UPDATED FOR 2022
As long as your kids are doing legitimate work for your business you can hire your kids.
As long as they’re doing legitimate work for your business, you can hire your kids and pay each of them up to $12,000 per year tax-free.
It’s true. And all of this while they earn a little money AND start saving for college or that first business. And it’s all tax-free.
So you may want to hire your child(ren) to work in your business. And you want to do it for many good reasons: to teach them about entrepreneurship, develop a strong work ethic, AND for the tax-free income — up to $12,000 per child.
You can hire your kids and pay each of them up to $12,000 per year tax-free. If you hire your son to stuff envelopes and your daughter to update your website then you get to lower your personal income by $24,000! Simply by engaging your children in the family business.
If they stay under this limit, they don’t even have to file a tax return, which means they don’t pay any income tax on it. And you get to deduct their wages, which lowers your business’ taxable income.
BUT WAIT. THERE'S MORE.
The IRS ACTUALLY Rewards You For It! Source: Publication 929 (2020), Tax Rules for Children and Dependents)
If you have children between the ages of 7 - 22, you can use this strategy to save some money. Here is how it works:
- Each of your children can be employed by your business and paid an annual wage of $12,000. This is an important amount because it is the standard deduction amount for single individuals.
- Your business gets to take a deduction for the payment, thus decreasing your taxable income.
- Your children will then file their own tax return, & since they only made $12,000 they pay no federal income tax because of the standard deduction of $12,000, their taxable income is ZERO.
- So the business gets to take a deduction, but the kids pay no federal income tax. It does not get much easier than that!
This strategy can also be combined with IRA and 401k strategies to really maximize the benefit. For instance, if you paid each child $12K each as salary. You could put $6K into an IRA that is deductible, and you can use their standard deduction to take their taxable income to zero.
In that case, your business can deduct $18K per child, but again, no taxable income.
If you want to save money then hire your kids and make sure you have them actually work!
Keep track of the hours and tasks your children perform and make sure it’s age-appropriate. DOL Rules Regarding Youth & Labor The IRS isn’t going to believe your 5-year-old earned $12,000 analyzing dental records. But that 5-year-old can model those pearly whites in photographs to be used on your website or brochure! It’s easy to document an “image agreement” that pays an ongoing licensing fee right from the start.
Using this strategy, rather than just dumping change into their jar, (money you likely paid personal taxes on) you’ve moved those taxable dollars from your tax rate to your child’s tax rate and bracket, which, is zero, and you still keep the money in the family!.
There are countless jobs kids can do for you, and remember, you can pay them at the SAME RATE you would pay any other employee or outsourced company.
- Cleaning the office
- Washing company cars
- Updating customer lists on the computer
- Simple to advanced Data-entry
- Transcribing video or audio
- Trips to the post office or general errands
- Helping at the office, passing out handouts, and more
- Walking door to door, placing fliers for your business
- Updating your social media accounts (They won’t even equate this as work!)
But then, let’s say after reading the guide, you find out that this strategy “doesn’t work” if your business is a corporation.
The Corporation “Problem,” and Its Simple Solution to Hire You Kids
There are different rules for different types of businesses. And that when the owners of a corporation hire their child, there are still payroll taxes like FICA to deal with.
We even pointed this out in your free guide. See for yourself:
FICA tax may not have to be withheld on work performed by a child under the age of 18 while employed by a parent in an unincorporated business (sole-proprietorship, single member LLC or a partnership where the only partners are the child’s parents). However, there is no FICA or FUTA exemption for employing a child in an incorporated business (S or C Corp) or in a partnership that includes non-parent partners. In these cases, the children are subject to the same withholding rules that apply to all other employees.
So you DO NOT have to pay payroll taxes for employing your kids if your business is a sole-proprietorship, a single-member LLC taxed as a disregarded entity, or an LLC taxed as a partnership and owned solely by you and your spouse.
But if your business is a corporation, the IRS’s rules are clear. You must pay payroll taxes on income given to your children.
So are you stuck if your small business is set up as an S or C Corp? Or if you’re planning on switching to an S Corp like we normally recommend for maximum tax advantages?
Well, it turns out there is a workaround.
As one high-profile tax strategist says: in order to lower your tax, just change the facts.
Here’s how to do it:
The Payroll Tax Workaround to Hire Your Kids
If your business is set up as an S or a C corporation, or as a partnership with other non-parent partners, the IRS says you have to withhold payroll taxes when employing your kids.
But there is a way to get around this restriction utilizing a little creativity and a “hybrid” approach.
Instead of paying your children directly from your S Corp, you pay them out of a family management company.
You can create this simple family management company as a Sole Proprietorship separate from your S Corp, and owned by yourself or your spouse.
Its only purpose is to support the operations of your Corporation, which can include the scheduling and monitoring of jobs done by your child(ren) — and all the bookkeeping and documentation necessary to keep the jobs within IRS standards.
The family management company charges the Corporation a management fee for these services and can then pay your child — which removes them from your corporate payroll.
And since the family management company is a Sole Proprietorship owned by a parent, you, or your spouse, it falls under the IRS exemption where payroll taxes don’t have to be withheld.
By following this workaround, you’ve found a way to truly pay your kids $12,000 per year tax-free using nothing but the IRS’s own rules.
For more tax-saving tips check out how my blog on Tax Deductions VS Tax Credits! Then put on your HR hat, because you've got some little new hires to train!
IRS Tax Form 941 for Payroll Tax Filing
Here’s everything you need to know about payroll tax filing, quarterly returns, and form 941.
