Posted on August 21, 2016 by Jan Roberg

Earn Cash Blowing the Whistle on Tax Cheaters!

Report tax fraud to the IRS using form 211 to earn an informant award.

Blowing the whistle on tax cheats could earn you cash, but it could also cause you a lot of trouble.

You’ve thought about it, haven’t you? Someone you know is cheating on their taxes, making huge refunds when they don’t even work, while you bust your backside making ends meet. Makes your blood boil doesn’t it? I know it does because people write to me all the time wanting to report an ex or a neighbor that they know is cheating on their taxes. I did a post about reporting fraud a few years back, here’s a link to it: Reporting Tax Fraud

Basically, if you’re just reporting fraud, you file form 3949, send it to the IRS and let them take it from there. You’re done.

But if you want to get a reward for reporting the tax fraud, that’s a different story! And, of course, a different form. But how do you know you can qualify for an award? Well first, you have to be able to provide specific and credible information. You can’t just send the IRS a form saying, “I think my neighbor’s cheating on his taxes, he can’t afford that new Volvo on the money he makes at the Post Office.”That’s just not going to fly. Also, it’s got to be a significant Federal tax issue. “My ex-wife claimed that those old clothes she gave to Good Will were worth $500 and they couldn’t have been worth more than $450.” That’s not big enough to make it worth their while to investigate.

There are two types of whistle blower cases: ones where the amount of tax, penalties, and interest exceed $2 million dollars. (Geek speak, that’s a section 7623(b).) That’s usually a business case. Or if you’re dealing with an individual, his or her income must be over $200,000 annually for at least one of the tax years you’re reporting on. In these types of cases, the IRS will pay between 15% and 30% of the tax that they recover. Seriously, if you’re in a position to report on a major case like that, you should find an attorney to represent you. Don’t mess with that on your own. 30% of $2 million is $600,000, it’s worth hiring an attorney for!

The IRS also has another program for cases where the tax is under $2 million or an individual makes less than $200,000. (Geekspeak, that’s section 7623(a).) Although the paperwork is the same, the rules are a little different for the smaller cases. The maximum award will be 15% of the tax recovered. Also, the awards are discretionary; meaning – the IRS doesn’t have to give you an award if they don’t feel like it. And, if you’re not happy with your award, you can’t go to Tax Court and argue it. You’re done. That’s it. So even if you’ve got the perfect case, there’s no guarantee that you’re going to get paid.

Just to give you an idea of how things go though, in 2015, of the 204 claims that were paid, 99 awards were given so it’s about half of the claims. But the IRS generally doesn’t pay awards until 5 to 7 years after a claim is filed so if you are going to get anything out of this, you’re going to be waiting for quite some time.

But let’s say you still want to go ahead with this. What do you do? You’re going to want to submit form 211. Here’s a link to that: Form 211

Basically, the form is going to ask for the name, address and the last 4 digits of the tax cheat’s social security number. The IRS will also want a description of what he or she did and why you believe it’s a violation of tax law. You’re also going to need to describe how you know about the cheating. How are you related to that person? And also how much tax you think that person owes. The bottom line here is, you really need to know something about the tax cheat to report them.

Here’s the last piece of information I want you to have. The IRS Whistleblower – Informant Award, unlike other whistle blower programs, does not provide whistle blower protection. That means that whoever you report on could find out. If it’s an employer, you could lose your job. If it’s someone you know (like an ex spouse), you could be placing yourself in danger. You really want to think about this before sending the IRS form 211.

If you still want to report a tax cheat, and don’t care about a reward, then go ahead and send form 3949-A instead. You can do that and remain anonymous. Continue reading →

Posted on August 15, 2016August 15, 2016 by Jan Roberg

Settle Your IRS Debt!

Over the past year I’ve taken hundreds of calls from people asking me about settling their IRS Debt. They have all sorts of questions:

Have you heard of that Fresh Start Initiative?

Do I need an attorney?

Can I really settle my debt for pennies on the dollar?

How much does it cost to do that anyway?

A lot of those companies that advertise on TV are charging from $5,000 to $8,000 – that’s money that you could have used to pay down your tax debt! And they keep your money even if the IRS turns you down!

