Despite our best intentions, life sometimes gets in the way of meeting an important deadline or obligation. In many cases, there are so-called “grace periods”, like for missing your mortgage payment or sending your car payment a few days late. But what happens when you’re late filing an income tax return, or paying the taxes reported on the return? Many people seem to believe that if one prepares his return, but cannot pay the tax shown on the return, he either cannot file the return, or should not. Neither proposition is true. The correct answer is to always file a return on time.

Underpaying Tax Due Is Better Than Failing to File

If you have a choice between filing on time and underpaying, or filing late, it is always better to file on time. It seems that the IRS treats withholding information more seriously than withholding tax money. The penalty for failing to file is more significant than the penalty for filing on time and simply underpaying. If an income tax return (and a variety of other returns) is not timely filed, a penalty of 5% of the tax required to be shown on the return accrues during the first month of delay, and another 5% for each additional month of delay, up to a maximum of 25% of the aggregate. Delayed payments are penalized at a much slower rate, 0.5% per month up to a maximum of 25% of the aggregate. However, that percentage accrual increases to 1.0% once the tax due is assessed and demand is made therefore.
Those are so-called “civil” penalties. Failure to file may also be treated as a crime, a misdemeanor. The government typically does not prosecute failures to file unless accompanied by another crime, such as an
illegal activity e.g. selling drugs, evading tax.

Abatement of Penalties

Under certain circumstances, the IRS will abate (waive) failure to file and to pay penalties if the taxpayer can show that one or the other failure was “due to reasonable cause and not due to willful neglect.” “Reasonable cause” may be found if the taxpayer shows he “exercised ordinary business care and prudence”, but was unable to avoid one failure or the other. Examples of reasonable cause may include a taxpayer’s serious medical issues or unexpected forces of nature.

When it comes to the IRS, many people take the approach that no news is good news. And when individuals and businesses receive IRS mailings, they tend to feel panic and anxiety. Although not all IRS communications are harbingers of doom, it is still important to address them promptly and thoroughly.
In numerous cases, the IRS sends straightforward requests that an individual taxpayer can take care of with relative ease. Everyone makes mistakes, and it’s easy to forget a name or an account number on tax forms. In these cases, it is a simple fix to respond with the requested information.
In other situations, the taxpayer miscalculated. Fortunately, math mistakes can be remedied by submitting a corrected tax form, along with any additional funds due.

When a Notice Is Serious

In some situations, an IRS communication identifies a more complex problem. In these cases, it may be important that you not proceed alone. Trying to handle a complicated tax matter on your own can result in costly mistakes. It’s also important to remember that the IRS isn’t always correct. As a huge federal agency that oversees millions of taxpayers, the IRS is quite capable of getting things wrong.
If you believe that an IRS communication was sent in error, you may need to produce compelling evidence that shows why its information is incorrect. You will also want to be very careful if you decide to speak with the IRS directly. Choose carefully – frequently you are better off having a lawyer speak for you or at least monitor your communications. Evidence on which the IRS/U.S. Attorneys rely in tax prosecutions often comes from the taxpayers themselves. The IRS will jump at the opportunity to introduce your communications with government representatives as evidence of tax evasion or other crimes, or in support of a civil fraud penalty.
Bottom line: You don’t need to be nervous when you get an IRS notice in the mail, but you do need to be very thoughtful and careful.

Adjusting Your 2014 Tax Obligation

If you take time to calculate your 2014 federal tax obligation in advance and discover that it’s higher than you expected, it may not be too late to make changes that lower it. For example, employees can adjust their withholding by completing a new W-4 at any time. By withholding extra money from your paychecks through the end of 2014, you can reduce your unpaid tax obligation. Alternatively, you can adjust your allowances to lower your tax bill for the year. A common strategy is to review outstanding and anticipated business, medical and other deductible expenses and pay them in the year in which they would do the most good. Generally, a decision to pay those expenses after the beginning of next year may be most beneficial because federal taxes tend to increase from year to year. But that is a generalization that should be subject to review in each individual case.

