocent Spouse relief, the Offer-in-Compromise, required supervisor permission for any lien, levy or seizure, limited the IRS ability to seize a residence, created the right to a Due Process appeals in all IRS collections actions, release of levies if there is a determination that the tax obligation is currently not collectible, increased the dollar amount of exemptions to levy and garnishment actions. There were also changes to interest rates, and penalties applied while in an installment agreement, and disallowed interest and penalties without at least yearly notice.

The Tax Payer Bill of Right 1 – 3 has turned out, less then expected – there is still room for improvement. But we are worlds apart from where we were before TPBR. If you owe the IRS money, or have unfiled returns these changes can help you. To find out, 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.

IRS – Fresh Start Initiative

by

Steven A. Leahy
IRS – Fresh Start Initiative

By Steven A Leahy

In 2011, the IRS implemented a new program to help taxpayers pay back taxes and avoid tax liens. The IRS calls this new program the Fresh Start Initiative. “This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years,” Said former IRS Commissioner Doug Shulman. “It is part of our multiyear effort to help taxpayers who are struggling to make ends meet.”

The “Fresh Start” initiative changed several important IRS programs. The program was directed to help taxpayers with installment agreements, Offers-in-Compromise & tax liens. The Fresh Start initiative expanded streamlined installment agreements. Installment agreements allow taxpayers to pay the IRS over time. Streamlined agreements remove the cumbersome disclosure requirements that normally apply to IRS installment agreements. The IRS program increased the threshold for total tax debt from $25,000.00 to $50,000.00. The number of installments acceptable from the IRS was increased from 60 months to 72 months. These two changes provide much relief to a very large number of taxpayers.

The Fresh Start initiative also changed the Offer-in-Compromise program. An Offer-in-Compromise is an agreement that allows taxpayers to pay less than the full amount due in order to settle their IRS obligation. The initiative gave the IRS more flexibility when calculating a taxpayer’s “reasonable collection potential.” The amount the IRS will accept for an Offer-in-Compromise depends on three major factors – the taxpayer’s monthly disposable income, the multiplier, and the taxpayer’s assets. The reasonable collection potential is calculated: (taxpayer’s monthly disposable income) x (the multiplier) + (value of assets).

Disposable income is the difference between a taxpayer’s income and their expenses. The IRS uses national standards when calculating expenses, not the taxpayer’s actual expenses. Historically, the IRS did not consider many of the taxpayer’s actual debts. Under the initiative, the IRS will now allow taxpayer’s to deduct student loan payments and monthly payments for state and local delinquent taxes. The national standards now also include a “miscellaneous” allowance. The miscellaneous allowance can be used for credit card payments and other debts that were previously not considered. The additional expenses will reduce the calculated monthly disposable income.

The biggest change concerns the multiplier used to calculate the amount the IRS will settle the debt. Once a taxpayer’s disposable income is calculated, the IRS uses the multiplier to calculate the cash component. If the taxpayer can pay the lump sum in five or fewer months, the IRS multiplier was 48 (4 years). Now, that multiplier is 12 (1 year). If the taxpayer can pay in 6 to 24 months, the multiplier was reduced to 24 (2years) from 60 (5 years). The decreased multipliers significantly reduce the reasonable collection potential calculated to settle an IRS obligation.

The asset calculation has also been reduced. The IRS will use 80% of the value of assets, overlook some dissipated assets and forego any equity in income producing assets in calculating the asset portion of the offer-in-compromise. All of these changes have the effect of lowering the calculated “reasonable collection potential.”

Finally, the Fresh Start initiative changed IRS policy concerning Tax Liens. A Federal Tax Lien secures the IRS’s interest in property when a taxpayer fails to pay their tax obligation and alerts creditors of the government’s claim. The initiative increased the tax obligation to $10,000.00, from $5,000.00 before the IRS will file a federal tax lien (in most cases). The initiative also made it easier to remove a lien. For example, if the outstanding tax obligation is less than $25,000.00 (even if you paid down your obligation to under $25,000.00) and you agree to an installment agreement to pay the full amount through a direct debit agreement, the IRS will agree to withdraw the Federal Tax Lien. But, the taxpayer must be in full compliance with other filing requirements, made 3 consecutive monthly payments and there wasn’t a previous default.

The IRS Fresh Start Initiative may be just what you need. To find out if this program will work for you, you should give me a call. We can discuss your 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.

IRS Madness – Reefer Rules

by

Steven A. Leahy
IRS Madness – Reefer Rules

By Steven A Leahy

On Tuesday, November 4, 2014, Oregon, Alaska and the Washington D.C. made recreational use of marijuana legal. Twenty-one other states allow medical use of marijuana. Illinois now accepts applications from patients for the “Medical Cannabis Pilot Program.” Businesses have sprung up around the country to accommodate the new demand. But the federal government has laws against marijuana – and the IRS enforces those laws through our tax policy. This article will examine our tax laws as applied to those in the “Canabusiness.”

IRS Code Section 280E “prohibits taxpayers[] from deducting any expense of a trade or business that consists of the trafficking of a controlled substance such as marijuana.” Section 280E was drafted in response to a 1974 case involving a Minneapolis drug dealer. After his arrest, the IRS audited him and assessed taxes based on his drug deals. The convicted drug dealer reduced his tax burden by deducting his drug dealing expenses. He included traveling expenses, rent, telephone, equipment, etc. Congress decided to close the drug dealer loop hole and adopted 280E.

Now that states and jurisdictions have legalized the recreational use of marijuana and have permitted medical use of marijuana the tax laws have changed, right. Well not exactly. Under the federal Controlled Substances Act, Marijuana is still a “controlled substance.” The United State Supreme Court has held that “no exception in the Controlled Substances Act exists for marijuana that is medically necessary.”

A number of cannabis dispensaries have found out what this apparent contradiction means. Early on, the IRS interpreted the prohibition to mean that cannabis dispensaries are not permitted any deductions for income tax purposes, including the cost of goods sold. That means dispensaries would be taxed on the gross sales rather than net sales. In a 2012 case heard by the Tax Court in California, Judge Kroupa narrowed that interpretation, holding that the cost of goods sold (COGS) “is not a deduction [] but is subtracted from gross receipts in determining a taxpayer’s gross income.” Therefore, COGS can be used by cannabis dispensaries to reduce taxable income. Other expenses (wages, rent, utilities, etc), however, are deductions and prohibited to cannabis dispensaries under the code. Obviously, the loss of any deduction can make a big difference at tax time.

To add to the burdens of cannabis dispensaries, the IRS assesses a 10% penalty on businesses that pay their federal employee withholding taxes in cash, according to the Denver Post. The Controlled Substances Act also prohibits banks from doing business with cannabis dispensaries. The Justice Department and Treasury have changed some regulations to address the concerns of the banking industry. But the banks are still not comfortable with the change of regulations without a change in the law.

Frank Keating, president of the American Bankers Association said “While we appreciate the efforts by the Department of Justice and FinCEN, guidance or regulation doesn’t alter the underlying challenge for banks.” He continued, “as it stands, possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution and assorted sanctions.”

The banking rules create other problems for cannabis dispensaries. For example, dispensaries can’t get credit card processing accounts, checking accounts or saving accounts. The lack of banking services means the dispensaries deal as a cash business. The large amounts of cash create security problems and IRS reporting concerns.

Those in the canabusiness have been struggling with these IRS problems. If you have IRS problems, you should take action. You need an attorney to help you sort through your options and choose the best remedy. 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.

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