Remember the thrill of your first paycheck? Remember feeling less thrilled when you discovered that your employer held some money for income taxes and Social Security?
That is payroll tax. Likewise now it’s your turn for payroll tax filing and to file form 941 and be the bearer of bad news. Certainly, you have employees, therefore, you pay into their income & FICA (Social Security & Medicare) taxes by withholding some of their paychecks.
Here, we’ll go over IRS Form 941, the tax form that makes all this possible.
What is Form 941?
Employers must submit IRS Form 941, also known as the Quarterly Federal Tax Return, to report three different taxes via payroll tax filing:
Most noteworthy is the federal income tax in addition to other payroll taxes withheld from employee paychecks like social security and Medicare. Finally the employer’s portion of social security or Medicare tax. You use Form 941 quarterly to report these taxes on your federal payroll tax filing.
Most likely, you’ll make the tax payments themselves monthly or every two weeks through direct deposits (more on that below), depending on the dates wages are paid.
If you pay wages to an employee (remember: there’s a difference between employees and independent contractors) you have to withhold or ‘hold onto’ some of their pay to cover things like income taxes, social security, and Medicare therefore you have to file Form 941.
If you’re a seasonal employer, you only need to File Form 941 in quarters where you’ve paid employee’s wages. If you’re paying less than $1,000 in employment tax in a tax year, you’re off the hook (but you must file Form 944 instead). And if your employees are “household employees” (a house cook or nanny, that kind of thing), you’ll just fill out Schedule H from Form 1040.
If you’re a new employer, have never withheld money from an employee’s paycheck, and never filed Form 941, talk to an accountant to make sure your bookkeeping and payroll are set up and that you’re signed up for EFTPS deposits. You can do this over the phone by calling the IRS at 1-800-555-3453 (have your bank account info ready) or online at the EFTPS website. You’ll then have to create a password for your Electronic Federal Tax Payment System account, which you then must log in here.
You still have to file Form 941. Only seasonal and agricultural employers who show their status on line 18 of the form don’t have to file Form 941. (See the IRS’s instructions to Form 941 for more information about who doesn’t have to file.)
What do I need to have ready before payroll tax filing?
Have your tax and payroll records on hand, and information about taxable tips your employees collected this quarter (here’s the IRS’s guide to tip record keeping).
How to pay payroll taxes online?
You can e-file Form 941 yourself online, or you can have someone else do it for you.
What does it look like?
The current Form 941 PDF from the IRS contains a two-page form, a voucher, and a fourth extra page of instructions. Besides the employer information section at the top, the form contains five parts.
The employer information section
Here you’ll show which period you’re reporting for, your name, address, and employer identification number (EIN). Don’t use your social security number (SSN) or individual taxpayer identification number (ITIN) here. You can apply for an EIN online at IRS.gov/EIN.
Line 1: Asks you for the number of employees working for you.
Line 2: Asks for any wages, tips, or other compensation you paid them.
Line 3: Asks for income taxes you withheld from employees’ paychecks. If you have no wages, tips, or other compensation subject to social security or Medicare to report this quarter, check the box on line 4.
Line 5: This is the heart of Form 941. It’s all about calculating your tax obligations and making sure they’re up to date. Line 5a will ask you to multiply total wages by 12.4% to calculate your social security tax obligation on wages.
Line 5b: Asks you to do the same thing for tips.
Line 5c: Is all about calculating Medicare taxes. The current rate of 2.9% covers both your portion and the employees’ portion.
Line 5d: Is about any additional taxes on employee compensation over $200,000, which is taxed at 0.9% and paid by employees.
Line 5e: Will ask you to total up all the amounts above.Line 5f: Is for employers who have been asked
by the IRS to pay additional taxes on unreported tips. (See the instructions for 941 for more.)
Lines 6-10: Will walk you through calculating your total taxes after adjustments, which you’ll make to account for things like sick pay and group-term life insurance. Line 11 is about the qualified small business payroll tax credit for increasing research activities, which you can read more about Instructions for Form 941.
Lines 12-14: Take your total taxes and subtract any payments you’ve already made to come up with your total balance due. If you overpaid (i.e. line 13 is greater than line 12) you report that on line 15.
This part is where you’ll figure out how often you must send the IRS the taxes you calculated in part 1. Most employers will have to deposit monthly or every two weeks. If you deposit semi-weekly, you must explain your tax liability on Schedule B of Form 941. If you owe more than $100,000 in taxes for the quarter, you must deposit these taxes immediately.
Here you’ll show whether you’ve stopped paying wages altogether and whether you have any seasonal employees. If you do, you might not need to file 941 every quarter.
If you want to let an accountant, lawyer, or tax prep professional discuss this form with the IRS on your behalf, this is where you’ll give them permission to do so.
Sign and date here to ensure everything you’ve entered is correct.
Form 941-V, Payment Voucher
If you have a total balance due (i.e. line 14 contains a positive number) use this voucher to pay any taxes you owe to the IRS.
When do I need to Form 941?
If you’ve never filed 941, you must file your first copy at the end of the quarter in which your business first started paying employee wages. You then must file on the last day of the month that follows the end of every quarter after that.
If you’re not sure when the quarter begins and ends, consult the following chart from the IRS:
|The Quarter Includes…||Quarter
941 Is Due
quarter: January, February, March
quarter: April, May, June
quarter: July, August, September
quarter: October, November, December
Report Payroll Taxes
You must report taxes you deposit by filing Forms 940, 941, and 944 on paper or through e-file.