Individuals who are self-employed, along with folks who receive rental or interest income, must generally pay estimated taxes. Because estimated taxes frequently turn out to be more than what business owners and other self-employed individuals anticipate, now is a good time to calculate what you owe and, if necessary, increase your fourth quarter estimated tax payment.

When it comes to health insurance, individuals who buy coverage through an Exchange may qualify for an advance payment on the premium tax credit if their incomes fall within specific ranges. The IRS is geared up to go after premium overpayments. It follows that qualifying taxpayers should quickly consider marital status, changing family size, income amounts and other factors that will bear on the tax credits to which they are entitled.

The lesson here is that many taxpayers cannot wait until April of the following year to think about taxes and tax planning. The related considerations can be complex and time consuming. The anticipation and planning summarized here, together with a potential myriad of other considerations, are best undertaken with one’s accountant or another knowledgeable professional.

This website has been prepared by the Law Offices of Matthew W. Stanley for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

What Are Health Savings Accounts?

HSAs, which are offered by employers, banks, and health insurance companies, have been around since 2003 and have gained popularity due to the tax incentives they offer. Similar to an IRA, they allow participants to deposit money to apply toward future health care costs. Contributions are tax deductible, and individuals do not pay taxes on the interest they earn. Additionally, unused contributions can be rolled over to the next year. Account holders can withdraw their money to pay for non-health care costs, although they pay a tax penalty for doing so.

To be eligible for an HSA, individuals must also be enrolled in a high-deductible health plan, which offers lower premiums in exchange for higher deductibles (out-of-pocket costs). Many employers match employee contributions, which can lower the cost of annual deductibles. Proponents of HSAs point out that these plans give individuals greater control over their health care providers and choices because account holders can use the money deposited in their HSA for any qualified medical expense without first obtaining approval from a health insurer.

Deduction Limits for 2015

Each year, the IRS adjusts the deduction limits for annual contributions to HSAs. Per IRS Revenue Procedure 2014-30, the maximum amount you can contribute to your HSA in 2015 is as follows:
$3,350 for individuals
$6,650 for families
Individuals between 55 and 65 years old can contribute up to $1,000 as a “catch-up” contribution

The IRS also determines the minimum annual deductibles for high-deductible health plans, which are required for HSAs. For 2015, the minimum annual deductibles are:
$1,300 for individuals
$2,600 for families

The maximum annual deductibles for high-deductible health plans for 2015 are:
$6,450 for individuals
$12,900 for families

This website has been prepared by the Law Offices of Matthew W. Stanley for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

The federal government doesn’t always keep up with the pace of technology, but the IRS recently moved one step further into the 21st Century by making individual tax records available online. Through its Get Transcript service, which it announced in early 2014, taxpayers can now obtain instant access to tax returns and other personal tax records.

Before Get Transcript, obtaining your old tax records was something of a laborious process, requiring you to fill out a form and submit it by mail. You then had to wait anywhere between five and 10 business days for the IRS to mail your documents. With Get Transcript, individual taxpayers no longer have to wait for their information – previously-filed tax records can be downloaded instantly onto your computer. The new service is ideal for individuals being audited and for people who need financial information to apply for a mortgage, car loan, or student loan.

You can download the following documents through Get Transcript:

Individual Tax Returns

If you filed a Form 1040, 1040A, or 1040EZ tax return within the past three years, you can access it instantly on the IRS website.

Tax Accounts

Tax Account Transcripts show basic information – filer’s name, marital status, type of return, taxable income, and adjusted gross income – as well as any adjustments made by the taxpayer or the IRS after the return was filed. These records are important, as individual tax returns appear as originally filed and do not show subsequent adjustments.

Record of Account

A Record of Account is a combination of a taxpayer’s Tax Return and Tax Account information.

Wage and Income Transcripts

Wage and Income Transcripts are records of financial data about a taxpayer submitted to the IRS, such as W-2s, 1099s, and 1098s. If you need a Wage and Income Transcript for the most recent year, you may have to wait until July, which is when complete information generally becomes available.

