The IRS is responsible for collecting taxes to fund government operations. While the IRS has various tools at its disposal to ensure tax compliance, there are limitations on what assets it can seize. One question that often arises is whether the IRS has the authority to take pensions. In this article, we will explore the complexities surrounding this issue and understand the safeguards in place to protect retirement savings.
Understanding the IRS Collection Powers
The IRS has broad collection powers, allowing it to pursue various avenues to collect unpaid taxes. These powers include placing liens on property, garnishing wages, and seizing assets. Unfortunately, if you owe back taxes, the IRS has the full authority to garnish your pensions and other retirement income.
At What Point Does the IRS Garnish Pensions?
If you owe back taxes, almost all assets and income will be at risk of garnishment. However, the IRS consider garnishment a last-resort option. In other words, they will make plenty of attempts to collect from you through IRS notices. Before the IRS can seize or garnish your assets, they must send you a final notice of intent to garnish your wages. If you do not pay them or make any attempt to contact them, they will move forward with collecting.
The IRS will audit you to get a full understanding of your assets that can pay off your tax liability. These can include normal assets like homes, vehicles, and regular income. It can also include pensions, Social Security payments, retirement funds, and more. But the IRS is more likely to seize retirement accounts if you are considered a flagrant taxpayer. In other words, if you purposely evaded paying taxes, they are more likely to resort to taking retirement funds.
How Much of My Pension Can the IRS Take?
Even though the IRS can take your pension, there are some limitations they must follow. These limitations depend on the type of pension you have and the laws that apply to that pension type. For example, the IRS can garnish up to 25% of your private pension and 15% of your Social Security benefits.
The Consumer Credit Protection Act (CCPA) is a federal statute that governs how debts are collected, including federal tax debt. Title III of the CCPA allows up to 50% to 60% of a taxpayer’s disposable income to be garnished to pay federal or state taxes. If the taxpayer is supporting a spouse or child, the garnished amount is 50% of their disposable income and 60% if they are not. Disposable income is the amount of income left over after certain deductions, such as taxes, Social Security, unemployment insurance, and state employee retirement systems. Ineligible deductions can include health insurance and charitable contributions.
Strategies to Address Tax Issues
If an individual is facing tax liabilities that they are unable to pay, it is advisable to explore alternative options before retirement accounts become vulnerable. These may include negotiating a payment plan with the IRS, seeking professional tax advice, or considering other tax resolution strategies.
Tax Help for Those with Pensions
In general, the IRS will avoid seizing pensions until it is clear or obvious that you are evading taxes. The protection of retirement savings is vital to encourage individuals to plan for their future. However, it is crucial for individuals to address tax issues promptly and explore available options to prevent potential collection efforts by the IRS. Seeking professional advice and understanding one’s rights and obligations can go a long way in navigating the complexities of tax collection. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
The worst thing that can happen for most taxpayers is being told by the IRS that they are being audited. However, what most people don’t realize is that there is a timeframe for how long the IRS can audit an individual. This timeframe is known as the audit statute of limitations. Taxpayers have a right to dispute an IRS audit if they have proper substantiation. In this article, we’ll explain how long the IRS has to audit taxes and what factors may affect this timeline.
Audit Statute of Limitations: The Three-Year Rule
Section 6501(a) of the Internal Revenue Code sets out the rule for the IRS audit statute of limitations. The IRS generally has three years from the date a tax return is filed to assess any additional taxes owed. It starts ticking on the date the return is filed.
Exceptions to the Three-Year Rule
The three-year rule serves as a broad guideline. However, there are exceptions and circumstances that can extend or suspend the audit statute of limitations. Some key exceptions include:
Substantial Omission of Income:If a taxpayer omits more than 25% of their gross income on their tax return, the IRS has six years from the filing date to assess additional taxes.
No Return Filed: If a taxpayer fails to file a tax return, the statute of limitations doesn’t apply, and the IRS can initiate an audit at any time.