Federal Income Tax and Social Security and Medicare Tax
If you held federal income tax or social security and Medicare taxes, subsequently, then you must file Form 941, Employer's Quarterly Federal Tax Return each quarter. This includes withholding on sick pay and supplemental unemployment benefits.
For a step by step guide on filling out form 941, read my post last month called What You Should Know About Payroll Tax Filling Form 941
Federal Unemployment Tax Act (FUTA)
Only the employer pays FUTA tax; it is not withheld from the employee's wages. Report your FUTA taxes by filing Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Preparing and Filing Form W-2
At the end of the year, the employer must complete Form W-2, Wage and Tax Statement to report wages, tips, and other compensation paid to an employee. File Copy A of all paper and electronic Forms W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration (SSA). File Copy 1 to an employee’s state or local tax department. The detailed instructions are listed on the back of these forms.
Two deposit schedules are in effect. They are monthly and semi-weekly where you must deposit federal income tax withheld and both the employer and employee social security and Medicare taxes.
However, before, the beginning of each calendar year, you must look up which deposit schedule you have to use which is based on your 941 total tax liability. You would have reported this during a special rule for Forms 944 and 945. Schedules for depositing and reporting taxes are not the same.
You must use electronic funds transfer (EFTPS) to make all federal tax deposits.
Under the monthly deposit schedule, deposit employment taxes on payments made during a month by the 15th day of the following month. Employers who deposit monthly should only report their deposits quarterly or annually by filing Form 941 or Form 944.
Under the semiweekly deposit schedule, deposit employment taxes for payments made on Wednesday, Thursday, and/or Friday by the following Wednesday. Deposit taxes for payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday. Report your deposits quarterly or annually only by filing Form 941 or Form 944.
Deposit FUTA tax by the last day of the first month that follows the end of the quarter. If the due date for making your deposit falls on a Saturday, Sunday, or legal holiday, you may make your deposit on the next business day.
Here Are IRS Published Upcoming Payroll Tax Dates
Deposit payroll tax for payments on Feb 5-7 if the semiweekly deposit rule applies.
Deposit payroll tax for payments on Feb 8-11 if the semiweekly deposit rule applies.
File Form 8038-GC, Consolidated Information Return for Small Tax-Exempt Government Bond Issues
File Forms 990, 990-EZ, 990-PF, 990-N, 990-BL, 990-T (Trusts other than section 401(a) or 408(a) trusts), 4720, or 8868
File Form 8038, 8038-B, 8038-G, 8038-TC for bonds issued in Oct/Nov/Dec 2019
File a new Form W-4 if you claimed exemption from income tax withholding in 2019.
Furnish Forms 1099-B, 1099-S and certain Forms 1099-MISC to recipients.
Deposit payroll tax for Jan if the monthly deposit rule applies.
Start withholding tax from employees who claimed exemption from withholding in 2019 but did not file a W-4. This was to continue withholding exemption in 2020.
Deposit payroll tax for payments on Feb 12-14 if the semiweekly deposit rule applies.
Deposit payroll tax for payments on Feb 15-18 if the semiweekly deposit rule applies.
Deposit payroll tax for payments on Feb 19-21 if the semiweekly deposit rule applies.
File Form 1096 with information returns, including Forms 1098, 1099, and W-2G for payments made during 2019.
File paper Forms 1094-C and 1095-C with IRS if you are an Applicable Large Employer; For all other providers file paper Forms 1094-B and 1095-B with the IRS
Deposit payroll tax for payments on Feb 22-25 if the semiweekly deposit rule applies.
File Form 8027 if you are a large food or beverage establishment.
File Form 730 and pay the tax on wagers accepted during January.
File Form 2290 and pay the tax for vehicles first used in January.
Farmers and fishermen: File Form 1040 and pay any tax due. However, you have until Apr 15 to file if you paid your 2019 estimated tax payments by Jan 15, 2020.
Deposit payroll tax for payments on Feb 26-28 if the semiweekly deposit rule applies.
Deposit payroll tax for payments on Feb 29 - Mar 3 if the semiweekly deposit rule applies.
Employers: Employees are required to report to you tips of $20 or more earned during February.
Deposit payroll tax for payments on Mar 4-6 if the semiweekly deposit rule applies.
If you withhold payroll tax and don't report or pay it then you may need to read my post on Payroll Tax Debt!
The richest Americans pay less tax via paid overall a lower tax rate than average due to what the IRS shows they do differently.
The ultra-rich save the most tax, according to IRS statistics. And over 90% of them have one thing in common. They do not sign their own returns. They hire tax pros instead. It shows they paid at a combined 24% rate on average, down 1% compared to the 25% national average.
The more money you make, the more complicated the returns. But it also means the more money you have for tax planning, to pay someone to navigate the complex tax system. They find ways to legally avoid paying tax.
Most less wealthy Americans don't pay for tax planning. Thus they miss out on the various ways of legally avoiding paying taxes. Tax avoidance is finding ways within the law to keep taxation at its smallest amount. That, after all, is what the paid professionals are there to do.
Here’s what you need to know.
What Tax Planning Really Does
Tax planning is the art of arranging your affairs in ways that postpone or avoid taxes as allowed through the ever-changing tax regulations. By employing effective tax planning strategies, you can have more money to save and invest or more money to spend.
Put another way, tax planning means deferring and flat out avoiding taxes by taking advantage of beneficial tax-law provisions, increasing and accelerating tax deductions and tax credits, and generally making maximum use of all applicable breaks available under our fabulous IRS Code.