So I’m going to be teaching a class about how to do do an offer in compromise by yourself. A step by step, easy to understand, instruction guide. Why do that? Because, the hardest part about making a deal with the IRS isn’t the forms you fill out, it’s pulling your paperwork together and figuring out your monthly expenses. And you’re doing that part yourself even if you’re paying the TV tax guys $5,000. So why give them all your money after you’ve already done all the work? You can use that cash to pay the IRS instead!

I’ve done a bunch of offers in compromise. The key is to use the IRS formula for making the offer. If you use the right formula-you get your offer accepted. If you can’t afford to pay what the IRS formula says you need to pay, you’re not out of options. You can still make an installment agreement to settle that debt.

So if you could do me a little favor, I’d really appreciate it. Don’t leave a comment below, please just respond to my survey. I want to make sure that I cover all the questions that people really care about. And most importantly, I want to make sure that I make it easy to understand. Thanks for your feedback

-Jan

Click Here for the Survey!

Posted on June 16, 2016 by Jan Roberg

Missouri Sales Tax Issues for Professional Photographers

Missouri has special rules for sales taxes for photographers

Professional photographers have unique issues when it comes to Missouri sales taxes.

I work with quite a few professional photographers and I’m always being asked about Missouri sales tax. There seem to be different answers about what is considered taxable and non-taxable here in Missouri. Well, I decided to get to the bottom of this – I called the Missouri Department of Revenue and this is what they told me.

Service – is not subject to sales tax. So if you perform the service of photographing a wedding (for example) the service portion of your work is not subject to sales tax.

Product – is subject to sales tax. So, if you produce a tangible product that you can hold in your hand – like a wedding album – that product is subject to sales tax. Even if you ship that product out of the state–it’s going to be subject to Missouri sales tax. Note – that’s for photographers only! Let’s say you manufacture a product – like wedding garters for example. You sell those garters online to people all over the country. If you sell that garter in Missouri, yes, that’s subject to tax, but if you sell it to someone outside of the state – then there is no Missouri sales tax. Photographers are treated differently on this issue.

Combined service/product is subject to sales tax. Let’s say you are going to photograph a wedding and the fee is $5,000 and that includes a wedding album book that you provide the bride and groom with at the end. In a situation like this – because the service and the product are priced as one unit – then the whole thing is taxed!

What’s the lesson here? You separate out the price of your service from your product! So if that album is worth $500 – then you say the service of taking the photos is $4,500 and the album is $500. You need to break it out so that your clients will not be taxed on your service of photographing the event.

Here’s a few more things to consider:

Electronic downloads are not taxable. If your client can purchase the photos by downloading them online – the photos are not subject to sales tax. It doesn’t matter if the downloads occur across state lines or in Missouri – downloads are not subject to sales tax. (That would include things like video games or apps as well.)

One more thing – if you paid sales tax on the product instead of using your business exemption – then you don’t have to charge sales tax on that product! So if you take the photos and have the wedding book printed up by someplace that charges you sales tax – then you don’t have to charge sales tax when you sell the book! Remember, even in this situation, you still need to break out the service fee from the product!

Some other thoughts –

What about saying the service is $5,000 and the album is free? My opinion is that would make the whole thing taxable. Your clients are basically getting the wedding book for $5,000 and I believe that would make your service taxable.

Okay, so what if I said the service is $5,000 and the wedding album is a penny? Once again, I would think that would still make your service taxable. Being realistic, the wedding album is worth more than a penny. I think you need to price the album at a fair market rate to pass Missouri scrutiny.

The big take away here though is that you must separate out your service fee from your product fee or else you’ll be paying sales tax on all of your work.

Posted on June 12, 2016November 30, 2017 by Jan Roberg

Death, Taxes and IRAs

When people talk about “death” taxes, they usually mean “estate” taxes. Now, for 2017, there is no federal estate tax if your estate is under $5,490,000. So for most people, you don’t have to deal with estate tax. But IRAs are a different animal!

An IRA is considered to be taxable income. So – if you die, your beneficiary will have to pay tax on that IRA money. So, maybe you don’t care – since you’ll be dead anyway. But if you do care about leaving a taxable legacy to your heirs, here’s a few things to think about.

