Author: Jan Roberg

Posted on by Jan Roberg

IRS Liens and Your Credit Score

Yes, that's an axe

Photo by danesparza on Flickr.com

A question that I’ve heard a lot lately is, “How much damage will an IRS lien do to my credit score?” I recently heard that question again at an IRS panel about liens and they couldn’t answer the question either. I decided to do some research.

The term FICO score comes from a company called Fair Isaac and Company. They developed a computer software program that most of the credit bureaus use to determine your credit worthiness. Because the computer software is the Fair Isaac and Company’s business (and source of their income), they don’t release the mathematical formulas they use to determine the scores. If they did, no one would buy the software, people would just recreate the program and figure their FICO scores themselves. How any one event, such as an IRS tax lien, might affect your personal credit score is a pretty well guarded secret.

That said, there are a few things I can tell you.

  1. Although I can’t say by how much, I can tell you that an IRS tax lien will make your FICO score go down.
  2. Although many debts will come off of your credit report after 7 years, an IRS tax lien will never come off your credit report unless it’s paid.
  3. Once you have paid off your IRS debt, the IRS will automatically issue a lien release. Even with the lien release, the IRS tax lien will stay on your credit report for seven years.

Seven years! But there is something you can do about that. An IRS Lien Release is basically an automatic procedure that happens after you pay off your tax debt. You pay the bill, the release is issued and your credit still stinks. But you can take action.

What you want is an IRS Lien Withdrawal. An IRS Lien Withdrawal expunges the tax lien from your record as if it was never filed. This is what you want to do to bring your credit score up. In order to get an IRS Lien Withdrawal, you have to request it with a special form. Here’s a link to get it: http://www.irs.gov/pub/irs-pdf/f12277.pdf. It’s called form 12277. Remember, every IRS form has a name and number.

You can request an IRS Lien Withdrawal even if you haven’t paid your taxes in full, you just have to have a direct debit installment agreement set up and make a few payments. I have some more information about that in another post: http://robergtaxsolutions.com/2011/06/irs-liens/

An IRS tax lien can do some damage to your credit report, but you have the power to fix it.

Posted on by Jan Roberg

Estimated Taxes for Small Businesses

Income Tax

Photo by Shayne Kaye on Flickr.com

I’ve gotten this question twice in the past week so I thought I’d post it on my blog:

I pay my estimated taxes out of my personal account, but really I’m paying estimated taxes for my small business, shouldn’t I take the money out of my business account?

That’s a really good question, and the answer is “It depends.” If you own a C corporation, then the answer is yes. But most of the small businesses I deal with are Sole Proprietors and Sub S Corporations; if you have one of those, the answer is NO!

Here’s why Sole Proprietors and Sub S Corporation Owners should not pay their estimated taxes out of their business accounts: All of the profits from these kinds of companies are taxable to the individual that owns them. The companies themselves pay no tax, the individual owner does. Because the owner, not the company, owes the tax, the owner must pay from his personal account.

Let’s do an example: Daisy Duke owns Daisy’s Delightful Doggie Daycare (D4). It’s basically a pet-sitting business she runs out of her home. Daisy’s pretty savvy about accounting, so she maintains a separate bank account for her business and she claims every legal deduction she’s entitled to. She runs all of her business expenses through her business account.

For the quarter, Daisy has $10,000 of income and $6,000 of business expenses. She wants to make an estimated payment on the remaining $4,000 of income. Daisy determined that she spends 40% of her net income on federal taxes so she’s going to send $1600 to the IRS. This check is not written on the D4 checking account, but instead on Daisy’s personal account.

Note that Daisy runs all of the business expenses through the business account, but because the taxes are not considered to be a business expense, they can’t go in there. If Daisy were to take her kids to Chuck E. Cheese’s for pizza, she would not pay for that out of her D4 account either. Now it’s sounds crazy equating estimated tax payments with Chuck E. Cheese’s Pizza but to the IRS’s eyes, they’re the same thing—a personal expense.