Agreements and Extensions: If a taxpayer agrees to extend the statute of limitations or signs an agreement with the IRS, the audit period may be extended.
Omission of Foreign Income: If a taxpayer omits more than $5,000 of their foreign income on their tax return, the IRS has six years from the filing date to assess additional taxes.
Omission of Gifts or Inheritances: If a taxpayer receives a gift or inheritance of over $100,000 from a non-U.S. person and does not file Form 3520, the IRS can initiate an audit at any time.
Fraudulent Returns: In cases of fraud or the willful intent to evade taxes, there is no statute of limitations. The IRS can initiate an audit at any time.
Audit Process
Flagged tax returns typically end up going into an IRS audit. At this point, these taxpayers may receive an IRS notice called a CP2000. The IRS agent will be required to open and close an audit within 26 months after a tax return has been filed. The IRS strictly adheres to its guidelines to ensure that the audit is complete within the three-year timeframe.
For audits that start a few months after a return is filed, the IRS will typically freeze any refunds. However, the IRS will have to pay interest on refunds that are sent late. This is why the IRS will attempt to resolve its audit quickly. Once a taxpayer answers the questions regarding their tax return with accuracy, their refund will be released and sent out. Audits that happen immediately after filing a tax return typically contain tax credits. Usually, these will include earned income tax credits, and the child tax credit. The IRS usually wants to verify the filing status, dependents, and other return items before sending your refund.
Practical Considerations
While the IRS has a specified period to initiate an audit, taxpayers should keep their tax records for at least three years after filing. However, keeping records for an extended period, such as seven years, can provide an added layer of protection. This is especially true if there are concerns about substantial omissions or potential audits related to certain transactions.
Seek Help if You’re Being Audited
Understanding the IRS audit statute of limitations is crucial for taxpayers to navigate the complexities of tax compliance confidently. While the general rule is a three-year window for the IRS to initiate an audit, exceptions can affect this timeframe. As tax laws and regulations are subject to change, it is advisable to consult with a tax professional to stay informed about any updates that may impact the audit process. By maintaining accurate records, individuals and businesses can mitigate the risks associated with IRS audits. Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens.
Receiving an IRS notice in the mail can be scary, but the situation can be less daunting if you know what to do. First, it’s important to note that not all IRS notices are negative as some are only informational. In any case, taxpayers should know what steps to take upon receiving an IRS notice.
Do Review Your IRS Notice
The IRS will send notices for many reasons, from notifying you of a balance dueto informing you of a delay in processing your return. From inquiring whether your return is missing a schedule or form required for processing to informing you of a potential audit. Carefully review your notice for important information. If you’re unsure of what the notice means, you can look up the CP or LTR number, located on the top or bottom right-hand corner of the notice.
It also shows the date and time the IRS expects you to respond. In the best case scenario, the IRS is pursuing a correspondence audit covering one or two items of a single year’s tax return. Correspondence audits are conducted entirely by mail and makeup 75 to 80 percent of all audits. An in-person interview audit takes place at your local IRS office. A field audit is scheduled for a particular date and time but takes place in your home or office. It is considered the most comprehensive type of audit.
Do Not Panic
Understand what auditors are seeking. While each audit is different, all audits focus on three basic questions:
Is your business truly a business – or just a hobby?
If you can answer these three questions to the satisfaction of the auditor, you stand a good chance of emerging from an audit relatively unscathed.
Do Gather Your Documentation
Once you have determined what information the IRS is seeking, it’s time to begin gathering your paperwork. If the IRS is challenging a particular deduction or tax credit that you claimed, gather whatever documentation you have to support your claim. This can include bank statements, receipts, and invoices. Provide as much information as possible concerning the inquiries the IRS has made. Also, make photocopies of everything that you intend to provide to the IRS. Never give up your original documents. If you must report in person for an office audit or prepare your home or office for a field audit, ensure that your paperwork – and your representative – will be available and ready.