1. Roth IRAs are not taxable. Not to you, not to your heirs. (I always like Roth IRAs.)

2. A lot of people sign up for IRAs but they don’t know who the beneficiary should be (or they don’t have all the information they need to complete that part of the paperwork.) When they sign up they just put “estate” down in the beneficiary box. This is usually a bad thing. What happens is that your heirs wind up having to file a form 1041, an Estate and Trust tax return. Now, if you Google “estate tax” you’ll probably find all the tax rates on estates – and you’ll read the tax brackets for if you have over $5,450,000. (And that’s a form 706 – it’s a different animal.)

The 1041 form for income tax on estates and trusts is for the income earned by the estate – which includes your IRA income. The first $2,550 is taxed at 15%, the next bracket up to $6,000 is taxed at 25%, the next bracket up to $9,150 is at 28%, then up to $12,500 is at 33%, and anything over that is $39.6%. It doesn’t take a whole lot of money to kick your IRA income into the top tax bracket! Just to give you a comparison – a single person won’t hit the 39.6% tax bracket until he or she reaches $418,400 in taxable income.

So what does this mean? Well, if your heirs aren’t rich, they’re going to be better off if they inherit your IRA directly from you instead of from your estate.

3. If your goal is to leave a legacy to your children – life insurance is better than an IRA. (I can’t tell you how much I hate sounding like a life insurance salesman but it’s true.) Your IRA is your retirement account – it’s supposed to be money for you to spend during your retirement. In a perfect world, you spend it all before you die. (And of course, have enough to enjoy a long and happy retirement.) Life insurance provides your loved ones with tax free cash after you die.

This is really a personal decision on your part. Do you want to leave something for the kids or not? For some people that’s a major priority, for others, not at all. It’s your choice. But not matter what you decide, be sure to work with your financial advisor to make sure your heirs are properly listed as beneficiaries to your taxable retirement accounts.

Posted on June 6, 2016November 30, 2017 by Jan Roberg

What You Need to File Your Taxes

Sometimes, the hardest part about filing your taxes is getting the paperwork together.

Whether you’re hiring a professional or preparing your own return, make sure you have all of your paperwork together before you start. If you’re expecting a refund, you’re probably anxious to get everything together so that you can file as soon as possible. For those of you who expect to pay, you’re probably not too thrilled about it. I know I never am anyway.

Here’s a list of some of the more common documents associated with filing. Not every person will have every form on this list, but hopefully this will help jog your memory so that you don’t forget something you need.

W-2 forms – that’s your statement of wages, you’ll need a W-2 for each job you held
1099 forms – there are several types:
- 1099-INT for interest
- 1099-DIV for dividends
- 1099-B for sale of securities (some companies, like Edward Jones or Raymond James, will send out a combined form that has your 1099-INT, 1099-DIV and 1099-B all in one statement)
- 1099-R for annuities, pensions and other retirement plan withdrawals
- 1099-G is for government payments like a state tax refund or unemployment benefits
- 1099 MISC is for miscellaneous income, like commissions or non-employee compensation
- SSA-1099 is for Social Security income — a note about the SSA 1099 form, it has to be the most frequently lost form on the planet. It’s usually the first one mailed out and I think it kind of gets lost in the shuffle. If you receive Social Security benefits, or are assisting someone who does, please make sure that this form is included with the other tax documents. For some people, it’s not taxable—but you need to include the figures from this form when preparing your taxes to determine if it is taxable or not.
- W-2G is for gambling income. If the Social Security form is the most frequently lost form, the W2-G comes in second. If you’ve received one of these statements, you need to include it on your tax return. If you don’t, you will get a letter from the IRS. (Gambling losses, up to the amount of winnings, can be deducted on your Schedule A.
1098 tells how much interest you paid on your mortgage – you want this because it can be used as a deduction
1098-E shows interest paid on a student loan – ditto!
1098-T shows the amount of tuition paid at an educational institution (you need this to claim those college tax credits.) Here’s the kicker, if you’re the parent paying the tuition, you won’t get the form, your student child will. You may need to work at getting your student to download this of the student portal.