Verification of Nonfiling Letters

These records provide proof that you did not file an income tax return with the IRS for a specific year, or at least that the IRS did not receive it. If you need a Verification of Nonfiling Letter for the current tax year, you must wait until it becomes available after June 15th.

This website has been prepared by the Law Offices of Matthew W. Stanley for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

When you’re launching a new business, choice of entity is one of the most important decisions you must make as a business owner. The limited liability company (LLC) is a popular choice, primarily because it shields owners from personal liability for business debts and allows significant tax flexibility. Before you decide to form an LLC, however, it is usually important to work with an experienced professional to determine which business entity is right for you

Advantages of the LLC

Generally, LLCs work well for small and closely-held businesses, including family businesses, investment partnerships, and real estate investors. To form an LLC in Washington State, you must comply with several statutory requirements, including choosing a unique business name, filing an articles of formation form with the Secretary of State, appointing a registered agent and preparing an operating agreement. Owners of LLCs must also take care to comply with both state and federal tax requirements, as well as file an annual report with the Washington Secretary of State. Once you have satisfied these requirements, you can take advantage of the benefits offered by the LLC.

Protection from Personal Liability

Business owners – especially new business owners – must frequently take on considerable debt to get their enterprise up and running. Unfortunately, many business owners pledge their personal assets in exchange for business credit. The LLC insulates individual business owners from liability to business creditors. Although limited partnerships offer the same protection, they also require at least one general partner to take on personal liability for business debts. Like most states, Washington permits creditors to “pierce the corporate veil” and obtain a “charging order” to pursue a judgment against an LLC if the member personally owes money to a creditor. However, Washington also allows personal creditors to foreclose on a member’s interests in the LLC, which can make the LLC an unattractive choice for some business owners. To obtain greater personal liability protection, some business owners may choose to form an LLC in another state and do business in Washington. This option won’t save you any money on state taxes, but it can help you avoid exposure to creditors.

Flexible Tax Treatment

When it comes to federal taxes, LLCs can choose whether they want to be taxed as a partnership, C-corporation or S-corporation. Single-member LLCs can also select to be taxed as a “disregarded entity”, or sole proprietorship. Current IRS policy in community property states like Washington is to adhere to the spouses’ choice of tax treatment. This flexibility is one of the LLC’s more attractive advantages. Of these entity types, only the C-corporation is taxed separately from the principal(s).

This website has been prepared by the Law Offices of Matthew W. Stanley for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

If you are an ex-pat living abroad, or a citizen who lives in the U.S. but maintains offshore accounts, you may have heard about the Foreign Tax Compliance Act, which often goes by the acronym FATCA and went into effect on July 1, 2014. Born out of the same legislation that produced the Hiring Incentives to Restore Employment (HIRE) Act passed in 2010, FATCA has almost nothing to do with creating jobs and everything to do with catching American citizens who attempt to hide money overseas.

As one of only two countries in the world that requires its citizens living abroad to pay taxes on income earned in other countries, the United States has a powerful incentive to police ex-pat citizens’ foreign bank accounts to ensure they are reporting all of their income to the IRS. In past years, the U.S. Treasury Department has stated that the U.S. loses up to $100 billion each year to offshore tax noncompliance.

FATCA aims to recoup these lost tax dollars by imposing the following regulations:

1. U.S. taxpayers with more than $50,000 in offshore accounts must report their foreign income by submitting a new form (Form 8938 Statement of Specified Foreign Financial Assets) along with their 1040 income tax return – this form is a supplement to existing FBAR reporting requirements and does not replace a taxpayer’s annual FBAR report
2. Foreign financial institutions must agree to disclose the names, tax identification numbers, addresses, and transactions of all U.S. accountholders to the IRS
3. The IRS will impose a 30 percent withholding tax on offshore accounts where a foreign financial institution refuses to disclose U.S. accountholder information

The majority of countries in the world have signed agreements with the U.S. government consenting to FATCA’s requirements. The U.S. Department of the Treasury maintains a list of compliant nations and updates it regularly.

This website has been prepared by the Law Offices of Matthew W. Stanley for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.