Category Archives: Tax Talk

How To Sell or Refinance A Home With an IRS Lien

Good luck selling a home when the IRS get’s their padlock on it!

When a homeowner wants to sell their home, but it is encumbered with an Federal tax lien (i.e. IRS Form 668(Y)), they might feel as if all hope is lost. But alas, it isn’t. In this post we’ll outline what to do if you are facing this situation and the exact steps to take.

The first thing to note is that if there is a federal tax lien on your home, you must satisfy the lien before you can sell or refinance it. Yet, there are a number of options to satisfy the tax lien. For some, if you have equity in your property, the tax lien can be paid (in part or in whole depending on the equity) out of the sales proceeds at the time of closing. For others, if the home is being sold for less than the lien amount, the taxpayer can request the IRS discharge the lien to allow for the completion of the sale. Additionally, taxpayers or lenders also can ask that a federal tax lien be made secondary to the lending institution’s lien to allow for the refinancing or restructuring of a mortgage. Let’s now look at what happens under each scenario.

Proceeds Satisfy The Debt – Get A Tax Lien Payoff

If the amount received from the sale will satisfy the amount of IRS debt owed, then one simply needs to obtain tax lien payoff amount.

An updated lien payoff or balance due amount may be requested from the IRS Collections Advisory Group. This unit will issue a payoff letter to taxpayers or to third parties such as taxpayer representatives, lenders, and escrow or title companies. The letter will indicate the current amount that must be paid before the IRS releases the lien.

Third parties must submit their request in writing accompanied by a properly completed Form 8821, Tax Information Authorization, signed by the taxpayer. Without a Form 8821, the IRS cannot disclose
taxpayer information to third parties. The Form 8821 must address each tax period on the notice of lien and be received by the IRS within 60 days after the taxpayer signs and dates it.

Payoff requests can be made by phone (1-800-913-6050), fax (1-855-753-8177) or by mail sent to:

Internal Revenue Service
Centralized Lien Operation
P.O. Box 145595, Stop 8420G
Cincinnati, OH 45250-5595

Payoff computations may take up to 14 calendar days to process. Two copies of all payoff letters are mailed to the requester. One copy of the payoff letter must be returned with the payment to ensure proper application and timely release of the lien. To ensure expedited processing the payment must be sent to the address identified on the payoff letter. Payments should be made payable to the United States Treasury.

Proceeds Don’t Satisfy The Debt – Obtain Lien Subordination or Discharge

What is a discharge or subordination and how can it help you sell or refinance your property?  A discharge removes an entire asset (collateral) from being covered by the tax lien so that it may transfer to the new owner free of the lien. To apply for a Lien Discharge, one completes IRS Form 14135. A subordination is used to put the IRS’ position in 2nd priority.  It is used to “unlock” an asset so that another creditor can be paid before the tax lien is paid (e.g. bank loan refinancing). To apply for a Lien Subordination, one completes IRS Form 14134.

Now let’s look at the specific steps on how to complete each application.  To help you with the application process, you might want to review IRS Publication 783 or IRS Publication 784, which contain instructions on filling out the forms, have the application forms themselves, along with FAQ’s.

The first item of note is that the application for discharge or subordination is handled on a first come, first served basis.  As such, one needs to get either application to the IRS at least 45 days before the sale or loan settlement meeting.  If the Notice of Federal Tax Lien is discovered late, or the application isn’t submitted in time, the sale or loan could be delayed.  If you’re trying to avoid foreclosure, be sure to indicate this on your application and the IRS will do its best to expedite your request.

  • Sections 1, 2, and 3 of either the discharge Form 14135 or the subordination Form 14134 are self-explanatory. 
  • If you are using a representative, fill in Section 4, and be sure to indicate who is being represented.  While having a representative is not required, if you hired someone to represent and speak on your behalf, attach IRS Form 2848.  Both of you must sign this form. If you want the IRS to share your information with someone else, you would attach IRS Form 8821.  If you are attaching one or both of these forms, check the “yes” box in Section 4.
  • In Section 5, you would fill in the contact information for your finance company.
  • The information in Section 6 will vary depending on the type of transaction.  If you are selling, use Form 14135 and enter the sales price.  If you are refinancing or getting a loan, use Form 14134 and enter both your existing and new loan amounts.
  • Section 7 asks for your basis for discharge or subordination. Basically, you need to check the box that best addresses what you would like the IRS to consider as the reason why they should approve your application.
  • Section 8 for either application form asks for a description of your property, which could be either real estate or personal property such as art work, a boat, a plane, or your business receivables.  Don’t forget to provide the property address.
  • For Section 9 of Form 14135, when you are selling property, the IRS requires a professional appraisal, which is generally part of the closing package and a second type of value estimate.  Form 14134 Section 9 does not call for a professional appraisal for your refinance or loan.  Check the box for the type of value estimate you are including.
  • Sections 10 through 14 are a checklist of the attachments which you must include with either the discharge or subordination application form.
  • These next two sections only pertain to Discharge Form 14135. 
    • If your property will be sold in an escrow sale, with creditors paid from the escrow, the IRS needs your draft escrow agreement with your Form 14135.  Be sure to check the “attached” box in Section 15. 
    • Section 16 of Form 14135 is if you bought property with a lien attached where you are not the taxpayer and you checked 6325(b)(2)(A) or (B) as your basis for discharge in Section 7.
  • The final section on both forms is the Declaration.  Here is where you must sign and date your application under penalties of perjury.

