IRS considers Tax Payer rights!

The Right to Pay No More than the Correct Amount of Tax – Taxpayer Bill of Rights #3

Taxpayers have the right to pay no more than the correct amount of tax they owe. This is one of ten basic rights known collectively as the Taxpayer Bill of Rights. This tip is the third in a series outlining these rights.

Taxpayers have the right to pay only the amount of tax legally due. This includes interest and penalties. Additionally, taxpayers can expect to have the IRS apply all tax payments properly.

Here are some things taxpayers should know about the right to pay no more than the correct amount:

• Taxpayers who overpaid their taxes can file for a refund. Taxpayers must file a claim for a credit or refund by the later of these two dates:

• Three years from the date they filed their original return.
• Two years from the date they paid the tax.  

• Taxpayers who receive a letter from the IRS should review the information in it. The taxpayers who believe the information is incorrect should contact the office listed in the letter. The letter also provides a date by which the taxpayer should respond.  

• The IRS may automatically correct math errors on a return. Taxpayers who disagree with the adjustment must request that the IRS reverse the change. The taxpayer has 60 days to make this request from the time the IRS made the change, or otherwise the taxpayer will lose the right to dispute the adjustment in United States Tax Court before paying the tax.  

• Taxpayers may request that the IRS remove any interest from their account caused by unreasonable IRS errors or delays. For example, this could happen if the IRS delays issuing a late notice because an IRS employee was out of the office, and interest accrues during that time.  

• If a taxpayer believes they do not owe all or part of their bill, they can submit an offer in compromise. This offer asks the IRS to accept less than the full amount owed. To do this, taxpayers use Form 656-L, Offer in Compromise.  

• Some taxpayers enter a payment plan to pay their taxes. This plan is an installment agreement. The IRS must send these taxpayers an annual statement that provides how much the taxpayer:

• Owes at the beginning of the year.
• Paid during the year.
• Still owes at the end of the year.

Tax Season, in full swing!

Avoid the Rush: Today Marks Busiest Phone Day of the Year; Taxpayers Get Answers Faster by Visiting IRS.gov

WASHINGTON – The Internal Revenue Service alerted taxpayers the day after Presidents Day marks the busiest day of the year for calls to the toll-free help line. The IRS reminded taxpayers that most answers to their tax questions can be quickly found on IRS.gov.

Taxpayers who call the IRS the day after Presidents Day can expect longer than usual wait times. Those who need to call can avoid the rush by waiting a day or two or by using online options to get their tax questions answered immediately.

To help taxpayers, the IRS has redesigned its website to make it easier to use, whether with a computer, smart phone or tablet. A good first stop is the IRS Services Guide, which provides an overview of the many IRS.gov tools available to taxpayers and tax professionals. For fast answers to general tax questions, taxpayers can search the Interactive Tax Assistant, Tax Topics, Frequently Asked Questions, Tax Trails and IRS Tax Map.

Those who have already filed can use the "Where’s My Refund?" tool to track their refund. Alternatively, they can call 800-829-1954 for automated refund information.

“Where’s My Refund?” is the best way to check the status of a refund. The application displays progress through three stages: (1) Return Received, (2) Refund Approved, and (3) Refund Sent. Taxpayers get personalized information based on the processing of their tax return. The tool provides an actual refund date after the IRS has approved a refund.

The IRS reminded taxpayers about a common misconception that requesting a tax transcript will help a taxpayer determine the status of their refund. The information included on a transcript does not necessarily reflect the amount or timing of a refund. Transcripts are best used to validate past income and tax filing status for loan applications and to help with tax preparation.

Taxpayers visiting IRS.gov will also find answers to tax questions about filing requirements and credits and deductions that may be available to them and can download forms and instructions. Taxpayers who owe additional tax can learn about payment options or what steps they can take online to create a payment agreement if they can’t pay what they owe all at once.