So here’s the next question that people always ask: What if Daisy doesn’t have enough money in her personal checking account to pay the taxes? That’s another good question. Remember, though, that the reason Daisy has to pay estimated taxes is because she’s making a profit. She’s got that $4,000 of profit sitting in her business bank account. She can make a payment to herself because she owns the company. She’s paying herself a draw (or maybe with an S Corp a salary), but when you own the business and you have a separate business account, you are allowed to pay yourself from the account.

Next question: But isn’t it a waste of time? Aren’t you writing two checks-one to Daisy and then one to the IRS, when writing one check directly to the IRS would solve the problem? No, it’s not a waste of time because it’s worth the extra five minutes to keep your books straight.

If you keep your business books strictly for business, with no personal expenses running through there at all, the IRS is going to think you’re pretty boring and not worth wasting much time on trying to audit you. This is one of those times where boring is good! Remember, paying your estimated taxes out of your business account is seen to be the same as taking your kids to Chuck E. Cheese’s Pizza. It’s a cheesy expense! (Sorry, that pun flew out of the keyboard, I couldn’t stop it.)

Many small business owners get into tax trouble because they wind up using their business accounts for personal spending. While your estimated tax payment seems like it would be a business expense, it’s not and you have to keep it separate.

See also: http://robergtaxsolutions.com/2011/04/how-do-i-keep-from-owing-so-much-tax-next-year-estimated-tax-payments/

Posted on by Jan Roberg

ATMs and the IRS: Why Your Business Shouldn’t Take Cash Out of the ATM

P4250062.JPG

Photo by Jenny Brown on Flickr.com

You should never take cash out of the ATM using your business bank account. Never.

If you never have and never will take ATM cash out of your business account, you’re done here. Go read a different post, I’m not worried about you. If you still think it’s okay to make a cash ATM withdrawal from your business account, keep reading. Imagine you’re routinely getting whacked upside the head with a rolled up newspaper about every two minutes until you learn this lesson.

Why not use the business account for the ATM?

1. It’s a blazing red flag to the IRS that you’re doing something naughty. Even if everything you do related to your ATM withdrawals is 100% legitimate, to the IRS it says, “I’ve been a scumbag! Make me pay more taxes!” It’s really not a message you want to convey.

2. It’s bad bookkeeping practice. You have income and expenses. You take money in and you spend it. You need to account for how you spend it. An ATM cash withdrawal doesn’t give you the paper trail you need for your expenses. Even if you’re good about keeping those receipts (and believe me, you’d be the exception) you’re still stuck with issue number 1 – blazing red flag to the IRS.

But I own the business and it’s my money, why can’t I just make a withdrawal? Good question. Let’s say you’re just a plain sole proprietor, nothing fancy. You’re absolutely right; that’s your money and you’re entitled to use it as you see fit. If you’re keeping a separate bank account for your business, then you should write a check from your business to you for your “draw”. That’s legit and it gives you a paper trail. Whenever you take money from your ATM, it is considered as going to you and you’ll be taxed as that being your profit.

Here’s an example: Fred takes $200 a month out of his business account to pay some contract laborers. He occasionally hires some kids from the local football team to help him with his moving company. He pays the boys in cash and has never paid any one boy more than $600 so he hasn’t had to issue a 1099 (1099s must be issued if you pay $600 or more.) Fred gets audited by the IRS. He’s claimed $2400 in expenses for contract labor. That’s the $200 a month cash he’s paid to the boys on the football team to help him with some moving projects. What the IRS sees is $2400 in ATM cash paid directly to Fred and they charge him $1200 in taxes and penalties for under-reported income. Fred will have a very difficult time fighting this. It’s possible that he can fight and win, but why be in that position in the first place?

Let’s move it up a notch, what if Fred has an LLC-a limited liability company? Let’s say Fred takes an ATM withdrawal from his business account so he can take his wife out to dinner. Once again, its Fred’s money and he has that right. But now Fred is treating his business account as a personal account. This messes up his “limited liability” status. If you don’t keep a strict line between your business account and your personal account, you risk losing your limited liability protection. This makes it even more important for Fred not to use his business ATM card for cash if he has an LLC.