If you sold stocks, mutual funds, or real estate, you’ll want to have your basis information on hand. (Basis is what you paid for the property. Many investment firms include the information right on your 1099B, but some don’t, especially if you sold old stocks.) Make sure you have this information ready before you file – it can save you lots of money!

If you purchased or sold a home this year, you’ll want to have a copy of your settlement statement. Depending upon your situation, there may be valuable deductions hidden in those statements.

If you are a member of a partnership, joint venture, S corporation, estate or trust, you will also need a copy of the Schedule K-1. Those forms aren’t required to be completed until March 15^th, so you may not be able to file your personal return before then. It’s a good idea to make your tax appointment once you have all of your other forms together. The K-1 information can be added at a later date.

And of course, you’ll want to have all the documents to support your deductions like real estate taxes, charitable contributions or deductible business expenses.

It’s always a good idea to have a copy of your last year’s return with you also. Sometimes you might have items that can carry forward into the next year. If you don’t provide you preparer with your old return, you’ll miss those deductions and credits.

If you save all the mail that says “Important Tax Information Enclosed”, you’re onto a good start. Having all of your tax paperwork together before you start your tax return is one of the best ways to avoid getting a letter from the IRS later.

Posted on November 1, 2015May 31, 2016 by Jan Roberg

S Corporation – Computing the Tax Savings

When deciding if you should elect Sub-chapter S corporation status for your company, you need to run the numbers first!

Electing to be taxed as a Subchapter S Corporation instead of as a Sole Proprietor could mean big tax savings for you as a small business owner. Notice I said could–because it’s not always the case. It’s really important to run the numbers – all the numbers – and do a comparison so you can make an informed decision.

This post is going to be a little technical. I apologize for that up front. I’m going to try to keep it in plain English though, because even if you can’t run the numbers yourself, you need to see what I’m talking about so you can discuss this with your accountant.

Here’s an example where I think choosing to be a Sub S Corporation is the right choice for a business owner: Jack Sparrow is a single, self employed pirate with net self-employment income of $100,000. (Yes, Johnny Depp was on TV last night.) Jack has no other income to report on his tax return.

I ran the numbers for 2014 and it shows the total tax on the 1040 return to be $30,680. ($16,550 for the income tax and $14,130 for the self employment tax.)

That’s a lot of taxes!

But what if Jack were to set up a Sub Chapter S Corporation? He’d have to set himself up to receive payroll–(that’s part of the deal with an S Corporation, you have to pay yourself a salary) but the rest of his income would be taxed at his regular tax rate (they call that ordinary income) instead of at the self employment rate.

So for my example, I set Jack up with a payroll of $40,000, his S Corp income is $56,340 (not $60,000 because he’s paying some payroll taxes that are deducted.) So when I run the taxes for that, I’m showing that his total tax on his 1040 is $17,400.

Right here you’re probably going, “$13,280 in tax savings per year? Awesome! Sign me up now!”

But it’s not that simple. Because remember, part of being an S Corporation means that you must set up a salary for yourself and pay the payroll taxes. If you don’t include the cost of those payroll taxes in your calculations, you’re not giving yourself a true comparison of the total tax cost.

For Jack’s example, we set up a payroll for $40,000. From his $40,000, Jack will have $3,060 withheld as his employee share of FICA-that’s the Social Security and Medicare tax that gets withheld from everyone’s wages. Also, remember when I said his S Corp income was $56,340 instead of $60,000? That’s because as an employer, Jack also had to pay an additional $3,060 for the employer’s share of FICA, and I added another $600 for state and federal unemployment taxes. The unemployment tax will vary by state but $600 is a reasonable estimate.

When you add those payroll tax costs to the 1040 tax cost, Jack’s total S Corp taxes are now $24,1120. That’s still a big tax savings of $6,650! In this case, of course I would recommend that Jack go for the S Corp.

Just for fun, what if Jack were offered a pirate job as a wage earning position? All W2 income with no self-employment at $100,000 per year? Just running the numbers straight like that, his 1040 taxes would be $18,341 and his FICA withholding would be $7,650 so his total tax cost would be $25,991 which turns out to be $1871 more than his S Corp taxes.