At this point, your form should be complete.  Attach all your supporting paperwork and send your application package to one of the IRS Advisory Offices.  The correct mailing address of the IRS Advisory Office will be found in IRS Publication 4235.  It will be the one for the state that the Notice of Federal Tax Lien was filed in.

The IRS Advisory approves or denies your request based on your application and comparison with federal and state property rules.  If the IRS approves your application, they will send you your discharge or subordination certificate, based on what box you checked, or best applies to you in Section 7.  If, however, the IRS denies your request, or you disagree with the IRS valuation in a commitment letter, you can request an appeal through the Advisory office using IRS Form 9423, Collection Appeal RequestIRS Publication 1660, Collection Appeal Rights, explains your appeal rights.

Need Help Removing A Tax Lien So A Property Can Sell?

We know that having a notice of federal tax lien a property raises many complex financial issues.  Our in-depth coverage of the subordination and discharge application forms was designed to give you insight into what is needed to be able to successfully navigate through the application process.  However, as this article should not be construed as advice, one is advised to check IRS publications, talk to the IRS Collections Advisory Group or contact a tax advisor for more details.

Don’t feel like doing any of the above? We don’t blame you! So, if you are trying to sell your home, are a real estate agent or title company that just found out that a deal has a tax lien on it, or are concerned with a deal closing on time, contact us NOW.

We can work with the IRS (so you don’t have to) so that the deal can close. Nothing feels better then a homeowner selling their home and getting the IRS debt monkey off their back or a real estate agent getting a commission check from a deal that was in jeopardy!

The Real Estate Brokers Little Black Tax Book

Your Top Secret Guide To Tax Reduction, Business Success and Solving IRS Debt Problems

As a broker, your primary job is marketing. Marketing yourself, your services, your client’s properties… you get the idea. Once the marketing is done, you then move on to the sales side of the house. You know, getting the clients to fall in love with the property, dealing with objections, bringing them back to reality, and ultimately getting the parties to sign a contact. Once those two things happen, you then move on to the technical part of your job. That is, the actual part of dealing with the real estate transaction itself and wrangling all the other parties that become involved.

Yet what was not obvious in the three roles mentioned above is this: you are also actually running a business. Furthermore, running a business is not what your pre-licensing class trained you to do. Still further, you were not trained on taxes and how they impact your business or your client’s scenario. To that end, it is your accountant’s job to help you understand and navigate these items. So, if you are going to select a partner to help you in this area, would it not make sense to find one who is experienced? Given the above, that is where this book and I enter the picture!

My goal for writing this book is three-fold. First, I want to help you understand how taxes impact you both from the standpoint of being a business owner as well as from the perspective of reducing them. It is important for all taxpayers to understand their responsibilities, the associated rules, and what can be done within those rules to legally reduce their tax liability. Second, like CPAs and other tax professionals, brokers are advisors to their clients. The better equipped you are to help your client as it relates to certain tax aspects of their transaction, the more efficiently you can address problems and close deals. Besides who does not like to close more deals? No broker that I am aware of!

Finally, tax problems are commonplace with those who earn money where no income tax withholding occurs. Think of anyone who is paid via cash (or check) or as an independent contractor (i.e. self-employed): dentists, brokers, attorneys, truck drivers, construction contractors, etc. I have known a fair number of brokers who have tax problems. As a CPA authorized to represent taxpayers before the Internal Revenue Service (IRS), I help them solve those issues. Not only do I assist them in resolving their issues, but also those of their clients so that deals can close. The key thing to know is that no matter how bad it initially seems, I have never been unable to help a client solve their tax debt matter.

Check out the video below to hear more and look below the video on ways that you can place an order.