While the federal income tax rules are now more complicated than ever, the benefits of good tax planning to pay less tax are arguably more valuable than ever before.
BOOK YOUR NO-COST NO-OBLIGATION APPOINTMENT HERE TO SCHEDULE A CONFIDENTIAL VIRTUAL MEETING FROM THE COMFORT OF YOUR HOME OR OFFICE!
You might ask yourself if you can afford Tax planning, but the real question is - Can you afford not to plan and pay less tax?
The IRS streamlined the Closing a Business page into simple steps, so business owners and self-employed individuals can make final IRS payment.
During this difficult and challenging time, the IRS streamlined the Closing a Business page into simple steps, the release states, so business owners and self-employed individuals can quickly find the information they need.
"The IRS realizes small businesses and self-employed individuals are facing challenges in their personal and business lives during these uncertain times," said Eric Hylton, commissioner, Small Business/Self-Employed Division. "Closing a business is a difficult decision and we want to help ease the burden for people making this tough choice.
We redesigned the closing a business page on IRS.gov to help businesses comply with final tax responsibilities and make IRS payment."
The information includes what forms to file and how to report revenue received in the final year of business and expenses incurred before closure.
- File a final return and related forms. The type of return to file depends on whether the business is a sole proprietorship, partnership or corporation. The page features a section for each business type. Business owners can click on the section that applies to them to get the returns and forms they need.
- Take care of employees. Business owners with one or more employees must make final federal tax deposits and report employment taxes.
- Pay the taxes owed. Even if the business closes now, tax payments may be due next filing season.
- Report payments to contract workers. Businesses that pay contractors at least $600 for services (including parts and materials) during the calendar year in which they go out of business, must report those payments.
- Cancel EIN and close IRS business account. The IRS cannot close out an account until the business has filed all necessary returns and paid all taxes owed.
- Keep business records. How long a business needs to keep records depends on what's recorded in each document.
The page also has information to help business owners who are declaring bankruptcy, selling their business and terminating retirement plans.
The IRS has a legitimate right to raise taxes on companies, even though the company has gone bankrupt. However, precisely who will be liable to pay these taxes will depend on the legal framework of the company. For example, if a company is structured as an LLC, or limited liability corporation, shareholders in the company will not be responsible for paying back taxes. However, sole proprietors and partnerships will.
The only way that a business required to pay penalties could get out of it would be to reach a settlement with the IRS. In a settlement, the company will not be obligated to pay the entire amount that it owed. The precise conditions in which an IRS may consent to a settlement are unknown — the IRS prefers not to disclose them, so as not to threaten its ability to collect taxes — but the agency has been known to accept partial payment.
Closing your business can be a difficult and challenging task. The IRS has resources that can help you navigate this.
On this page, you’ll find the steps you’ll need to take to close your business from a federal tax perspective regardless of your business type and information to help you take care of your employees.
Whether a sole proprietorship, partnership or corporation, information on this page will help you understand what to file and how to report income you receive and expenses you incur before closure.
Remember to check your state responsibilities when closing a business.
There are three main collection alternatives taxpayers use to resolve an IRS back-tax debt: Installment Agreement, Uncollectable Status and Offer-in-Compromise.
Collection alternatives if you cannot pay the tax debt
We know the story: things are tight financially, so you either (1) do not file the tax return, or (2) file the return but don’t pay the balance due. But do not worry, you tell yourself, next year will be better.
Now it is 2-3 years later and a letter arrives from the IRS, and the threats start, and maybe it has even gotten to the point of actual levy and seizure activity.
Now the IRS is wreaking havoc on your financial life and you simply do not know what to do.
We know. We have helped many clients through that exact scenario. Fear not, there is a light at the end of the tunnel.
The most commonly used alternatives are extensions of time to pay and streamlined installment agreements. That’s because most individual taxpayers just need a few weeks to get the funds to pay their tax bill, or they can pay monthly.
As it turns out the IRS is usually only too happy to work with taxpayers, but there are some ground rule you need to be aware of and a roadmap to follow.
1. Tax Compliance
The first step in resolving your tax issue is to get into “tax Compliance.” Compliance means that you have filed all tax returns due for the last 6 years and have made your current tax payments. Once you are in tax compliance we can now work on resolving the back-tax issue.
2. Collection Alternatives
There are three main collection alternatives to resolve a back-tax debt: Installment Agreement, Uncollectable Status, and Offer-in-Compromise.
An installment agreement is an agreement to pay the taxes back over time. There are three variations of the installment agreement: Regular, Streamlined, and Partial-Pay.
Which type of agreement works best for you will depend upon your personal circumstances and is something we can help you address when you are ready.
Uncollectable status is when the IRS determines that you are unable to make current tax payments.
When a taxpayer is deemed uncollectable the IRS may still file a Notice of Federal Tax Lien to secure its position in the taxpayer’s assets but will not otherwise take enforcement action to seize (or levy) the taxpayer’s assets or income streams.
If you cannot pay the IRS, you can request currently not collectible (CNC) status, which strictly limits allowable expenses to necessary living expenses limited by IRS collection financial standards. CNC status is usually temporary; the IRS uses manual and automated procedures to determine whether your client’s financial situation has improved.
For CNC arrangements, the IRS will file a tax lien if more than $10,000 is owed. To request a CNC arrangement, you must contact the IRS by phone, in writing, or in person.
An Offer-in-Compromise is an agreement where the IRS agrees to accept less than the total amount owed to it and the taxpayer agrees to pay the amount negotiated, as well as maintain his or her tax compliance for 5 years following the acceptance of the Offer-in-Compromise (“Offer”).