Now in real life, there would be other considerations – like health insurance and other fringe benefits that might make Jack want to jump at that wage position. But I left all of that out for this comparison.

The chart at the bottom of the post shows the numbers for Jack’s case side by side so you can see how I got to my numbers, in case you want to replicate them for yourself.

So, how do you determine if YOU should have an S Corporation instead of a sole proprietorship? You look at these numbers and it’s pretty persuasive. If you could save $6,000 or more a year, who wouldn’t do that? But taxes have a lot of moving parts these days. Maybe you have investment income, maybe you have wages from another job. Maybe you have deductions that are allowed on a Schedule C that aren’t allowed for an S Corp. Healthcare costs can also make a difference and so can your retirement savings goals.

If you don’t run the numbers fully through a tax program, including the payroll tax costs, you could actually lose money going with an S Corp. I ran a scenario the other day – this is a real person’s actual numbers: her tax savings by converting to an S Corp–before adding in any payroll taxes, was only $1,338. She’d spend that much in accounting fees for the payroll and additional tax return. Adding in the FICA and employer payroll taxes we send her to the loss column. I never would have known that had I not sat down and ran the numbers based on her whole situation.

While that taxpayer’s situation was unique, your situation is also unique to you. Before electing to be an S Corporation, make sure you have all the facts and run all the numbers. You’ll be glad you did.

Here’s that chart I promised you:

Comparison of wage, vs. self-employment, vs. Sub S Corporation taxes

Posted on October 4, 2015November 15, 2018 by Jan Roberg

Tax Tips for Single Parents

Kids can be a real advantage on your tax return

Having a baby really changes your taxes. Make sure you know the rules.

Updated November 15, 2018

Welcome to the world of parenthood. Raising kids is hard enough with help but it’s even harder when you’re alone. Here are some tips to help you navigate the changes that will happen to your tax return, because you deserve a little help once in awhile.

Claiming your baby for the child tax credit: If you are earning income, then you’re going to want to file a tax return and claim your baby for the child tax credit. I sometimes hear women say they didn’t claim their children because the child was born in December and they read the child is supposed to live with you for 7 months. In the year of birth, you claim the child even if she was born on December 31st. Let’s be honest. If you’ve jut gone through a pregnancy, that child has been living with you for more than 7 months anyway. Claim your baby! We’ll talk a little more about possibly letting someone else claim the baby, but unless there are special circumstances, plan on it being you.

Changing your filing status: If you’re on your own and supporting yourself, then once your baby is born you will change your filing status from Single to Head of Household. It gets a little more complicated if you are living with your parents, the baby’s father or someone else. The issue becomes, who is providing most of the support for the child? If you’re using computer software, there are all sorts of questions you can ask to determine how much support is provided to the baby and by whom. But here’s a quick and easy technique that’s pretty helpful. If you prepare the tax return with Head of Household status, and then switch it to Single status and the refund amount is exactly the same, then claim Single as your filing status. If your income is so low that your refund won’t change then you really don’t need Head of Household status. The IRS often audits returns claiming HH status when the income is too low. They never audit Single for the income being low. Why not just avoid a headache that you don’t need? The Earned Income Credit amount is the same for Single as for Head of Household filers.

What about letting someone else claim the baby? If you are living with the baby’s father and it would benefit you to have the child on his tax return instead of yours, then that’s fine. If you are living with your parents and they are supporting you and the baby, you can let your parents claim the child. Your parents would have to make more money than you do to be able to do this though.

Letting anyone outside of you, the father, or a grandparent claim your child on a tax return has the potential to get you into trouble and even land you in jail for tax fraud. There are a few situations where it can be done, but for that you should go see a professional. A new boyfriend who is not the baby’s father can NEVER claim your child for EIC. NEVER! The rules regarding dependents change often. Things that were allowed a few years ago aren’t allowed now. Sometimes well meaning friends and relatives can give you bad advice which could get you into big trouble. Protect yourself.