You can also view this video on our YouTube Channel here.

How To Order Your Copy

Order directly from our office.  You can order via credit card by clicking the “Buy Now” button below.  If you select the “autographed with my custom message” option, you will be contacted post order to obtain your message.  Please note that payment processing is performed via PayPal and if you do not have an account, you can simply select the option to pay with credit or debit card at the bottom.  All orders processed via this method include Illinois sales tax as well as priority shipping via USPS.

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Electing S-Corp Status and Late Filing Relief

Filing Form 2553 is CRITICAL to being granted S-Corp status!

Every tax season we encounter some common issues and errors surrounding business owners who desire to be taxed as a S Corporation (S-Corp) by the IRS. What might those issues be? Well, usually one of the following:

  • Failing to make the S-Corp election entirely because they didn’t realize that Form 2553 needed to be filed with the IRS
  • Failing to make the election in a timely manner

In one of our previous posts we discuss the qualifications to become a S-Corp and some of the tax considerations. In this post, we are strictly going to discuss how to make the election and what to do if the deadline is missed.

When to Submit Form 2553

Form 2553 is used to tell the IRS that you want a corporation (or entity eligible to be taxed as a corporation, such as a single member LLC) to be taxed as a S-Corp. It is due:

  • No more than 2 months and 15 days after the beginning of the tax year the election is to take effect,
  • or at any time during the tax year preceding the tax year it is to take effect.

You can file the election at any time after thee above deadlines if your corporation meets the criteria for making a late S-Corp election (which we will discuss next).

It is important to note that the S-Corp election is made with the IRS, not the state. One is NOT changing their entity structure with the state. They are merely asking the IRS to tax the entity in a certain fashion. To help clarify what the election deadlines look like in practice, we’ve provided the following example:

Example 1 – New Corporation. New Corp, operates on a calendar year. It incorporated and began its first tax year on January 7th 2019. The 2-month period ends March 6th and 15 days after that is March 21st. To be a S-Corp beginning with its first tax year, it must file Form 2553 during the period that begins January 7th 2019 and ends March 21st 2019 (i.e. 2 months and 15 days after it incorporated). Because the corporation didn’t exist prior to January 7th, an election requesting an effective date prior to January 7th 2019 won’t be granted by the IRS.

Example 2 – New Corporation With Short Tax Year (less than 2 1/2 months). Short Corp, operates on a calendar year. It incorporated and began its first tax year on November 8th 2019. The 2-month period ends January 7th 2020 and 15 days after that is January 22nd 2020. To be an S corporation beginning with its short tax year, the corporation must file Form 2553 during the period that begins November 8th 2019 and ends January 22nd 2020. Because the corporation didn’t exist prior to November 8th, an election requesting an effective date prior to November 8th 2019 won’t be granted by the IRS.

Example 3 – Established Business. Old Corp, operates on a calendar year. It has been filing Form 1120 as a C corporation but wishes to make the S-Corp election for its next tax year (e.g. 2020) beginning January 1st. The 2-month period ends February 28th (the 29th in leap years) and 15 days after that is March 15th. To be a S-Corp in 2020, the corporation must file Form 2553 during the period that begins the first day (January 1st) of its last year as a C corporation (i.e. 2019) and ends March 15th of the year it wishes to be an S corporation (i.e. 2020). Because the corporation had a prior tax year, it can make the election at any time during 2019 but NO LATER than 2 months and 15 days beyond January 1st 2020 (i.e. the tax year the election is to be effective).

For the specific steps on when, where and how to submit your S-Corp election request, please refer to the Form 2553 Instructions per the IRS.

Requesting Relief for A Late S-Corp Status Election

So what happens if the deadline has passed to make the S-Corp election or you didn’t even know there was a deadline? Lucky for you, the IRS realizes that people makes mistakes and offers you some options to correct the oversight. They basically fall into the categories of:

  • Simply make the election effective for the NEXT year
  • Request relief stating that there was “reasonable cause”
  • Request relief using an IRS Revenue Procedure

Make the election effective next year. For those who miss the deadline, but don’t need it to be effective immediately, they can simply request that if be effective for the next year. For example, if you incorporate in late December 2019, but miss the March 15th 2020 deadline, you can always request that the election be effective for Tax Year 2021 by submitting Form 2553 prior to January 1st 2021.