Do Respondto the IRS Noticein a Timely Manner
If the information on the notice looks inaccurate, you should respond with a written dispute. Doing so in a timely manner can help minimize interest and penalty fees. Be sure to include any information and supplemental documentation to support your case. However, do not volunteer information the IRS has not specifically requested. Typically, the IRS should respond to disputes within 30 days.
Do Check for Scams
Remember that the IRS will never contact you via text message or social media. In fact, initial contact from the IRS is usually via mail. If the IRS notice does not appear credible, you can always check your online tax account on the IRS website to confirm balances due, communication preferences, and more.
The IRS will notify a taxpayer if they believe that there may be fraudulent activityoccurring on their tax return. The IRS will send a letter to you inquiring about a suspicious tax return that you may have not filed. They will request that you do not e-file your return because of the duplicate social security number that was used. Act quickly should you receive this letter from the IRS to avoid further fraudulent activity with your personal information.
Do Not Ignore the IRS Notice
Some IRS notices are purely informational and require no additional action. However, do not assume this is always the case and ignore the notice. Simple mistakes made on your return or underreporting income can result in the IRS requesting action from you. A notice can also be a notification that you owe taxes and will give instructions on how to pay the balance by the due date.
Do Not Replyto the IRS NoticeUnless Instructed To Do So
Typically, a response to an IRS notice is not needed. Once you confirm a response is not required, you can proceed with other actions. Even if the notice informs you of a balance due, there is no need to contact the IRS unless you do not agree with the information on the notice.
Do Learn from the Experience
Use the situation as an opportunity to learn more about tax regulations and ensure that your future tax filings are accurate and complete. Consider consulting with a tax professional for ongoing guidance.
Tax Help for Those Who Received an IRS Notice
Even if you prepare your own returns, having a professional from Optima Tax Relief check out your response before you return it to the IRS may save you from making a costly error. The IRS allows you to be accompanied by a representative if you have been contacted for an in-person interview audit or a field audit. Take advantage of this opportunity. You’ll likely be nervous during the procedure and may share information that might prompt the IRS agent to probe beyond the original scope of inquiry. Not only that, most IRS agents prefer dealing with a professional.
The best thing to do to avoid receiving warnings from the IRS is to always ensure that you remain compliant with tax law. However, if you find yourself in a situation where you owe the IRS, tax relief is always an option. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
While there is no guaranteed method of avoiding tax audits, there are things that could help trigger them. Since the Senate approved nearly $80 billion in IRS funding through the Inflation Reduction Act of 2022, with $45.6 billion specifically for enforcement, the IRS has promised an increase in tax audits. Below are some things that the IRS has historically viewed as “red flags,” which could increase the chances of an audit for taxpayers. But first, let’s review the different types of audits.
Types of IRS Audits
The IRS conducts different types of audits to review and verify taxpayers’ financial information and ensure compliance with tax laws. There are three primary types of IRS audits:
Correspondence Audits: These are the most common and least intrusive type of IRS audit. In a correspondence audit, the IRS requests specific documentation to support claims on their tax return. Typically, these audits are focused on one or a few specific issues, such as income, deductions, or credits. Taxpayers can respond to these audits by mail, providing the requested documentation and explanations.
Office Audits: An office audit, as the name suggests, takes place at an IRS office or a local IRS branch office. The IRS will contact the taxpayer to schedule a face-to-face appointment for the audit. The taxpayer will be required to bring the necessary records and documentation to the IRS office. Office audits are often more comprehensive than correspondence audits as they can cover a wider range of issues on a tax return.
Field Audits: Field audits are the most extensive and thorough type of IRS audit. In a field audit, an IRS agent comes to the taxpayer’s home or business to conduct the audit in person. These audits are usually reserved for more complex or high-risk cases. That said, they can involve a comprehensive review of a taxpayer’s financial records and activities. Field audits are often conducted when there are significant discrepancies or concerns about a taxpayer’s compliance with tax laws. However, note that the IRS has halted most unannounced visits to taxpayers.