The Earned Income Credit: Many single moms, especially when they’re just starting out, qualify for the Earned Income Tax Credit. It’s a refundable credit, that means you get the money even if you didn’t pay any tax into the system. EIC is a big deal and can make a huge difference on your refund. That’s why people may want to try and claim your baby for you. There’s billions of dollars a year of EIC fraud. That’s also why you need to be careful, the IRS is very aggressive about pursuing EIC fraud. Don’t let anyone else claim your child.

Protect your child’s social security card like it was gold. It’s that valuable. Infant identity theft happens all the time. You won’t know it’s happened until you file your tax return and it gets rejected because someone else has claimed your child. Do not carry the card around in your purse or wallet. Store it someplace safe.

Congratulations on your new baby!

Posted on September 20, 2015May 31, 2016 by Jan Roberg

Should Your LLC Be an S Corporation?

If your small business has reached the point where your self employment taxes are really hurting you, choosing an S Corporation status might be the answer to your problem.

If you own a single member LLC, the IRS considers that to be a “disregarded entity.” That basically means there’s no such thing as an LLC tax return. So, if you don’t make an “election” to taxed some other way, you’re taxed as a sole proprietor on your 1040 personal tax return. That means, you not only pay income tax on your LLC income, you also pay self employment tax on top of it. Ouch!

But as a disregarded entity, you may make an election to be taxed as an S corporation (or even a C corporation if you want to) instead of being a sole proprietor. So how do you know you might be ready to be an S Corp? Here’s my top three criteria:

1. Steady net income. If you have a loss on your business, that business loss can offset your other income on your tax return. One of the big benefits of an S corp is to reduce your self employment tax. If your business has a loss, you’re not paying self employment tax anyway so the S corp status wouldn’t provide much benefit there. A good rule of thumb, but certainly not a deal breaker, is to have a net income of about $50,000 to make the tax savings be greater than the additional cost of separate tax returns and payroll expenses. I work with business that have losses and still are S Corps. The $50K income isn’t a requirement, it’s just sort of a break even point on costs.

2. Separate Employer Identification Number (EIN) and bank account. If your business is set up as an LLC, you should have a separate EIN and a bank account for your business already. I’m always surprised by people who skip this step, but it’s important. You can get an EIN number for free, online. It takes about 5 minutes.

Learn more here.

And you really need a separate bank account. You don’t want to co-mingle your business funds with your personal money.

3. Discipline to make monthly payroll deposits and quarterly reporting. One of the requirements of an S Corporation is that the owner has to pay him or herself a reasonable wage. That means, even if nobody else works for you, you still need to write yourself a paycheck and pay yourself like an employee. If you’re already making your quarterly estimated tax payments–you’re probably able to handle doing a payroll. If you’re scrambling every year, you can’t keep on schedule etc, then I say don’t do the S corp. Not being up to date on your estimated payments can be a problem, but the IRS can get really nasty if you’re behind on payroll tax deposits.

If you have no discipline, and your business easily has enough revenue to handle the payments–and still want to do the S Corp, then pay the extra money to hire a payroll company to do it for you.

Setting a reasonable wage is usually the most difficult thing to determine. You want to go by what a person in your line of work would get normally get paid, that’s not always easy to figure. You should probably have your wage be at least 1/3 of your net income unless you can document that people in your line of work usually make less.

Now, these are just my guidelines. There’s really no “set in stone” criteria for S Corp status. And really, before you make any change to the status of your business, what you really should do is run the numbers. Sit down with your tax professional and – using the most recent tax return – run the business numbers as if you were an S Corp, a C Corp, and as a sole proprietor. Don’t forget to include the costs of your payroll taxes when running the numbers.

Everybody’s situation is a little different. Compare your numbers side by see to see if changing to an S Corporation makes sense for your small business. That’s really the best way to tell.

Posted on September 7, 2015May 31, 2016 by Jan Roberg

How to Settle Your IRS Debt for Less: Taking the First Step

You’ve heard those commercials on the radio or seen them on late night television. “Settle your debt with the IRS for pennies on the dollar!” Those companies charge a lot of money for something called an “Offer in Compromise.” I’ve dealt with a lot of people who’ve paid between $5,000 and $8,000 for those services and gotten nothing-NOTHING for their money. That’s good money they could have used to pay off their debt!