Request relief on the grounds of reasonable cause. Reasonable cause refers to when a taxpayer didn’t file the forms on time due to a “valid reason” so to speak. In most cases, we’ve found the IRS to be fairly lenient when it comes to granting relief and allowing a corporation to elect S-Corp status in the year intended. Please note that reasonable causes may vary, and the IRS does not publish a list of what it considers to be one that is valid. However, there are numerous court cases that show that certain reasonable causes are “nearly always” allowed. Two of these typically include:

  • The company’s president, chief executive officer or similar responsible person neglected to file the election, or your corporation’s tax professional or accountant neglected to do so.
  • The corporation or its shareholders either did not know of the need to file an election or didn’t know they needed to file the election by a certain date.

If you are going to request relief on the grounds of reasonable cause, make sure that you address the following points within your statement: 

  • What happened that caused the filing to be late and when did it happen?
  • How did these facts and circumstances result in the forms not being filed on time?
  • How did the company handle its financial and tax affairs during this time? Meaning, did they operate as if they were a S-Corp or did they delay individual income tax filings because they were intending to be a S-Corp?
  • What attempt did the company make to correct the situation when they learned they did not make the election correctly?

Request relief using an IRS Revenue Procedure. Rev. Proc. 2013-30 (PDF) facilitates the grant of relief to those who make a late S-Corp election. This procedure provides guidance for relief for late:

  • S corporation elections,
  • Electing Small Business Trust (ESBT) elections,
  • Qualified Subchapter S Trust (QSST) elections,
  • Qualified Subchapter S Subsidiary (QSub) elections, and
  • Corporate classification elections which the entity intended to take effect on the same date that the S corporation election would take effect.

Generally, the relief under the revenue procedure can be granted when the following requirements are met:

  • The entity intended to be classified as an S corporation, is an eligible entity, and failed to qualify as an S corporation solely because the election was not timely;
  • The entity has reasonable cause for its failure to make the election timely;
  • The entity and all shareholders reported their income consistent with an S corporation election in effect for the year the election should have been made and all subsequent years; and
  • Less than 3 years and 75 days have passed since the effective date of the election.

To assist in determining if an entity qualifies for late election relief, Rev. Proc. 2013-30 includes flow charts, as well as specific guidance for each of the five categories listed above.

If an entity does not qualify for relief under Rev. Proc. 2013-30, the entity may request relief by requesting a private letter ruling. The procedural requirements for requesting a letter ruling and the associated fees are described in Rev. Proc. 2019-1 (PDF). For more information on late election relief, check out this page on the IRS’ website.

Need help correcting a late S-Corp election? We’ve helped many companies that thought they filed their election or didn’t know they needed to file by a certain deadline obtain their desired S-Corp status. If you find yourself in this unfortunate predicament, you’re best advised to seek a professional who knows how to address the situation.

To that end, give us a call at 773-239-8850 or shoot us an email via the address contained in the footer of this page. The sooner you put us to work for you, the sooner you can have your election granted to you by the IRS!

Solve Your Tax Trouble on National Get Out of The Doghouse Day

Time to get out of the dog house!

If you have “tax problems” then there is no better day to start dealing with them than National Get Out of The Doghouse Day! No, this is not some dreamed up holiday to sell greeting cards and it is actually real. Don’t believe us? Then check out this post over at the National Day calendar and you’ll see that it’s on the third Monday of July. So if you’re not sure how to get out of the dog house with the IRS or the state tax authorities, then here are 5 things you can do:

Open your mail.

When clients come to us to tackle their back taxes, many will often have several if not a dozen (or two) unopened letters. These may be from the Internal Revenue Service (IRS) of their state department of revenue. While many feel that not opening the letters keeps the problem at bay, it can actually make things worse. Did you know that many times when the IRS is attempting to assess a tax to someone, that they have to give them a chance to disagree? But there often comes a time where they give you a window, say 90 days, before what they propose becomes reality. If you fail to respond, you can get stuck with something that isn’t actually reality.

So the single best thing you can do to solve your tax problem is open your mail AND read it. What the letter says is actually not as bad as you think. Plus, there is no way that opening your mail is going to make the situation worse!

Address any unfiled tax returns.

One of the biggest tax cases that we worked on involved a taxpayer who had not filed since 1999. It was 2014 when we were getting involved with their matter. That’s 15 years of unfiled taxes! But don’t worry, according to the IRS Data Book SOI Tax Stats, there were over 13.1 million taxpayers with unfiled returns. So if you have unfiled returns, then know that you are not alone.

People fall behind on filing their tax returns for many reasons. Health issues, death of a loved one, fear, procrastination all have a place in keeping people from filing. But the one thing we see come up routinely is “I did’t file because I know I owe and I can’t pay it.” While this may be a true statement, it shouldn’t stop one from filing. Filing on time is best, but filing late is better than not filing. Similarly, not paying your taxes isn’t good, but paying late is better than not paying at all. There are penalties for not filling and not paying, but they are only calculated ONCE YOU FILE. And if you can’t pay what you owe? We’ll the IRS is always willing to set up a payment plan (installment agreement) with you to settle up.