The basis for an Offer is a formula referred to as “Reasonable Collection Potential” or “RCP.” RCP is effectively the net equity in assets plus the taxpayer’s excess future income for 12 or 24 months, depending upon how the Offer is structured.
There can be significant planning done to help a taxpayer maximize the potential for the Offer acceptance.
If you or someone you know has an issue with paying their federal taxes and needs help to end their IRS nightmare, please contact us by either phone at 844-888-1040.
IRS Gears Up for Aggressive Tax Collections and Enforcement
IRS Commissioner Charles P. Rettig testified before the Senate Finance Committee, sending the message that the IRS is committed to catching intentional tax evaders.
He stated "The IRS is committed to having a strong, visible, robust tax enforcement presence to appropriately support taxpayers who comply voluntarily. When taxpayers file their returns, they should feel confident others are doing the right thing too. Enforcement of the tax laws is critical to ensuring fairness in our tax system. IRS employees who collect taxes, audit returns, and investigate fraud, as well as tax-related identity theft, work hard throughout the year to enforce the tax laws while treating taxpayers fairly and respecting their rights."
There was no ambiguity in the message of his testimony to Congress; he noted that under his watch, the IRS will aggressively pursue those purposely evading their tax obligations with civil and criminal enforcement.
The commissioner made sure to mention that those who were not defrauding the system intentionally had nothing to worry about; they are not the target of stepped-up enforcement.
The IRS will be targeting five major enforcement initiatives:
Technology – The IRS will put a new focus on their use of technology as an enforcement tool; specifically, advanced data and analytical strategies. With this data-driven approach, the IRS believes it will be able to catch tax fraud impossible to spot even just a few years ago.
Offshore Tax Evasion – Offshore tax reporting enforcement is a long-standing priority of the IRS, but the current commissioner reiterated the focus on this area, so don’t expect to see any easing here.
Tax Shelters – The IRS believes many taxpayers are abusing two tax shelters, syndicated conservation easements, and micro-captive insurance arrangements. They plan on stepped-up tax enforcement on both those who arrange these shelters and taxpayers who participate in them.
Cryptocurrency – The IRS believes there is mass non-compliance in the world of cryptocurrencies through either underreporting or non-reporting of taxable transactions.
Wealthy Taxpayers – Tax enforcement actions take time and are resource-intensive, so it should be no surprise that the IRS is going after non-compliant taxpayers with the biggest ROI. The IRS is considering anyone with an income level of over $100,000 to be high-income.
Expect to see increased tax enforcement efforts ahead, with a focus on those who are intentionally evading the system. If you haven’t purposely defrauded the system, you have little to worry about.
THE PRESIDENT’S FY 2021 BUDGET
The President’s FY 2021 budget proposal for the IRS provides $12 billion to
administer the nation’s tax system fairly, collect more than $3.6 trillion in gross taxes to fund the government, and strengthen tax compliance.
In addition to the base appropriations request, the Budget proposes a program integrity cap adjustment that would provide an additional $400 million in FY 2021 to fund investments in the IRS tax enforcement program.
These investments will generate $79 billion in additional revenue over 10 years and cost $15 billion, for net revenue of $64 billion over 10 years, which will help reduce the net tax gap of $381 billion.
LEGISLATIVE PROPOSALS IN THE PRESIDENT’S FY 2021 BUDGET
Along with the funding requested in the President’s FY 2021 Budget, the IRS is asking for Congress’s help legislatively in several important areas that would improve tax administration and support the IRS in fulfilling its mission in tax enforcement, including the following:
Greater Flexibility to Address Correctable Errors. The budget would expand the IRS authority to correct errors on taxpayer returns. Current law only allows the IRS to correct errors on returns in certain limited instances, such as basic math errors or the failure to include the appropriate social security number (SSN) or taxpayer-identification number.
This proposal would expand the still limited instances in
which the IRS could correct a taxpayer’s return to situations where:
(1) the information provided by the taxpayer does not match the information contained in Government databases or Form W-2, or from other third-party databases as the Secretary determines by regulation;
(2) the taxpayer exceeded the lifetime limit for claiming a deduction or credit; or
(3) the taxpayer failed to include with his or her return certain documentation that is required to be included on or attached to the
This proposal would lessen taxpayer burdens and make it easier for IRS
to correct verified taxpayer errors, directly improving tax compliance and reducing EITC and other improper payments, and freeing limited IRS resources for other compliance activities.
Increase Oversight of Paid Tax Return Preparers. Paid tax return preparers
have an important role in tax administration because they assist taxpayers in complying with their obligations under the tax laws.
Incompetent and dishonest tax return preparers burden unsuspecting taxpayers, increase collection costs, reduce revenues, disadvantage taxpayers by potentially subjecting them to penalties and interest because of incorrect returns, and undermine confidence in the tax system.
To promote high quality services from paid tax return preparers, the proposal would explicitly provide that the Secretary of the Treasury has the authority to regulate all paid tax return preparers.
Improve Clarity in Worker Classification and Information Reporting. The
budget proposes to:
(1) establish a new safe harbor that allows a service recipient to classify a service provider as an independent contractor and requires withholding of individual income taxes to this independent contractor at a rate of five percent on the first $20,000 of payments; and
(2) raises the reporting threshold for payments to all independent contractors from $600 to $1,000, and reduces the reporting threshold for third-party settlement organizations from $20,000 and 200 transactions per payee to $1,000 without regard to the number of transactions.