How’s your head? Been smacked enough times? Bottom line: never make an ATM cash withdrawal from your business bank account. If you want to pay yourself, write yourself a check. If your business needs to use cash, set up a petty cash account and fund it by writing a check for petty cash. A clean paper trail will keep the IRS off your back and that means money in your pocket.

Posted on by Jan Roberg

What You Need to Know About Hiring Contract Labor

Construction experts

Photo by Julien Harneis on Flickr.com

I’ve done a lot of blog posts about what to do if you’re the contract labor, but the other day I had a client ask me about hiring contract labor. Here’s what you need to know if you’re doing the hiring.

First, you don’t need a “contract” with them.  Contract labor is a term that’s used to mean they are working for you, but they are not on the payroll. For some things, it’s good to have a contract, but often it’s not necessary.

Second, never pay in cash—always pay by check.  A check shows where you paid the money to – it’s a paper trail of how your business spent it’s money.  That’s a good thing.  The number one mortal sin in business accounting is making cash payments.  Never take cash out of the ATM for your business; never pay bills in cash.  You can use a “petty cash” account for really minor things, but there should be receipts for everything and a check should be written for “petty cash”.  Cash gets you into trouble so you have to be doubly careful with it. If you remember nothing else, remember:real businesses do not pay bills with cash!

Third, although you don’t need a contract for the people who do work for you, you do need to have them fill out a form called a W-9.  Here’s a link to get the form: http://www.irs.gov/pub/irs-pdf/fw9.pdf

Say for example that John Doe was doing some construction work for your business and over the course of the year you thought you might pay him over $600.  You would have him complete the W-9 form for your records.  (I even had my own kid do a W-9 and I didn’t expect her to make over $600.  It’s just a good business habit.) I recommend having your contract labor give you the completed W-9 before you make the first payment. This keeps your behind covered in case the IRS or one of the other taxing jurisdictions decides to audit your books.

Anyway, on the form, John Doe would list his name under “name”.

For business name, he would leave it blank unless he had a business with a different name like “John’s Construction Business.”

Under the business type, he’d be an individual/sole proprietor (once again, unless he owned a regular business that was a corporation or something.)

He’d put down his address, zip code etc.  He probably wouldn’t have an account number for you, but if he did, he could put it in the box. It’s not necessary.

Requester’s name is “Your Business Name.”  You don’t really need to fill that out, you know who you are. If he’s completing the form right in your office, it’s okay to leave blank. If you’re mailing it to him, then you should put your business information in that box.

The TIN is John Doe’s social security number, unless he has a business EIN number.   A regular business will know the EIN number and use it. If the person doesn’t know what an EIN is, then he should put his social security number. This W-9 form gives you good records and will protect you in an audit.

Make sure your contract laborer understands that if he receives over $600 from you, then you will be reporting his pay to the IRS as non-employee compensation. You need to do this or else the IRS will not allow you a deduction for the money you paid him.

You will need to prepare 1099 MISC forms in January (they’re easy to do.) Your contract laborer will receive his form by January 31st. You’ll also be sending copies to the IRS which are due at the end of February.

Hiring contract labor is much easier than putting someone on the payroll, but you do have to remember the rules: pay by check, get a W-9, and issue a 1099 MISC. These three things will help audit-proof your contract labor.

Posted on by Jan Roberg

Two State Tax Returns: Live in One State, Work in Another

Photo by Jimmy Emerson on Flickr.com

I get a lot of questions from people about working in one state and living in another. That’s pretty common here in Saint Louis where we have lots of folks living in Illinois that come over the river to work here and vice versa. Today I’m going to talk about doing your tax return when you have two states to deal with.

First, the technical words you need to know:

The state you live in is called your resident state. There will probably be a check box or something like that in your computer program. If you live in Illinois, then your resident state is Illinois.

The state you work in (but don’t live in) is called the non-resident state. In this example, Missouri is the non-resident state.