If you have unfiled returns, you might want to talk to a tax advisor (see last point) prior to filing. While it may seem “correct” to file all of the unfiled tax returns, it may not be needed. While the IRS can “technically” ask for the last 10 years of unfiled returns, it often doesn’t. Furthermore, if you are owed a refund on any of those unfiled returns, the IRS will only issue it for the last 3 years. Anything older than that will be refortified due to the statute of limitations. As such, a tax advisor can help you determine what returns need to be filed to help you get back into the good graces of the IRS or the state.

Identify the root cause of your problem and face it head on.

We’ve all heard that insanity is doing the same thing over and over expecting to get a different result. Well, if you keep finding yourself in tax trouble, maybe you should figure out what is not working and change it. For example:

  • Have more taxes withheld from your check by decreasing your withholdings on your W4
  • Don’t claim “exempt” on your W4 unless you ARE actually exempt from paying income taxes (hint – most people aren’t exempt)
  • Start paying estimated taxes if you are self employed or your income is reported to you on a Form 1099-MISC or Form 1099-K
  • Withhold from your retirement income or social security if you are retired and constantly find yourself owing the government
  • Make sure that you are claiming all the deductions and credits you are entitled to
  • Review your filing status and make sure that you are using the one that is most advantageous to your situation (e.g. Head of Household if you are a single parent)

Reach out to the tax authorities.

Putting your head in the sand is not going to solve the issue. If you contact the IRS, they can tell you the current status of your account as well as what they want you to do to solve your tax matter. For example, they can tell you want years they want you to file and even give you copies of the tax records you need to file them if you’ve lost your records (it’s called a Wage & Income Transcript).

To reach out to the IRS, start with the last notice that you’ve received. It will have an address on the top left hand corner and a contact name and/or phone number in the top right hand corner. This will be the best contact to use because the folks at that number will understand what’s going on with your account as of now.

But if you’ve lost the notice or you have other issues, you can call the IRS at 1-800-829-1040, Monday – Friday, 7:00 a.m. – 7:00 p.m. your local time. If you’re calling about a business tax account, call 1-800-829-4933, Monday – Friday, 7:00 a.m. – 7:00 p.m. your local time. If you have a hearing impairment, call 1-800-829-4059 (TDD), Monday – Friday, 7:00 a.m. – 7:00 p.m. your local time.

Find a qualified tax advisor if needed.

Many people (approximately 40%) use software to prepare their tax returns. But if you get into tax trouble, a qualified tax advisor can be well worth their weight in gold. We don’t recommend that you shop for one based on price, but we do recommend that you find a person/firm that is open AFTER April 15th. Remember, the IRS doesn’t typically contact you during tax season and the notices associated with their matching program typically are sent between March and October following the year the return was due (e.g. 2019 for TY 2017 returns that were due in calendar year 2018).

To that end, you want to find someone who:

  • understands tax (i.e. filing returns), tax debt issues and has experience resolving YOUR particular situation
  • has the credentials to represent you before the IRS so you don’t have to ever speak to them (e.g. EA, CPA, JD)
  • has a good personality fit with you as the two of you will have to work closely with one another

Need tax help?

We routinely help taxpayers get current and compliant and enter into resolution options with the IRS or state. Do you need help? Feel free to check out this page of our site then shoot us an email or give us a call. The sooner you do, the sooner you can but your tax nightmares behind you and get out of the doghouse!

What does my IRS notice mean?

You go to the mailbox and one of the letters has a return address that sends chills down your spine: IRS. While most people don’t like being contacted by the IRS, many of their letters are no cause for panic because they are not audit related.  However, they should also not be ignored as some of them are time bound and require a response. This post will discuss some of the common notices the IRS sends and how to interpret what it means.

IRS notice types

The IRS sends notices for many reasons: bills for overdue taxes, requests for you to file a missing tax return, to request additional information about something, notify you of a pending deadline, etc. When the IRS sends a letter via certified mail, it’s giving you legal notice that they intend to levy you, file a lien against you, or that they will examine or audit you or your business.  The notice will ALWAYS thoroughly explain why you are receiving it. READ IT.

The very bottom of this post list some of the many notices that the IRS sends and provides you with a brief explanation. If you click on the green notice number, you will be taken to the IRS site where you can read some further details about that particular notice. If you want to see examples of the notices listed, then click this link and sort the notices by name to find the one your’re looking for.