So, before you spend that kind of money, you should see if you have a fighting chance at getting an Offer in Compromise (OIC) first. And here’s the best part–you can test it out for free. FREE!

The IRS has an Offer in Compromise Pre-Qualifier. It’s a wonderful little tool that will let you know if you even have a shot at an OIC before you spend money trying to get one. Here’s the link: IRS Offer In Compromise Pre-Qualifier

The first page has some pretty basic questions. Are you currently filing for bankruptcy? The answer has to be no, you can’t have an OIC if you’re in bankruptcy. If you’re in bankruptcy, you’ll have to wait until that’s over to file for an OIC. The next question is have you filed all of your tax returns. You have to say yes–otherwise the result will be no OIC. You’ll have to file those returns before filing for OIC, but you’re just trying to figure out if you could qualify in the first place.

Same thing with making your tax payments. Before you file for OIC, you’ll have to have your estimated payments caught up for the current year and self employed people must have their payroll deposits made.

So, just to get past the first page, you need to answer NO, YES, NA, NA. If that’s not true, you’ll need to rectify the situation, but you need to answer that way just to get past that screen to get to the meat of the program.

The next page is about where you live and the amount of tax that you owe. (This is one good reason why you need to file all of your returns before you make an offer–how can you settle your debt when you don’t know how much you owe?) But this is just a pre-qualifier, it’s to see if you may be able to make an offer so make your best guess.

The reason they ask about where you live is because the cost of living is different in different areas. A New Yorker will be able to claim more in housing expenses than someone from St. Louis because the cost of living is higher there. On the flip side, New Yorkers don’t get an adjustment for their other expenses which can hurt them when trying to qualify for an OIC. But that’s why the question about where you live is on the pre-qualifier.

This page also asks about your age. If you’re over 65, they make a higher allowance for your out of pocket medical expenses. That’s why that question is there.

From there, on the next page the IRS is looking at your equity–what are you worth financially? How much money do you have in the bank? What’s the value of your home? How big is the loan on it? How much is in your 401(k)? Do you have any stocks? How about the value of your car? How much do you still owe on your car loan? So where it asks for the equity in your car, it means what is the value right now minus how much you still owe on your car loan, that’s your car equity.

Home owners with a lot of equity and people with retirement assets often lose out right here. If you have assets, the IRS figures you can sell them or cash them in to pay your IRS debt. Be honest when filling this out (remember, no one is going to see it but you.) If you apply for an OIC, the IRS will be able to substantiate everything you say, so you may as well tell the truth to yourself on the pre-qualifier.

If your assets are too high to qualify for an OIC, the pre-qualifer will stop right here. You may want to double check your figures before giving up completely, but most likely you’ll need to pursue a different route to get settled with the IRS.

If you do get to the next section it’s all about your income. Wages, interest, dividends, child support, alimony, distributions from partnerships and S corporations. Anything else? The IRS doesn’t care if it’s taxable income or not. They include social security, pension income and even Veterans benefits as being money that you can use to pay your tax debt with.

The IRS is looking for monthly figures here. So, let’s say you get paid every two weeks. That means 26 paychecks a year. You’ll take the gross on your pay stub multiply that by 26, and divide by 12 to get your monthly pay. Lots of people would just double their pay check, because for the most part, you’re getting 2 checks a month. But the IRS doesn’t count that it way. They multiply by 26 and divide by 12 it makes a difference. You need to know how they’re calculating if you want to win this game.

The next page is all about your expenses. How much is your rent or mortgage? How much do you pay on your cars? What do you spend on gas and groceries? Child care? Child support? Alimony? Utilties?

Life insurance is on the list too. Now what they mean here is term life insurance. A whole life policy where it’s like an investment isn’t considered to be a cost of living expense, but term life is.

So now you’ve input your income, your expenses, your debt and your equity and the IRS computer runs all these numbers together and either says you may or may not qualify for an Offer in Compromise. It will also say what the IRS expects your offer to be given the information you put in.