Tax liability: This is not your refund or the amount of money that was withheld on your W2. Tax liability is a number computed when you prepare the state tax return. It will say “tax liability” on your state income tax form. This is the dollar amount the state says that you owe them for taxes before they take into account what you’ve already paid through your withholding or estimated payments.

That’s not so hard, right? Next, you need to make sure you do your tax returns in the right order:

Always do the federal return first. Make sure that it’s done and that it’s right before you start your state returns. If you finish, and then go back in to make changes to the federal, you’ll have to go back and double check everything on the state returns and that can be a pain in the back, so finish the federal first.

Next, do the non-resident state—that’s the state you work in. That one’s easiest. You only pay tax in that state for the wages you earn in that state. Usually, when preparing a non-resident state return, there will be a check box that says “non-resident” somewhere in your software. Be sure to check it. You’ll want to make note of your “tax liability” for the non-resident state. You’ll need that number for your resident state return.

After you’ve finished the non-resident state, then you can prepare your resident state return. You resident state is going to tax all of your income (including the wages you earned in the other state.) The resident state will include your wages, interest, dividends, stock trades, retirement income, and basically everything else that’s taxable.

Things to know about the resident state return:

Even though you pay tax on all of the income you earn to your resident state, you will get a credit for taxes paid to another state. For example: using our Illinois/Missouri return again—since you paid income tax to Missouri for the wages you earned while working there, Illinois will give you a credit for those taxes paid so you won’t end up having to pay twice for working in another state.

The form you need to complete will have different names depending on the state, but it will basically be called a Credit for Taxes Paid to Another State. Sometimes it will be listed as an NR Credit. Depending on which software you use, you might have to dig for it. Some software programs are really easy and it will just pop up automatically when it recognizes that you have multiple states.

Remember the tax liability number I told you to remember? Well that’s going to go on your NR Credit form. Some software is really good at automatically plugging it in for you. In some other programs, you’ll have to manually enter it. The important thing is that you know that number needs to be there and that you know to look for it.

I’m getting a really big refund from my resident state, can that be right? Most likely not. When you see an unusually large state refund, it’s always a good idea to take a closer look. Check to make sure that the income numbers match up to the federal return and that the Credit for Taxes paid to another state was computed properly. It’s rare to get a big refund to your resident state unless you’ve had some other income that had withholding. The credit for taxes paid to another state usually will almost never be more than what you would have paid for taxes in your own state.

I’m showing that I owe a whole lot of money to my home state, can that be right? Maybe yes, but maybe no. The first thing you want to check is that you’ve taken your credit for taxes paid to another state. That’s the most common problem when you owe a lot. Other factors could be working in a no-tax state while you’re living in a taxing state. For example, let’s say you live in Louisianna but work across the border in Texas. You won’t pay taxes in Texas so there’ll be no credit for taxes paid there. In a case like that, you’ll definitely owe. Also, you could have a big difference because the states have different tax rates. For example: Missouri’s tax rate used to be twice as much as Illinois. If you lived in Missouri and worked in Illinois (opposite of our example earlier), you’d still owe Missouri about as much again as what you paid Illinois. (Now the rates are much closer, but people who live in Missouri and work in Illinois will still wind up owing extra for their Missouri taxes.)

What if I live in a reciprocal state? Some states have arrangements with their neighboring states to share tax information and tax revenues. In a situation like that, you’ll just pay taxes in your home state. The states will actually sort out who gets how much of your tax money. Usually, it’s simply a matter of checking the “reciprocal state” button in the software.
For most people, if your federal return is fairly simple, preparing two states is not that difficult. Use a good software program, follow these directions, and you should be fine.

_______________________________________________________________________

Posted on by Jan Roberg

Filing a Tax Return For Your LLC

Rosebud business solutions is a boost for businesses

Photo by Lancashire County Council on Flickr.com

If you’ve started a new business and you filed the Articles of Organization in your state to become an LLC, then here are some things you need to know about filing taxes for your new company.