Employees who did not receive a Form W-2 from their employer should first contact their employer. If they receive no response by the end of February, they can call the IRS and the agency will contact the employer by mail. Taxpayers may have to use Form 4852, Substitute for Form W-2, and estimate wages and withholding by using their pay statements and other records.

Taxpayers must file their 2017 tax returns by April 17, 2018, or request a six-month extension. Extensions can be requested using Free File, by filing Form 4868 or by paying all or part of  the estimated income tax due and indicating that the payment is for an extension using Direct Pay, the Electronic Federal Tax Payment System (EFTPS) or a credit or debit card. Taxpayers don’t have to file a separate extension form and they receive a confirmation number for their records.

S Corp or C Corp, which is better under Trump's new tax law?

With the passage of the sweeping tax overhaul, small businesses and entrepreneurs are scrambling to understand how the changes will affect them. Much of 2018 will be spent figuring out all the implications, but that doesn’t stop anxious clients from turning to you now to figure out how to make the most of the changes.

For small businesses, the most pressing changes are the reduction in the tax rate for C corporations and the 20 percent tax deduction for pass-through entities. As such, we need to retool conventional thinking and help clients decide whether they should structure their business as a C Corp or a pass-through entity.

While the dust is still settling, here are some of the key considerations that small businesses should be thinking about in light of the new tax landscape:

What to know about the pass-through deduction

Before the new plan, people who owned small pass-through businesses typically paid income taxes based on their individual tax rate. For taxable years beginning after Dec. 31, 2017 and before Jan. 1, 2026, individuals can generally deduct 20 percent of their qualified business income from a pass-through entity (like an S Corp, partnership or sole proprietorship). This is a big change, and of course, the devil is in the details. Here are some of the key things your clients should know:

• There are limits. The deduction phases out beginning at $157,500 of income for single taxpayers and $315,000 for couples filing jointly.

• If your clients weren’t familiar with the term “qualified business income” before, they will be now. QBI is the net amount of income, gain, deduction and loss with respect to the trade or business. QBI does not include investment-related income or loss, such as capital gains or losses, dividend income or interest income.

• QBI also doesn’t include whatever is paid to the taxpayer as reasonable compensation for their services. In addition, QBI excludes certain service businesses, such as the fields of accounting, health, law, engineering, architecture, financial services, etc., where the principal asset of the business is the reputation or skill of one or more of its employees.

• And, QBI does not include any amount paid to the individual by an S corporation that is treated as reasonable compensation for their services. So if your client owns 50 percent of an S corporation that pays them $50,000 in wages and allocates $100,000 of income, then their QBI from the S Corp only includes the $100,000 of income (not the $50,000 of wages). Surely, there will be many who will want to shift their payments so there’s less in wages and more in income in order to increase the amount of their QBI and thus, increase the amount of the 20 percent deduction. However, everyone needs to keep in mind that the IRS expects reasonable compensation for the services performed and work done. And just as the IRS has monitored this closely to ensure that individuals weren’t improperly avoiding FICA or self-employment taxes, we can expect the IRS to look closely to ensure that individuals who conduct work for S corporations are reporting proper compensation for their services.

Corporation tax rates are attractive, but remember double taxation

One of the central tenets of the Tax Cuts and Jobs Act is the reduction of the C corporation tax rate from 35 to 21 percent. This may lead some pass-through entities to wonder if they’d be better off as a C Corp instead. While the corporate tax rate has been reduced to an attractive 21 percent, there still remains the concept of double taxation. When income is earned by the corporation, it’s first taxed at the business level. Then, when the corporation distributes its income to shareholders, the shareholder pays tax on the dividend.

With strategic planning and tax guidance, taxpayers may be able to reduce some of their tax liability by forming a C Corp now—but in many cases if an entrepreneur is looking to take the bulk of the profits out of the business (rather than re-investing it back into the business), a pass-through entity will be preferable.

The bottom line? The pass-through deduction is tricky business, and there are no standard guidelines yet. CPAs and financial professionals will most likely need to look at each client’s situation on a case by case basis. There will be no shortage of work for everyone in the coming year.