Reporting a Business Loss
The IRS will be more inclined to audit a taxpayer who reports a net business loss, even if it’s small. Reporting losses year after year will only increase IRS interest in your tax returns. Remember, it is mandatory to report all earnings in a tax year. However, it might be helpful to reconsider which expenses should be deducted from your tax return. Reporting even a small profit could reduce the chance of being audited by the IRS.
Being Vague About Expenses
When it comes to expenses, the more detail the better. This is especially true when categorizing them on your return. Try to avoid listing expenses under “Other Expenses” as this will lead to more scrutiny from the IRS. It may even be helpful to provide supplemental documentation explaining why certain expenses drastically increased or decreased for that year. Doing so can give potential auditors a valid explanation for such occurrences and possibly avoid a tax audit. Additionally, rounding dollar amounts are red flags for the IRS. You should always use exact dollar amounts on your tax return.
Filing Late
Some taxpayers believe that filing late can actually decrease the risk of being audited. However, filing on time, as well as paying on time, can help establish a history of IRS compliance. This will be far more beneficial in the long run. In addition, not filing by the due date will also result in receiving your tax refund later if you are expecting one. Even worse, if your late filing triggers an audit, it may prompt the IRS to look at older tax returns you’ve filed. If they find any other errors, this can add additional time to their normal processing schedule.
Claiming Excessive Deductions
It is best to avoid any excessive expenses. For example, deducting the cost of your breakfast and lunch each workday may not be acceptable to the IRS. Excessive deductions for your donations to charitable organizations can also increase the chances of being audited. Inflating business expenses can result in being audited, especially if you try to claim large amounts for business entertainment or claim a vehicle that is used for only business purposes 100 percent of the time.
Now that home offices are more common, it’s important to only claim the home office deduction for the portion of your home that is used exclusively for business purposes. When claiming this deduction, you will need to figure out how much square footage in your home is dedicated to your business. For tax year 2023, the rate for the simplified square footage calculation is $5 per square foot, with a maximum of 300 square feet or $1,500. Excessive deductions claimed on your return are fast tracks to being audited by the IRS. That said, it’s best to only claim the deductions you actually qualify for to avoid owing any additional taxes.
Keeping Poor Records
Even the simplest tax situations require adequate records. If your finances are more complicated, then detailed records are necessary. Some taxpayers may feel inclined to estimate their expenses because they did not save receipts or documents, which the IRS views as a red flag. It’s important to make sure you have detailed records for the past three tax years at minimum. Having items like your previous tax returns, medical bills, business receipts, real estate documents, and investment statements can help substantiate your claims and avoid an IRS audit.
Choosing the Wrong Filing Status
Your filing status (single, married filing jointly, married filing separately or head of household) determines how you treat many tax decisions, such as what forms you’ll fill out, which deductions and credits you’ll take and how much you will pay (or save) in taxes. Select the wrong status, and it will trigger a cascade of mistakes–maybe even an audit. On top of that, if you decide to file jointly with your spouse, this means you’re responsible for any errors or deliberate falsehoods on your partner’s return, so make sure that you’re comfortable with what it says.
Tax Relief for Those Being Audited
The chances of being audited are low, but those chances increase when the IRS notices any of the above red flags. The audit process can be very stressful. It is a tedious process that requires collecting information regarding your income, expenses, and itemized deductions. Failing an audit can result in a huge, unexpected tax bill. It’s best to seek assistance from experts who can help you avoid an IRS audit. Remember, filing your taxes correctly the first time can help avoid interest, tax penalties, and additional taxes owed. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
As the fourth quarter of 2023 unfolds, taxpayers across the U.S are faced with an important development – an increase in IRS interest rates. The IRS periodically adjusts its interest rates, and these changes can have significant implications for individuals and businesses. In this article, we will explore the reasons behind the IRS interest rate increases, how they impact taxpayers, and what individuals and businesses can do to navigate this change effectively.