First, there is no such thing as an LLC tax return.  I know that sounds crazy, but it’s true.  Every year, thousands of people walk into their accountants’ offices and say, “I want to file an LLC tax return!”   This is what accountants joke about at their conventions and at the water cooler.  We even post silly You Tube videos about it.  This post is to help you not be the butt of some dumb accounting joke.

An LLC is a Limited Liability Company.  One of the most common mistakes people make is that they think LLC means “Corporation”, it doesn’t.  If you have an LLC, you probably are not going to file a corporation return (although you might, I’ll discuss that later).

The IRS considers an LLC to be something they call a “disregarded entity.”  That means that it doesn’t have a specific tax document that goes with it.  If your LLC only has one “member” (member is LLC-speak for owner) then the default tax return for your LLC is a Schedule C which is part of your 1040 income tax return.  It’s due on April 15th just like any other individual tax return.

If your LLC has two or more members, then by default you are considered to be a partnership and you must file a partnership return, form 1065.  Form 1065 is due on April 15th also, but it’s a good idea to get it done sooner because the information on the 1065 needs to go onto your personal tax return before you file it.   When your accountant prepares the 1065, she’ll also prepare a K-1 form that will be used to prepare your personal income tax return.

So, if you have an LLC, the default tax return you might file would be a Schedule C as part of your individual income tax return, or a 1065 partnership return (and you’d receive a K1 form so you could put your partnership income on your personal tax return).

Instead of using the default filing options, you can choose to have your LLC treated as an S corporation or a C corporation for income tax purposes.  It’s very rare to choose to have your LLC treated as a C corporation.  Usually, if a person wanted to pay corporation tax rates, she would file articles of incorporation to begin with.  But one advantage to filing as an LLC and then electing to be taxed as a C corporation would be to avoid some of the stringent reporting and meeting requirements that C corporations have.  Usually, it’s not advantageous tax-wise to be treated as a C-Corporation, but there are always some exceptions.  If you do go this route, you will need to file an election to be taxed as a corporation: form 8832.  The tax return for a C-Corporation is called an 1120.  You must file the 1120 or the extension by March 15th or you will be assessed a late filing penalty even if you owe no tax.  A C-Corporation pays taxes on its income and pays wages and/or dividends to the owner.

The more common corporate tax treatment for LLCs is to be taxed as an S Corporation.   A Sub-chapter S corporation passes its profits through to the owner.  If you elect to be a Sub S Corporation, you must pay yourself a wage.  For most businesses, the purpose behind a Sub-chapter S corporation is to avoid paying self-employment taxes.  There are two things you must know:

1. A Sub S Corporation isn’t always the best way to avoid paying self-employment taxes and,

2. You’re not allowed to say that you’re trying to avoid paying self-employment taxes, even though that’s pretty much the reason anybody ever makes the Sub S election.

To make the election to be taxed as a Sub S Corporation, you will need to file form 2553.  A Sub S Corporation tax return is called an 1120S form and it is due by March 15th.  The S corp does not pay income tax; the income from the S corp will be reported on a K1 and will flow through to your personal tax return.

If you make an election to be taxed as a C or an S Corp, you will have to keep that designation for at least five years unless you get special permission from the IRS to change.  You want to make sure you really want to make the election for corporate tax treatment before filing those forms.

Here’s my really important tax advice:  Assume that you’re filing your LLC return either as a Schedule C (sole proprietor) if you’re a solo owner, or a 1065 partnership return if you have more than one owner, at least for the first year.  But then, sit down with your preparer and run the numbers all three ways, (Schedule C, S-Corp, C-Corp) to see what makes the most sense for your business.  Make some projections about your future income and expenses and take into account the deductions that you may have missed last year but won’t miss again.  Smart planning can save you thousands of dollars in taxes over the years to come.  Saving on taxes helps your business grow and puts money in your pocket.

Posted on by Jan Roberg

Five Tax Issues for these Crazy Financial Times

Wall Street

Photo by Sjoerd van Oosten on Flickr.com

Wow! The market’s up, the market’s down. It’s crazy! Now I don’t give advice about stocks—it’s actually against the law for me to give advice about stocks—but I do give advice about taxes. Here are some things you need to know about your taxes during all this market craziness.

