Monthly Archives: October 2013

How To Make Estimated Tax Payments

Quarterly-Estimated-Taxes

A while back we wrote a post on just how the mechanics of income taxes worked with regards to you receiving a refund or having to pay Uncle Sam.  In the end it boils down to how much you had withheld from your paycheck versus the amount of tax you owe at your income level.  But what if you work for yourself (i.e. self employed) and no one is “withholding” anything from your check?  Then this post will clue you in on how you make your payments and keep Uncle Sam happy.

What is estimated tax?

Estimated tax is how you pay your taxes when you have income that isn’t subject to withholding.  Just think of it as what your employer does for you (i.e. withholds taxes from your check) when you don’t have an employer  so to speak.

Who has to pay it?

If you are filing as a sole proprietor (Schedule C), or receive income as a partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments.  Fortunately, you only have to make payments if you expect to owe tax of $1,000 or more when you file your return.

If you are filing as a corporation you generally have to make estimated tax payments if you expect it to owe tax of $500 or more when you file its return.

When do you have to pay it?

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

For the period:              Due date:

Jan. 11 – March 31           April 15

April 1 – May 31                June 15

June 1 – August 31          September 15

Sept. 1 – Dec. 31               January 15  of the following year

How do you pay it?

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.  The worksheet in Form 1040-ES will help you figure the amount.  You can then make your payment(s) using the voucher contained within or electronically via the EFTPS system.

What happens if you don’t pay it?

If you didn’t pay enough tax throughout the year (either through withholding or estimated tax payments),  you may have to pay a penalty for underpayment of estimated tax.  You can avoid this penalty if you owe less than $1,000 in tax after subtracting withholdings and credits, or if you pay at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

 

IRS Operations During The Government Shutdown

shutdown

So, the IRS is closed during the current government shutdown.  Does that mean that you get a free pass on paying your taxes, especially if you extended to the October 15th deadline?  Not exactly.  Per the IRS, here is a brief summary of questions taxpayers have raised as well as their response.

What is the state of current operations?

Current IRS operations are limited. However, the underlying tax law remains in effect, and all taxpayers should continue to meet their tax obligations as normal.

Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as they are required to do so by law. The IRS will accept and process all tax returns with payments, but will be unable to issue refunds during this time. Taxpayers are urged to file electronically, because most of these returns will be processed automatically.

No live telephone customer service assistance will be available, however most automated toll-free telephone applications will remain operational. IRS walk-in taxpayer assistance centers will be closed.

While the government is closed, people with appointments related to examinations (audits), collection, Appeals or Taxpayer Advocate cases should assume their meetings are cancelled. IRS personnel will reschedule those meetings at a later date.

Automated IRS notices will continue to be mailed.  The IRS will not be working any paper correspondence during this period. Here are some basic steps for taxpayers to follow during this period.

How does this affect me?

You should continue to file and pay taxes as normal. Individuals who requested an extension of time to file should file their returns by Oct. 15, 2013.

All other tax deadlines remain in effect, including those covering individuals, corporations, partnerships and employers. The regular payroll tax deadlines remain in effect as well.

You can file your tax return electronically or on paper –– although the processing of paper returns will be delayed until full government operations resume. Payments accompanying paper tax returns will still be accepted as the IRS receives them.

Tax refunds will not be issued until normal government operations resume.

Is the Oct 15 due date still in effect and should people still file?  

Taxpayers should continue to file and pay taxes during a lapse in appropriations as they would under normal government operations. Individuals who requested an extension of time to file should file their returns by Oct. 15, 2013.

Will paper tax returns be considered timely filed even though the IRS is not processing paper returns?

Yes. the United States Postal Service  is operating during the shutdown, and they will postmark and deliver mail to the IRS.  Any return postmarked by the due date will be considered timely filed by the IRS even though processing of the return may not occur until after the return due date depending on the length of the lapse in appropriations.

Is the IRS continuing to issue levies or liens during this period?

During the lapse in appropriations, the IRS is not sending out levies or liens – either those generated systemically or those manually generated by employees. The IRS notes that taxpayers may still receive levy or lien correspondence with October mailing dates, but those notices were printed before IRS shut down operations were fully complete. (It is standard practice for these notices to be printed with a future date to allow for mailing time to reach taxpayers.) In addition, the IRS notes that other letters related to liens and levies – such as notifications that a taxpayer could potentially be subject to a lien or a levy at a future date – continue to be automatically generated by IRS systems during the appropriations lapse. However, the IRS emphasizes that these notices are not actual levies or liens; just a notification of potential future action.

Understanding IRS Debt and Allowable Expenses

When an individual is facing IRS debt and is working to get it resolved, they’re often required to fill out a Collection Information Statement.   The Revenue Officer assigned to the case is allowed to (and often does) question any expenses that look fishy.   However, what expenses are considered allowable can sometimes perplex a taxpayer.

For example, the IRS sets very specific limits on what a household can claim as an expense.  These are often referred to as the National Standards.   However, IRS simultaneously explicitly prohibits the claiming of certain expenses for collection purposes, including expenses that are deductible or create tax credits on a tax return.  Many taxpayers are confused by this fact, and it’s just one of the numerous inconsistencies across the tax code.

When it comes to the dollar amounts which are considered allowable per the National Standards, many people are shocked at how low some of the numbers are.  Conversely, there are other people that are shocked at how large some of the numbers are.  Keep in mind that the IRS National Standards reflect the government’s calculation regarding a precisely middle class existence.  For example, the allowable housing expense will vary geographically, because housing is cheaper in some parts of the United States, and much, much more expensive in other parts.  However, the allowable expense for any area represents the median housing cost for that geographical area.

The National Standards for other expenses, such as public transportation and out of pocket health care costs, are the same for everybody nationwide, and are updated every couple years.  For food, clothing, and other miscellaneous expenses, the IRS allows a set amount based on the number of family members in the household.

Historically, the IRS has not allowed expenses for unsecured obligations, such as your minimum monthly credit card bills and student loan payments.  However, as part of the 2012 “Fresh Start” program, the IRS now gives collections personnel discretion on these items.  Your Revenue Officer may permit you to claim these items, and it is therefore better if you do so up front, and let them tell you later that you can’t.

Hopefully this gives you a little more insight into why some expenses are allowed and how they are calculated.  In the end, the most important fact is to ensure that  that you claim every allowable expense on your Form 433.  Doing so will ultimately minimize the amount you end up paying the IRS on your back tax liabilities.