What IRS notices are particularly important?

Any of the notices that deal with collections, should be “handled with care” so to speak. Why? Because if one doesn’t address them, they could find themselves on the wrong side of the IRS pretty quick. What are these notices?

CP503We have not heard from you and you still have an unpaid balance on one of your tax accounts.
CP504You have an unpaid amount due on your account. If you do not pay the amount due immediately, the IRS will seize (levy) your state income tax refund and apply it to pay the amount you owe.
CP504BYou have an unpaid amount due on your account. If you do not pay the amount due immediately, the IRS will seize (levy) certain property or rights to property and apply it to pay the amount you owe.
Letter 1058
We haven’t received your payment for overdue taxes. We intend to seize your property or rights to property (levy). You must contact us immediately.

What if you still don’t understand the notice after reading it?

We can help via our notice evaluation service. For $75 we will analyze your notice and provide you with a detailed explanation (in plain english) of what it means. We’ll also review your IRS account (with your consent and the filing of some paperwork) if you have debt and even provide your IRS CSED (the date your IRS debt will expire).

Call us at (773) 239-8850 or click our email address at the bottom of this screen to get started.

Common IRS notices

Notice NumberDescription
CP01HYou received a CP 01H notice because we were unable to process your tax return. The IRS has locked your account because the Social Security Administration informed us that the Social Security number (SSN) of the primary or secondary taxpayer on the return belongs to someone who was deceased prior to the current tax year.
CP04Our records show that you or your spouse served in a combat zone, a qualified contingency operation, or a hazardous duty station during the tax year specified on your notice. As a result, you may be eligible for tax deferment.
CP08You may qualify for the Additional Child Tax Credit and be entitled to some additional money.
CP09We’ve sent you this notice because our records indicate you may be eligible for the Earned Income Credit (EIC), but didn’t claim it on your tax return.
CP10We made a change(s) to your return because we believe there’s a miscalculation. This change(s) affected the estimated tax payment you wanted applied to your taxes for next year.
CP10AWe made a change(s) to your return because we believe there’s a miscalculation involving your Earned Income Credit. This change(s) affected the estimated tax payment you wanted applied to your taxes for next year.
CP11We made changes to your return because we believe there’s a miscalculation. You owe money on your taxes as a result of these changes.
CP11AWe made changes to your return because we believe there’s a miscalculation involving your Earned Income Credit. You owe money on your taxes as a result of these changes.
CP12
We issue a CP12 Notice when we correct one or more mistakes on your tax return, and a payment becomes an overpayment, or an original overpayment amount has changed.
CP12AWe made changes to correct the Earned Income Credit (EIC) claimed on your tax return.
CP12EWe made changes to correct a miscalculation on your return.
CP13We made changes to your return because we believe there’s a miscalculation. You’re not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero.
CP13AWe made changes to your return because we found an error involving your Earned Income Credit. You’re not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero.
CP14We sent you this notice because you owe money on unpaid taxes.
CP14IYou owe taxes and penalties because you didn’t take out the minimum amount you had to from your traditional individual retirement arrangement (IRA). Or, you put into a tax-sheltered account more than you can legally.
CP16We sent you this notice to tell you about changes we made to your return that affect your refund. We made these changes because we believe there was a miscalculation. Our records show you owe other tax debts and we applied all or part of your refund to them.
CP19We have increased the amount of tax you owe because we believe you incorrectly claimed one or more deductions or credits.
CP20We believe you incorrectly claimed one or more deductions or credits. As a result, your refund is less than you expected.
CP21AWe made the change(s) you requested to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of the change(s).
CP21BWe made the change(s) you requested to your tax return for the tax year specified on the notice. You should receive your refund within 2-3 weeks of your notice.
CP21CWe made the change(s) you requested to your tax return for the tax year specified on the notice. You’re not due a refund nor do you owe any additional amount. Your account balance for this tax form and tax year is zero.
CP21EAs a result of your recent audit, we made changes to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of these changes.
CP21IWe made changes to your tax return for the tax year specified on the notice for Individual Retirement Arrangement (IRA) taxes. You owe money on your taxes as a result of these changes.
CP22AWe made the change(s) you requested to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of the change(s).
CP22EAs a result of your recent audit, we made changes to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of these changes.
CP22IWe made changes to your tax return for the tax year specified on the notice for Individual Retirement Arrangement (IRA) taxes. You owe money on your taxes as a result of these changes.