1. On your tax return, you only acknowledge a gain or a loss if you actually sell the stock. Let’s say you own 100 shares of Billy Beer stock that you bought at $100 per share, that’s $10,000 worth of stock. If the price of the Billy Beer drops to $90 a share, then you have $9000 worth of stock right? So technically you’ve lost $1,000. But, the loss only counts if you actually sell the stock for the $90 a share. If you keep the stock, nothing about Billy Beer goes on your tax return.

2. Stocks that are held within a 401(k) plan or an IRA can be sold at a gain or a loss and it never gets reported on your tax return. The whole point of your retirement plans is that you can have tax free gains. Most of the time, your money is growing inside these vehicles and you’re not getting taxed on it. When you do have a loss inside your 401(k), you don’t get to claim a deduction for it.

3. The maximum loss from a sale of stock that you can use to offset your ordinary income (like wages) is $3,000. Let’s say you sold off some stock and had a loss of $10,000. Sales of stock are considered to be passive income or passive losses. (To be blunt—it’s called passive income because it’s possible to sit on your butt and make money.) The maximum amount of passive income loss you can have on your tax return for any given year is $3,000. Any extra loss you have can carry forward to the next year. You can use the passive loss from the sale of your stock to offset other types of passive income also, such as income from a partnership or rental real estate. The important thing to know though is that if you have a loss of $100,000 in the stock market, you’re not going to get to write it all off at once.

4. Just because the market has taken a nosedive, it doesn’t mean that you really have a loss on your stock. Remember, your gain or loss is based upon what you bought the stock for and what you sold it for. This is especially important for senior citizens to remember. Back in 2008, we had some serious stock market drops. When tax time came around, I had several clients tell me how much money they lost in the market, but when I did the paperwork they really had large gains because they had held the stocks for so long. They were very surprised to be paying so much money in capital gains tax.

5. You must report the sale of stock on a Schedule D form. One of the most common IRS letters is to people who sold stock and forgot to report in on a Schedule D form on their tax return. Stock sales are reported to the IRS. Using the Billy Beer example, let’s say you bought it for $100,000 back in 2007 and sold it for $90,000 this year but you forgot to report it on your tax return. You’ll get a letter from the IRS saying that you owe them $22,500 (if you’re in the 25% tax bracket) in income tax plus penalties and interest. (And the penalties will be huge because you “forgot” $90,000 in income!) The reality is that you should show a loss on your Schedule D and you’re probably due a refund ($750 if you’re in the 25% tax bracket.) Always remember to report your stock sales on your tax return.

Posted on by Jan Roberg

Filing and Paying Taxes in the United States

If you are working in the United States, you should expect to pay US income taxes.

                               The United States government taxes the worldwide income of its citizens and residents.

 

If you plan on working in the United States, here are some things you need to know about the US federal income tax system.

 

The United States taxes residents differently from non-residents, so the first thing you need to do is determine if you’re considered to be a resident or not. Generally, if you’re in the US temporarily because you’re a student, teacher, trainee, foreign government employee or a relative of one of those, then you’re considered to be a non-resident. These Visas are usually labelled as F, J, M, or Q. If you fall into this category, you’re considered to be a “non-resident”. You will file a tax form called 1040NR.  This post is mostly about filing a tax return as a resident, a regular 1040 form.

 

If you are in the US on a regular working Visa (such as an H1) there are two ways to be considered a resident for income tax purposes. One is to have a green card—this form shows that you are a lawful, permanent resident of the United States. The other way to be considered a resident is to meet what’s known as the substantial presence test.  The quick and dirty way to figure that out is to ask yourself if you were here for over 183 days this year.  If the answer is, “yes” then you can be considered a resident.  I’ve attached a substantial presence test questionnaire at the bottom of this post for anyone who needs a more accurate determination, especially if your time here crosses over two or more calendar years.