In addition, Form 1099-K would be required to be filed with the IRS by January 31 of the year following the year for which the information is being reported. Significant information reporting and withholding can result in a 90% effective rate of voluntary compliance.
The proposal lessens worker classification disputes with service recipients, increases clarity in the tax code, reduces costly litigation, and significantly improves tax compliance.
In addition, the President’s FY 2021 Budget request also includes these two
provisions related to tax administration:
Fund the Federal Payment Levy Program via Collections: This proposal would allow the Fiscal Service to retain a portion of the funds collected under the Bureau’s Federal Payment Levy Program (FPLP) which processes and collects delinquent tax debts through the Treasury Offset Program (TOP).
TOP currently recoups its costs from retained amounts from collected amounts for all its programs except for the FPLP but under current law, the IRS must pay these costs through annual reimbursement agreements under the Economy Act. This proposal would make
the FPLP consistent with other TOP programs.
Delinquent taxpayers will not be impacted by the proposal, because they will receive credit for the full amount collected. This proposal creates efficiencies, because it allows the Fiscal Service to recover its FPLP costs from the IRS in the same manner as other TOP programs.
Require a social security number (SSN) that is valid for work to claim child
tax credit (CTC), earned income tax credit (EITC), and credit for other
The Administration proposes requiring an SSN that is valid for work to claim the EITC, CTC (both the refundable and non-refundable portion), and/or the ODTC for the taxable year.
For all credits, this requirement would apply to taxpayers (including both the primary and secondary filer on a joint return) and all qualifying children or dependents.
Under current law, taxpayers who do not have an SSN that is valid for work may claim the CTC if the qualifying child for whom the credit is claimed has a valid SSN.
Furthermore, the ODTC, created by the Tax Cuts and Jobs Act, allows taxpayers whose dependents do not meet the requirements of the CTC, including the SSN requirement, to claim this nonrefundable credit.
This proposal would ensure that only individuals who are authorized to work in the United States could claim these credits by extending the SSN requirement for qualifying children to parents on the tax form for the CTC and instituting an SSN requirement for the ODTC.
While this SSN requirement is already current law for the EITC, this proposal also would close an administrative
gap to strengthen enforcement of the provision.
Your Best Defense Against A Bank Levy
A Collection Due Process Hearing, also known as a CDP hearing, maybe your last best chance to resolve a tax controversy and stop a bank levy with the IRS short of tax litigation.
The IRS does not allow taxpayers to request these hearings for “frivolous” reasons. That includes refusing to pay tax on religious or moral grounds.
What Are Some Legitimate Reasons to Request a CDP Hearing?
- You want to seek payment alternatives such as a payment plan or an offer in compromise. To get these plans accepted, you must file all delinquent returns.
- You have a terminal illness and overwhelming medical bills.
- You can’t pay because you’re living on Social Security or unemployment.
- You can’t afford to pay with your income—the IRS has strict guidelines on this type of hardship arrangement.
Generally, the IRS must issue a Notice of Intent to Levy and Right to Request a Hearing before it sends a levy. Requesting a Collection Due Process Hearing
Complete Form 12153 Request for a Collection Due Process Hearing, and send it to the IRS at the address shown on the lien or levy notice within 30 days.
The taxpayer should check the IRS actions that he disagrees with and explain why he disagrees with such actions.
If the taxpayer receives both a lien and a bank levy notice, the taxpayer may appeal both actions.
The taxpayer must identify all reasons for disagreement, and may raise the following issues relating to the unpaid tax:
a. Appropriateness of collection actions;
c. Appropriate spousal defenses; and
d. The existence or amount of the tax, but only if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the tax liability.
- To preserve the right to go to court, Form 12153 must be sent to the IRS within 30 days of receipt of the notice from the IRS.
- Under CDP, a taxpayer is entitled to only one hearing relating to a lien notice and one hearing relating to a levy notice, for each taxable period.
- If a taxpayer receives a subsequent lien or levy notice after requesting a hearing on an earlier notice, Appeals can consider both matters at the same time.
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Frequently Asked Questions
What Is A Financial Institution (Bank Account) Levy?
A bank levy is an order from the IRS to seize money from a taxpayer's bank account. The levy can be in the form of all the money in the account or a certain percentage of it. The IRS is usually pretty aggressive in going after levies, so taxpayers should always try to reach out and negotiate with the agency if they're having trouble paying their taxes.
How A Bank Account Levy Works?
A bank levy is when a creditor seizes money from a debtor's bank account to satisfy a debt. The money seized can be used to pay the creditor directly, or it can be used to pay off the debt in full. If there's not enough money in the account to cover the entire debt, the creditor may seize whatever money is in the account, even if that means taking all of the money and leaving the debtor with an empty bank account.
The Federal Government has several options for collecting tax debts, including wage garnishment, asset seizure, and bank levy. Which option they choose depends on several factors, including how much money they think they can get from the debtor and how much hassle they're willing to go
Avoiding A Financial Institution Levy: What Can We Do?
Try to negotiate a payment plan with the IRS. They may be more willing to work with you if they know you're trying to make a payment plan and not just ignoring them. You may be able to avoid legal action and have taxes withheld from your paycheck if you pay off any outstanding debts before they become due.
How Long Does A Levy Stay On Your Bank Account?
A levy stays on your bank account until it's paid in full or released. A levy is a legal seizure of your property to satisfy a debt. The IRS can seize funds from your bank account, wages, or assets to pay your tax debt.
2020 was a tough year for many.
Now is time for Americans to seek IRS back tax relief as they face financial hardship making tax payments impossible.