CP23We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You have a balance due because of these changes.
CP24We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You have a potential overpayment credit because of these changes.
CP24EWe made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You have a potential overpayment credit because of these changes.
CP25We made changes to your return because we found a difference between the amount of estimated tax payments on your tax return and the amount we posted to your account. You’re not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero.
CP27We’ve sent you this notice because our records indicate you may be eligible for the Earned Income Credit (EIC), but didn’t claim it on your tax return.
CP30We charged you a penalty for not pre-paying enough of your tax either by having taxes withheld from your income, or by making timely estimated tax payments.
CP30AWe reduced or removed the penalty for underpayment of estimated tax reported on your tax return.
CP32We sent you a replacement refund check.
CP32ACall us to request your refund check.
CP39We used a refund from your spouse or former spouse to pay your past due tax debt. You may still owe money.
CP42The amount of your refund has changed because we used it to pay your spouse’s past due tax debt.
CP45We were unable to apply your overpayment to your estimated tax as you requested.
CP49We sent you this notice to tell you we used all or part of your refund to pay a tax debt.
CP51AWe computed the tax on your Form 1040, 1040A or 1040EZ. You owe taxes.
CP51BWe computed the tax on your Form 1040, 1040A or 1040EZ. You owe taxes.
CP51CWe computed the tax on your Form 1040, 1040A or 1040EZ. You owe taxes.
CP53We can’t provide your refund through direct deposit, so we’re sending you a refund check by mail.
CP59We sent you this notice because we have no record that you filed your prior personal tax return or returns.
CP60We removed a payment erroneously applied to your account.
CP62We applied a payment to your account.
CP63We are holding your refund because you have not filed one or more tax returns and we believe you will owe tax.
CP71You received this notice to remind you of the amount you owe in tax, penalty and interest.
CP71AYou received this notice to remind you of the amount you owe in tax, penalty and interest.
CP71CYou received this notice to remind you of the amount you owe in tax, penalty and interest.
CP71DYou received this notice to remind you of the amount you owe in tax, penalty and interest.
CP88We are holding your refund because you have not filed one or more tax returns and we believe you will owe tax.
CP90CWe levied you for unpaid taxes. You have the right to a Collection Due Process hearing.
CP120You need to send us documentation of your tax-exempt status.
CP130Your tax return filing requirements may have changed: You may no longer need to pay the Alternative Minimum Tax.
CP152We have received your return.
CP153We can’t provide you with your refund through a direct deposit, so we’re sending you a refund check/credit payment by mail.
CP166We were unable to process your monthly payment because there were insufficient funds in your bank account.
CP178Your tax return filing requirements may have changed: You may no longer owe excise tax.
CP180/CP181We sent you this notice because your tax return is missing a schedule or form.
CP231Your refund or credit payment was returned to us and we need you to update your current address.
CP259We’ve sent you this notice because our records indicate you didn’t file the required business tax return identified in the notice.
CP297CWe levied you for unpaid taxes. You have the right to a Collection Due Process hearing.
CP501You have a balance due (money you owe the IRS) on one of your tax accounts.
CP521This notice is to remind you that you have an installment agreement payment due. Please send your payment immediately.
CP523This notice informs you of our intent to terminate your installment agreement and seize (levy) your assets. You have defaulted on your agreement.
CP565We gave you an Individual Taxpayer Identification Number (ITIN).
CP566We need more information to process your application for an Individual Taxpayer Identification Number (ITIN). You may have sent us an incomplete form. You may have sent us the wrong documents.
CP2005We accepted the information you sent us. We’re not going to change your tax return. We’ve closed our review of it.
CP2006We received your information. We’ll look at it and let you know what we’re going to do.
CP2057You need to file an amended return. We’ve received information not reported on your tax return.
CP2501You need to contact us. We’ve received information not reported on your tax return.

Understanding Box 9B on Form 1099-R

When a taxpayer retires, they will start to receive money from their retirement plan (e.g. pension or annuity).  As the payments are made to you, each payment will consist of two parts.  One portion will be the amount (if any) that you contributed to the plan and the second portion will be the piece the employer contributed (or the earnings).

You are not required to enter the total employee contributions or designated Roth contributions that are reported in box 9b. However, failing to do so may cause you to pay more tax than you should.

What does an amount in box 9b mean?

The amount shown is the total amount of after-tax contributions you paid to your retirement plan while working.  It’s used to determine the after-tax contribution amount shown in Box 5.  If you want to know what each field on Form 1099-R means, then check out this informative illustration.

Do you pay tax on this amount?