 

Qualifying as a US resident usually reduces your American income taxes. The biggest benefit is being able to claim the same “standard deduction” that US citizens claim. The standard deduction is a portion of your income that the government doesn’t tax. Also, as a resident, if you are married, you can file your tax return as “married filing jointly” which gives you a larger standard deduction and a lower general tax rate. For many people, being able to claim “resident” will reduce your taxes.

 

The downside of being a “resident” is that the United States government taxes the world wide income of its citizens and residents. Let’s say you move to America from France where you earned an income equal to $50,000 USD. You move to the US in June and work for 7 months, easily qualifying you to be a US resident for income tax purposes. While in the US you earn an additional $50,000 USD for a combined global income of $100,000 USD.   You do not want to pay US income taxes on the $50,000 USD that you earned in France!

 

You have two options in this situation: One, you could file a “dual status alien” return— this would make you a US resident for the 7 months that you were here and a non-resident for the 5 months that you were in France. You would not get the full benefit of the resident deductions, but it would save you from being taxed on your French income. The second option would be to file as a US resident and claim a credit for the foreign taxes paid. If you come from a country where your taxes are equal to or higher than in the US, this is a good option for you. If you come from a country with lower taxes, you might be better off claiming the dual status alien. You do not have to decide this now, you can have your tax preparer work out the numbers for you both ways and choose which option works best for you.

 

A note about hiring a tax preparer in the US.  There are many companies that have shops where you can pay someone to prepare your income tax return for you. These are for profit companies, not government agencies, and they expect you to pay them for the service. Most of them do not prepare 1040NR returns, or dual status alien returns at all. If they see that you qualify to be treated as a resident, they will want to proceed with filing your return as a resident. If you had no income in your home country, this is not a problem, and you can feel comfortable filing a US resident return. If you had income in your home country, make sure that the person you are dealing with understands “dual status alien” and “foreign tax credits”. Many tax preparers, especially the ones that set up temporary kiosks in the shopping center, have not been trained in these areas, and it’s essential to you that you hire someone knowledgeable about tax issues for foreign persons.

 

A common question is: what if I just don’t report my foreign income? How will the IRS know? The IRS has treaties with several countries and there is a great deal of information sharing. Although it seems impossible that the IRS could find out about someone’s foreign wages, when they do have that information, the fines and penalties for not reporting your income are severe. I recommend filing an honest and accurate return, then you’ll never lose sleep worrying about it.

 

A few other things you should know about income taxes in the United States.  Our tax year ends on December 31st.  Your income tax form is due by April 15th of the next year.  Most states, and even some cities also have their own income tax forms that need to be completed and usually are due at the same time as your federal tax return.  Make sure to file all of the returns you need to file, not just the federal.  And the US government also wants to know about your foreign bank accounts.  Even if you don’t have any taxable income from them, if you have over $10,000 USD equivalent in a foreign bank, you’ll be expected to report that bank account in an FBAR form.

 

And probably one of the most confusing things about US income taxes is that different circumstances generate different income tax rates.  So you and your best friend could be working at the same job and making the exact same amount of money and withholding the exact same amount of tax – and one of you could wind up owing the IRS and the other one could get a huge refund.  It happens all the time.  There are different tax rates for married people than for single people, and there are special tax credits for children and all of those things affect what your tax bill will be.

 

My best advice is that if you are new to the United States, it’s a good idea to get some professional help with filing your US tax return.  It will cost you some money to have this done, but it will give you peace of mind.

 

 

Substantial Presence Test (You can also find this on the IRS website) to determine if you can qualify to file your tax return as a US resident.

You must pass both the 31-day and 183-day tests.

31 day test: Were you present in United States 31 days during current year?

183 day test: [If you weren’t here for the full 183 days during the current year, the time you spent here in prior years counts towards your being deemed a resident.]