How to Get IRS Back Tax Relief Without Using A Professional
Has the pandemic caused created you to fall behind on filing your federal income tax year return or paying your federal IRS tax liabilities? If it has, you are not the only one looking for IRS back tax relief.
More than 22 million taxpayers in the United States had either failed to file a current tax return or are behind in paying their IRS taxes due and that was before the pandemic hit.
This relief ranged from postponing certain installment payments related to Installment Agreements and Offers in Compromise to the collection and limiting certain enforcement actions.
Past-Due tax returns were still due and the IRS "continued its work to secure unfiled tax returns" but told taxpayers' in an official statement that they "should file any delinquent 2018 return (and their 2019 return) on or before July 15, 2020" thus moving the April 15th deadline and extending the filing season.
Mission-critical functions continued with certain IRS services such as live assistance on telephones, processing paper tax returns, and responding to correspondence were and still are extremely limited.
Current year Tax return bills did not go away and unpaid taxes for prior years still accrued penalties and interest.
If things have been tight financially, it can be easy to ignore the task of filing and paying your federal taxes to the IRS. Some might think that they can get caught up “next year” when things get better.
However, unfortunately, for many their financial hardship won't get better and they will skip tax filing again. And maybe again allowing the situation to snowball.
Initially, one might think they have gotten away with not paying the IRS, but eventually, the IRS will catch up with you. While procrastinating, the penalties and interest build-up to a dollar amount that is way more than what would have been owed if the returns were filed and the taxes were paid on time.
What Can The IRS Do If You Fail To Get IRS Back Tax Relief?
Internal Revenue Service Restructuring and Reform Act of 1998 was a landmark law that put respect for the individual taxpayer back into the system. It forced the IRS to more fully communicate with the public and grant taxpayers "due process" rights.
But make no mistake about it, the IRS is not a joke and has almost unlimited power. They can take away your car, your house, garnish wages, clean out your bank account and retirement fund, as well as restrict your travel by seizing your passport.
They will take anything of value – jewelry, precious family heirlooms, artwork, your gun collection, even garnish part of your social security earnings.
By then, the penalties and interest will be so high that it will feel like an impossible situation to get out of.
Did you know that some of IRS debt may not be forgiven if one declares bankruptcy? This is correct.
Just the anxiety alone is not worth getting behind on your taxes. Especially at a time when everyone needs to keep their stress level low and their immune system in tip-top shape to fight the coronavirus.
For some, the added stress could cause a more severe illness. And that's the last thing that is needed because in a worst-case scenario, that can lead to lost wages and hospital bills on top of your IRS debt.
Save Your Marriage With IRS Back Tax Relief
You owe it to yourself and your loved ones to begin the journey of coming clean with the IRS. A huge burden will be lifted from your shoulders and you will feel enormous relief when you take the first step toward getting your IRS issues resolved.
Sleep at night with IRS Back Tax Relief
So, let's see if we can begin to relieve some of that anxiety. We will take a look at all of the steps and options that you have when you get behind in filing or paying your federal income taxes to the IRS.
Facts about IRS Back Tax Relief or Tax Debt Resolution
Here are some facts about resolving your debt with the IRS.
1. The IRS wants to work with taxpayers and grant IRS back tax relief The IRS is actually on your side, in a way. The agency is typically eager and happy to collect old debts. It truly wants to work with taxpayers, but there are many, many rules you need to know about and a process to follow.
2. Only 3 types of professionals can represent you before the IRS.
While you can represent yourself in front of the IRS. It might not be the best idea, especially if your debt is very high or you've ignored the situation for a long time.
There are only three types of professionals that can represent your case at the IRS:
1) CPAs, Certified Public Accountants. But be careful: not all CPAs are experienced in IRS representation.
2) EAs, Enrolled Agents. Again, make sure the EA has experience representing clients to the IRS.
3) Attorneys. Same story as above. Not all attorneys are tax attorneys, and even not all tax attorneys have a bustling representation practice.
A great question to ask anyone you are looking to hire is “What is your offer-in-compromise acceptance rate?” 3. You'll probably need to get your bookkeeping caught up.
If you're behind on your taxes, it can often follow that you are behind on your bookkeeping as well. Anyone you hire is going to need good numbers in order to work with you, so a good first step is to catch up on your bookkeeping.
Often, tax resolution professionals provide bookkeeping catch-up services. They'll do the minimum you need in order to get you or your business in compliance.
4. You will probably need to open all of your IRS mail.
Yep, we know you. It's sitting in a stack somewhere in your home. If you haven't opened the mail, start opening it up.
It's helpful for tax professionals to know what type of notice you received. In most cases, tax resolution specialists will know the letter by form number, and that will give them an idea of where to start with your case.
The Internal Revenue Service, state tax agencies, and local entities will send a letter if one of the following happens:
- You miss a deadline for filing payroll tax reports.
- You miss a deadline for filing your personal or corporate income tax returns.
- You miss a deadline for paying the tax due from your personal or corporate income tax returns.
- You miss a deadline for filing and/or paying corporate franchise tax due.
- An amount paid is short or over what the IRS or another tax agency calculates as due.
- The agency notices a discrepancy on any of your tax returns and needs an explanation.
- You have been selected for an audit.
- You fail to respond to previous correspondence.
Getting into Compliance for IRS Back Tax Relief
Here is what you need to do to get into “compliance” with the IRS. You can't have any debt forgiven until you get into compliance.
5. You should almost always file your past due tax returns, but there are some exceptions and filing needs to be done carefully so additional debt is not triggered.