About IRS Interest Rates
The IRS sets interest rates to determine the amount of interest that accrues on unpaid taxes, late payments, and overpayments. Interest rates can vary by quarter. They are based on the federal short-term rate plus an additional 0.5 to 5 points, depending on the type of underpayment or overpayment. It’s also crucial to note that IRS interest rates compound daily. This means that the interest charged is based on the previous day’s tax balance, plus the interest.
What are the new IRS interest rates for Q4 2023?
The interest rates imposed by the IRS as of October 1, 2023, are as follows:
Portion of Large Corporation Tax Overpayment Exceeding $10,000: 5.5%
When does underpayment interest begin?
The IRS begins charging interest on balances owed beginning on the due date. Your balance will continue to accrue interest until it is paid in full. It’s important to note that tax extensions are not extensions to pay – only to file. This means that if you file for an extension in April, you will have until October to file your taxes. However, your balance will continue to accrue interest until it’s paid in full. That said, if you don’t file your taxes or don’t pay your balance, you’ll also be subject to failure-to-file or failure-to-pay penalties. You can also be penalized for underpaying estimated tax, making a payment with insufficient funds, or failing to file an accurate return.
When does overpayment interest begin?
Overpayments happen when you paid the IRS more than you owed in taxes. In these cases, the IRS will owe you a tax refund. The IRS generally has 45 days to issue your refund. If they exceed that time frame, they will typically pay overpayment interest. The interest will begin from the later of the following events:
The tax deadline
The date your late tax return was received by the IRS
The date the IRS received your tax return in a sufficient format
The date a payment was made
Impact on Taxpayers
The Q4 2023 increase in IRS interest rates will have several implications for taxpayers:
Increased Costs: Taxpayers who owe money to the IRS will face higher interest costs on unpaid taxes, potentially making it more expensive to resolve their tax liabilities.
More Attractive Savings: On the flip side, taxpayers who are owed refunds or have overpaid their taxes may benefit from higher interest rates on their refunds, making it more attractive to save or invest their tax refunds.
Prompt Payment Encouragement: The higher interest rates can serve as an incentive for taxpayers to pay their taxes promptly, as delaying payments can lead to accruing additional interest charges.
What You Can Do
In light of the IRS interest rate increases in Q4 2023, there are steps that individuals and businesses can take to navigate this change effectively.
Pay Taxes Promptly: To avoid higher interest charges on unpaid taxes, make sure to pay your tax liabilities on time.
Apply for a Payment Plan: If you cannot afford to pay your balance in full when it’s due, you should contact the IRS immediately to set up a payment plan. Doing so can help lower some of your penalties.
Request Penalty Relief: There are a few instances where you may be able to get your penalties waived, such as being a first-time offender, acting with reasonable cause, or other statutory exceptions.
File an Amended Return: You may be able to reduce your tax balance or penalties by filing an amended return.
Tax Help for Those with Tax Balances
Tax laws can be complex, and it’s advisable to consult a tax professional who can provide guidance on tax planning and managing your financial obligations efficiently. It’s essential for taxpayers to stay informed, plan wisely, and consider professional advice to navigate these changes in IRS interest rates effectively. By doing so, individuals and businesses can manage their financial responsibilities in an ever-evolving economic environment. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Taxes are an essential part of a functioning society, providing the government with the necessary funds to provide public services and support various programs. However, when it comes to paying taxes, many individuals and businesses may find themselves making mistakes or underestimating their obligations. This can lead to tax underpayment, a situation that often incurs penalties. In this article, we will delve into tax underpayment penalties, why they exist, and how to avoid them.
What is Tax Underpayment?