Here are some thoughts:

• S corporations are still advantageous in many situations, though are increasingly risky in others— particularly in passive income situations (such as rental real estate income).

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• C corporations shouldn’t necessarily look to elect S Corp status just because of this tax bill, especially if the corporation isn’t contemplating a sale or closure in the foreseeable future. While the corporate tax rate is “permanent,” the deduction based on QBI is set to expire at the end of 2025 (it could also be eliminated by Congress after 2020).

• Business owners should continue to think about their business structure in terms of their specific business needs and practices, as opposed to focusing solely on the changes from the Tax Cuts and Jobs Act. It’s also smart to wait for the IRS to release additional guidance on abusive situations.

• And lastly, one of the key advantages in forming a corporation remains the ability to minimize the personal liability of the business owners. This advantage is unaltered by the new tax bill.

Thank you to Nelli Akap with Accounting Today for this information.

Dependents and Exemptions in 2017

Five Things to Remember About Exemptions and Dependents for Tax Year 2017

Most taxpayers can claim one personal exemption for themselves and, if married, one for their spouse. This helps reduce their taxable income on their 2017 tax return. They may also be able to claim an exemption for each of their dependents. Each exemption normally allows them to deduct $4,050 on their 2017 tax return. While each is worth the same amount, different rules apply to each type.

Here are five key points for taxpayers to keep in mind on exemptions and dependents when filing their 2017 tax return:

1. Claiming Personal Exemptions.  On a joint return, taxpayers can claim one exemption for themselves and one for their spouse. If a married taxpayer files a separate return, they can only claim an exemption for their spouse if their spouse meets all of these requirements. The spouse:

• Had no gross income.
• Is not filing a tax return.
• Was not the dependent of another taxpayer.

2. Claiming Exemptions for Dependents.  A dependent is either a child or a relative who meets a set of tests. Taxpayers can normally claim an exemption for their dependents. Taxpayers should remember to list a Social Security number for each dependent on their tax return.

3. Dependents Cannot Claim Exemption. If a taxpayer claims an exemption for their dependent, the dependent cannot claim a personal exemption on their own tax return. This is true even if the taxpayer does not claim the dependent’s exemption on their tax return.

4. Dependents May Have to File a Tax Return. This depends on certain factors like total income, whether they are married, and if they owe certain taxes.

5. Exemption Phase-Out.  Taxpayers earning above certain amounts will lose part or all the $4,050 exemption. These amounts differ based on the taxpayer’s filing status.

The IRS urges taxpayers to file electronically. The software will walk taxpayers through the steps of completing their return, making sure all the necessary information is included about dependents.  E-file options include free Volunteer Assistance, IRS Free File, commercial software and professional assistance.

Taxpayers can get questions about claiming dependents answered by using the Interactive Tax Assistant tool on IRS.gov. The ITA called Whom May I Claim as a Dependent will help taxpayers determine if they can claim someone on their return.

More Information:

• Publication 17, Your Federal Income Tax 
• Publication 501, Exemptions, Standard Deduction and Filing Information.

IRS YouTube Videos:

Interactive Tax Assistant – English | ASL

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Additional time for Hurricane Repairs

Revenue Procedure 2018-14 extends the time for individuals to pay to repair damage to their personal residences.  Most importantly for affected homeowners, for damage resulting prior to 2018, if a taxpayer pays to repair the damage prior to the last day for filing a timely Form 1040X for the 2017 taxable year, the taxpayer may treat the amount paid as a casualty loss on a timely filed form 1040X for the 2017 taxable year.

Rev. Proc. 2017-60 provided a safe harbor that allows an individual to deduct the amounts paid to repair damage to his or her personal residence caused by deteriorating concrete foundations containing the mineral pyrrhotite.

Revenue Procedure 2018-14 will appear in IRB 2018-09 dated Feb. 26, 2018.