Before any debt can be forgiven, the taxpayer needs to get into compliance.
This means all past-due returns must be filed. You don't have to pay off all your debt at this time; we'll talk about what you need to pay in the next item.
However, there are a couple of really big “ifs” when it comes to this step. In rare situations, filing can trigger more debt. Also, filing a particular way can also trigger more debt.
That's why it just makes sense to get a tax resolution professional involved in every step of this process, so they can keep you out of more trouble than you're already in.
6. Pay your current taxes.
While you don't have to pay all of your old IRS debt, you do have to be paying your current taxes. This is part of getting into compliance. You need to be able to show IRS that you can pay your taxes that are current.
This means that if you have a job as an employee, withholding is being withheld from your current paychecks. Or, if you're an entrepreneur taking draws, that you are currently making your estimated tax payments.
Paying Off Your IRS Debt: Options for IRS Back Tax Relief
Here are the options you have for paying off your IRS debt.
7. Pay off the entire amount, including penalties and interest.
If you can afford to, just pay it off. You will save on legal fees, but if you're a first-time offender, you may be paying penalties and interest that you might have gotten out of if you hired someone.
8. If the IRS has made an error, get the error corrected.
For this you need a Tax Resolution Professional – they can get into the RIS files and find what they have on you. It can be scary to talk to an IRS person directly.
Review return for errors, amend return, file paper return to IRS.
IRS errors usually refer to when the IRS files a return on your behalf (called a "Substitute For Return" or SFR) and only uses the info they have on hand. Therefore, no deductions are used.
9. Spouse issue You may also have a special situation with your spouse if they promised to file and did not or they do not file correctly, or they don't pay.
As a business or an individual taxpayer, you may receive a penalty on top of what you owe to the IRS. It allows compliant taxpayers to request abatement or remove certain penalties.
A penalty abatement is a tax problem resolution designed to fully eliminate or lessen the degree of IRS penalties.
The IRS penalties can roll out penalties that range from imprisonment to civil fines.
Those fines can be over 25 percent of the total owed to the IRS.
If you have tried applying for an offer in compromise and it was rejected, penalty abatement is the next best tax problem resolution to consider.
You can use it when negotiating repayment method terms or an installment agreement.
There are several types of installment agreements:
- In Business; and
11. Understand RCP: Reasonable Collection Potential One of the key concepts in getting IRS back tax relief can be Reasonable Collection Potential or RCP.
It is the basis for making an offer to the IRS as to what you can pay.
RCP is a complicated formula based on the assets and income you currently have.
A tax representation professional can work with you to create a personal budget that can be used to present an offer to the IRS.
We will discuss offers a little later in this article.
When good, hard work is performed to create the budget, the taxpayer's chances of getting their offer accepted by the IRS improve.
When the IRS lets you know that you owe taxes, a common and reasonable response is panic, particularly if you owe a lot of money to the government. People often seek help from tax relief services. These firms represent you before the IRS, submit Offer In Compromises, discuss payment plans, innocent spouses relief, and other IRS collection alternatives.
After you receive a notice that you owe IRS money, you are likely to begin getting mail from companies claiming that they can help you negotiate the complex system of the IRS. Although these tax debt relief programs promise to be a godsend, you should be conscious that this industry has a lot of scams and fraudulent organizations.
There are legitimate companies to choose from, and if you do choose to engage a tax relief business, it is important that you pay attention and ensure that the service you use is legitimate. To read more about IRS tax debt forgiveness and related issues, check out our posts on tax debt relief services and other issues.
Do I Need a Tax Debt Relief Agency, or Can I Do It Myself?
When you're looking for tax debt relief, it's important to take into account all of your choices. These companies are experts at interacting with and handling the IRS and can save you time and frustrations, but perhaps you should know that there are options for someone like you to make arrangements with the IRS on your own, completely for free with no need for guidance. If you want to work directly with the IRS, try the IRS Fresh Start Program. Guidance and representation can also be sought from the Taxpayer Advocate Service.
IRS Fresh Start Initiative for Tax Debt Relief
Tax Debt Relief Using the Taxpayer Advocate Service
What to Expect When Choosing an IRS Tax Debt Relief Firm
The worst thing you can do when you start receiving notifications from the IRS is nothing. Whether you choose to deal with the IRS on your own or employ a tax debt relief company, make sure to find out what's going on before tax levies are put on your account and before the government collects your property and assets.
The best tax debt relief companies will work with the IRS in advance to investigate your circumstances and figure out where your tax debt comes from and what initiatives and programs you are qualified for. Some may charge a fee for performing this service also known as a transcript analysis and evaluation.
What Tax Debt Relief Negotiations Can You Expect?
A legitimate tax debt relief firm will not guarantee that you will obtain a specific type of relief. You may meet the criteria for an offer in compromise, which is where you and the IRS pay less than what you owe, provided that you can prove that you can not pay the full amount.
How Can I know if a Tax Debt Relief Business is Legitimate?
A lot of companies advertise that they can help you resolve your tax debt for "money pennies" or offer a deal that is only valid for a very limited amount of time. You might receive mail and phone calls that offer outstanding results that they can not really ensure. You should be mindful that these are common tactics used by tax relief scam artists.
I strongly recommend that you shouldn’t share any personal information with, and definitely do not pay any money to, any organization until you feel satisfied that it is legitimate. If you contact a company for more info, be sure to ask questions and evaluate the credentials of the owners of the organization.
Ask Questions & Check Qualifications of Tax Debt Relief Firms
A Final Word About Tax Debt Relief