Tax underpayment occurs when an individual or business fails to pay the full amount of taxes they owe by the due date. This can happen for various reasons, such as underestimating income, miscalculating deductions, or failing to make estimated tax payments. When you fail to meet your tax obligations fully, you may be subject to penalties.
Why Do Tax Underpayment Penalties Exist?
Tax underpayment penalties exist for several reasons:
Revenue Generation: One of the primary reasons for these penalties is to generate revenue for the government. While penalties act as a financial disincentive for underpayment, they also help to recoup some of the lost tax revenue.
Fairness: Tax underpayment penalties aim to create a level playing field. Those who accurately and timely pay their taxes should not be disadvantaged by those who do not. Basically, penalties encourage compliance and reduce the burden on law-abiding taxpayers.
Deterrence: The threat of penalties serves as a deterrent to discourage taxpayers from underpaying their taxes intentionally or negligently.
How Do Tax Underpayments Work?
Remember the IRS requires you to pay taxes as you’re earning income. If it’s not, underpayment penalties will likely apply. The rule of thumb is that if your adjusted gross income (AGI) is $150,000 or less, then you must pay the lesser of 90% of this year’s tax or 100% of last year’s. You can do this by figuring out how much taxes are being withheld from your paychecks. From here, you’d pay the remainder in estimated tax payments if necessary. If you earn more than $150,000, then you must pay the lesserof 90% of this year’s tax or 110% of last year’s.
In general, if you owe more than $1,000 when you calculate your taxes, you will likely pay an underpayment penalty. Here’s how tax underpayment penalties typically work:
Assessment of Underpayment
Tax underpayment penalties are assessed when the taxpayer either doesn’t pay the full amount of taxes owed by the due date. It also happens when a taxpayer fails to make accurate estimated tax payments throughout the year. This can result from underreporting income, not withholding enough taxes throughout the year, overstating deductions, or simply not paying the required amount.
Calculation of Penalties
Penalties are usually calculated based on the amount of the underpayment, the length of the underpayment period, and the applicable interest rates. Tax underpayments are subject to a failure to pay penalty. At this time, this is 0.5% of the tax owed and is paid each month or partial month that the tax goes unpaid. However, the failure to pay penalty will not exceed 25% of your total unpaid tax balance. In addition to penalties, you will also pay interest on your balance owed. While interest rates can change, the current rate for Q4 of 2023 is 8% for individuals and 10% for corporations.
Example of How Underpayment Penalty is Calculated
Let’s say you owe $4,000 in taxes this year, but only had $2,000 withheld and did not make any estimated tax payments. Your taxes would be considered underpaid by $2,000. Since you did not pay at least 90% of your total tax owed, and it’s more than $1,000 owed, you will likely owe an underpayment penalty. The penalty would be 8%, for a total of $160. If you fail to pay, interest will accrue on your tax balance until it’s paid in full.
Avoiding Tax Underpayment Penalties
To avoid tax underpayment penalties, follow these best practices:
Maintain Accurate Records: Keep thorough records of your income, expenses, and deductions to ensure accurate tax calculations.
Estimate Taxes Correctly:Make accurate quarterly estimated tax payments if you’re self-employed or have irregular income.
Consult a Tax Professional: Seek the adviceof a qualified tax professional to help you navigate complex tax issues and ensure compliance.
File On Time: Always file your tax returns by the due date, even if you can’t pay the full amount. Filing on time can reduce late filing penalties.
Communicate with Tax Authorities: If you’re facing financial difficulties and can’t meet your tax obligations, contact the tax authority to explore payment plans or alternative solutions.
Conclusion
Tax underpayment penalties are designed to encourage compliance with tax laws, promote fairness, and generate revenue for the government. However, these penalties can be avoided by accurately estimating and paying your taxes, maintaining good financial records, and seeking professional advice when necessary. By following these steps, you can navigate the complex world of taxes and minimize the risk of tax underpayment penalties. Remember, staying informed and proactive is the key to a trouble-free tax season. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