Current year days in United States x 1 =_____days [the days you spent here during this year count as full days]

B. First preceding year days in United States x 1/3 =_____days  [the days you spent here last year only count as 1/3 days.  So if you were here last year for one month (30 days) then it only counts as 10 days]

C. Second preceding year days in United States x 1/6 =_____days    [the farther back the time, the less it counts.  Two years ago only count as 1/6 of the days, so a month then counts for 5 days.]

D. Total Days in United States =_____days (add lines A, B, and C)

If line D equals or exceeds 183 days, you have passed the183-day test.

Exceptions: Do not count days of presence in the U.S. during which:
you are a commuter from a residence in Canada or Mexico;
you are in the U.S. less than 24 hours in transit;
you are unable to leave the U.S. due to a medical condition that developed in the U.S.;
you are an exempt individual; [basically that’s an F, J, M, or Q visa]
you are a regular member of the crew of a foreign vessel traveling between the U.S. and a foreign country or a possession of the U.S. (unless you are otherwise engaged in conducting a trade or business in the U.S.)

Posted on by Jan Roberg

Things To Do If the IRS Threatens to Levy Your Bank Account

Tax Concept

If you’ve received an IRS notice saying that they intend to levy your bank accounts if you don’t pay up in 30 days, then it’s time to pay attention. Before the IRS actually issues a levy notice, they’ve usually made a few attempts at contacting you and trying to get a payment. If you’ve received an IRS levy notice, it means that the IRS hasn’t heard from you—they think you’ve been blowing them off (which in many cases is true). If you ignore the levy notice, they’ll just take your money and the law is on their side so you need to act now.

First, the responsible thing is to call them, or hire someone to deal with them for you. (I personally think that if you’ve reached this point, it’s best to hire someone—but remember, I do this for a living, so note that I’m biased.)

There are things you can do to prevent the IRS from going through with the levy. Let’s assume that you really do owe the money:

1. You can set up a payment arrangement–you pay off the IRS on a monthly bill schedule

2.Your situation might qualify you for an offer in compromise (the pennies on the dollar thing you see in TV commercials), or

3. Maybe you’re going through hard times and need to be put into the currently uncollectable status—you still owe, but the IRS quits hounding you until you get a job or your situation changes.

But maybe you don’t really owe the money. That’s the big kicker for me. Usually, if you’re getting IRS levy notices, you do owe them money—or at least part of it, but I have seen several cases where my clients don’t owe the IRS anything! A couple of times I have even gotten them refunds instead. If you didn’t do your taxes, and the IRS did them for you, don’t assume that the IRS did them right. When the IRS does your taxes for you, they automatically put you in the highest tax bracket they can justify and you get no deductions or tax credits that you might have qualified for. (Here’s a hint: if you’ve got kids, the IRS probably did your taxes wrong.) Even if you find that you don’t owe the IRS money—you still have to contact them, let them know the situation, and then you’re going to have to provide proof. Usually your proof is your corrected tax return.

Dealing with the IRS is the best way to get yourself out of levy trouble. But here are a few things that you also might want to consider doing while the threat of a levy is still hanging over your head:

1. Make sure your name is taken off of your kids’ and/or parents’ bank accounts. If you’re on someone else’s bank account, the IRS can and will levy that account too.

2. Don’t keep large amounts in your bank accounts. If you’ve got lots of cash, then maybe you can just pay your debt. But usually, this isn’t an option for most people. If your paycheck is going direct deposit into your bank account, get the money out immediately. You can put your cash onto a prepaid Visa debit card. Once the levy is in place, the IRS can only take the funds that are in your account at the time of the levy, if you get another deposit, that money is accessible. Transfer money in only as you need to make payments out of the account.

IRS levies are serious business. Don’t make the mistake of ignoring them.

_______________________________________________________________________

Note:  We try to answer all the questions that come to us but please be patient.  It’s our busy season right now.  We may not get to your post until the weekend.  When you make a post and use the capcha code, it won’t immediately show up.  You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of.  (We try to keep this a G rated website.)   We have to edit those out.  If you need an answer right away, here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

If you want to hire us, please call (314) 275-9160 or email us.  We do prepare returns for people all over the country (and a few foreign countries as well.)  We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.