Here’s the thing: the IRS tool is only as good as the information you put in. Most people do the IRS Pre-Qualifier the first time around just guessing at the answers. (I think I’d get this much if I sold my house today, I’m guessing my loan balance is about $x.xx.) This is just to get a ballpark. To get a better picture, you’re going to want to really know what your home loan balance is. Check out the fair market value of your house on Zillow.com. Really look at what you spend for your utilities. Get the actual numbers off your pay stub and do the pre-qualifier again with the actual figures.

Does it still look like you can do this? Great. Remember, page one? Make sure all of your returns are filed first and you know how much debt you owe. Don’t be in bankruptcy. And most importantly, make sure that if you need to be making estimated tax payments, you’re caught up with making them. Make sure these issues are taken care of before you submit an actual offer. I suggest hiring a professional to do this, but if you’re going to do it yourself, start with the Offer in Compromise Booklet, here’s the link to that: Offer in Compromise Booklet

And if you don’t qualify for an Offer in Compromise? That’s still not the end of the world. If you have exceptional circumstances, like huge medical expenses, you may still be able to make an OIC. Be aware that your chances are significantly lower for getting accepted, but you can still make the offer. But you’re going to have to demonstrate that your circumstances are exceptional and that paying the tax would create an undue hardship. This seems silly, but I cannot stress this enough–simply not wanting to pay your tax is not considered an undue hardship. (I get asked that question all the time.) Paying for chemotherapy treatment for a cancer patient, that might get you somewhere.

Even if you cannot qualify for an OIC, you can still work out a payment arrangement with the IRS to get the debt handled. You’re just going to have to pay the full amount of your debt.

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Posted on July 29, 2015November 30, 2017 by Jan Roberg

Three Myths About Income Tax in Retirement

Do you still have to pay income tax after your retire? The short answer is: YES!

I’m not sure why, but there seems to be a myth floating around about seniors not paying taxes. I’ve always had to deal with seniors in trouble for not filing tax returns when they needed to, or not paying tax on their IRAs, but lately I’ve been hearing the age myth. Three times in the past three weeks I’ve heard real people say the following things:

“Now that I’m 65 I don’t have to pay self employment taxes on my 1099 income.”

“What do you mean I need to be concerned about required minimum distributions, I won’t have to pay tax after I’m 70 anyway?

“I won’t need you to do my taxes anymore now that I’ve turned 80. There’s no taxes after 80.”

The bad news is: those statements are all false! The IRS doesn’t really care how old you are. They still want your money. So how do some of these myths get started in the first place? Well, some states don’t tax your retirement income. So if you live in one of those states, it’s easy to assume that the IRS doesn’t tax it either, but the IRS does tax retirement income, and they don’t care how old you are.

Myth 1, not paying Social Security tax after age 65: Once you start receiving Social Security benefits, it’s easy to assume that you won’t be paying into Social Security anymore. But–you do. Actually, if you’re still working after your full retirement age you might even increase your Social Security benefits. It all depends upon your circumstances, but you’ll want to check with Social Security to make sure that you’re being credited for your Social Security contributions.

Myth 2, no taxes after age 70: After age 70 1/2 you are required to start taking money out of your IRAs. It’s called Required Minimum Distributions (RMDs)- and that money is taxed. The quick and dirty calculation to figure your first year RMD is to take the total dollar amount of the money you have in all of your IRAs and divide by 28. Now, this is a quick and dirty calculation. Different ages, and different situations can get you different results. If you want to compute an RMD for a different age, try the Kiplinger calculator: http://www.kiplinger.com/tool/retirement/T032-S000-minimum-ira-distribution-calculator-what-is-my-min/index.php

For many people over 70, you don’t stop paying taxes, you actually pay more in taxes. If you don’t know about the RMDs and you need to be taking them, there can also be some pretty hefty penalties.

Myth 3, not paying taxes after age 80: I don’t know where that came from. (Actually, I heard it from my mother-in-law who heard it at the senior center. But I don’t know where it started.) Many seniors don’t pay tax because their income is low enough not to pay, and they aren’t required to file. But they’re not paying tax because of their low income, not because of their age.

And even if you’re not required to file, I still recommend submitting a return anyway to prevent identity theft.