If you made post-tax contributions to your retirement account, you don’t pay income taxes on the portion of the distributions you receive based upon the amount for which you were already taxed.  This is referred to as your “basis” in  the plan.  If the taxpayer didn’t make any after-tax contributions to the retirement plan (which is often the case), then the “basis” is zero, and each distribution from the retirement plan is 100% taxable.

So what do you do with this amount?

If you are using software, then you want  to include it somewhere to indicate your basis.  If you are doing your taxes manually, then there is an IRS Simplified Method Worksheet that determines the amount of basis that is included in each periodic payment.  This worksheet will help you  determine how much basis the taxpayer should spread out over the payments they receive.  If you are using a professional, they should  know what to do!

8 Ways To Deal With A IRS Notice

Most people tend to panic when they receive a notice from the IRS. Many, many people think that by stuffing that notice under the mattress, the problem will go away. Unfortunately, it doesn’t work like that. The best way to address a notice from the IRS is to deal with it immediately and head on. Here are some tips for what to do when you receive an IRS notice.

1. Don’t panic, and don’t shred it. Most IRS notices can be dealt with pretty simply. Not quickly, but simply.

2. Be sure you understand WHAT the notice is for. The IRS sends all sorts of notices — bills for overdue taxes, requests for you to file a missing tax return, to request additional information about something, notify you of a pending deadline, etc. When the IRS sends a letter via certified mail, it’s giving you legal notice that they intend to levy you, file a lien against you, or that they will examine or audit you or your business.  The notice will ALWAYS thoroughly explain why you are receiving it. READ IT.

3. Every notice from the IRS will explain what you need to do with it. If they want extra information from you, it will explain what information they need. If it’s a bill, well, then they just want your money.

4. If you receive a notice about a correction to your tax return, you should review the correspondence and compare it with the information on your return.

5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due. The IRS will just “fix” the issue and then send you a bill (if one is needed).

6. If you do not agree with the correction the IRS made, it is important that you respond as requested. IRS notices are typically time bound and failing to respond in time can cause you to forfeit some of your rights/options. Respond to the IRS in writing to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days (sometimes it can take up to 90 days) for a response from the IRS.

7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the correspondence available.

8. Keep copies of any correspondence with your tax records. Also keep record of who you talk to, including their IRS employee ID number (they’re required to give it to you), and detailed notes of your conversation.

Don’t understand your notice?

If you receive a notice that you don’t understand or don’t agree with, then obviously consider speaking to a professional (such as ourselves). Feel free to email us via the address below in the footer. We can review a copy of your IRS notice, tell you what it means, and tell what you need to do about it, in simple terms.

Understanding The “New” Form 1040

So, when lawmakers vowed in 2017 to simplify the tax code, one of their targets was the good ‘ol IRS Form 1040 pictured above. There was much hoopla about making it so taxpayers could file their taxes on something about as big as a post card. Well, the new Form 1040 is smaller than it’s predecessors. But will it make the filing process more simplified? We don’t think so. Read on to see why.

More Schedules. The new Form 1040 replaces the former Form 1040 as well as the Form 1040A and the Form 1040EZ. The new Form 1040 uses a “building block” approach, in which the tax return is reduced to a simple form. That form can be supplemented with additional schedules if needed. Taxpayers with straightforward tax situations would only need to file this new 1040 with no additional schedules. But what if you do need one of the additional schedules? Well, just know that there are six new schedules to accommodate this approach. What are these new schedules?

Schedule 1 Additional Income and Adjustments to Income. This schedule is used to report all of the income that was reported on lines 10 and 21 of the 2017 form. This includes income from Schedule C (business income), Schedule D (capital gains and losses), Schedule E (supplemental income and loss from rental real estate) and Schedule F (farm and ranch income). It also includes the reductions to income that that were formerly reported on lines 23 to 35 of the 2017 form.

Schedule 2 Tax. This schedule reports lines 45 to 47 of the 2017 form 1040, including the tax, alternative minimum tax and any excess premium tax credit.

Schedule 3 Non-Refundable Credits. This schedule contains lines 48 to 55 of the 2017 form, including education expenses, child and dependent care credit, foreign tax credit, retirement savings plan credit and child tax credit.

Schedule 4 Other Taxes. This schedule contains lines 57 to 63 of the 2017 form, including self-employment tax, additional tax on IRA and retirement plan withdraws, household employment tax and the individual responsibility payment for not having health care.

Schedule 5 Other Payments and Refundable Credits. This schedule contains lines 65 to 74 of the 2017 form, including estimated tax payments and amounts applied to the next year’s return, earned income credit, additional child tax credit, American opportunity credit (the amount of the education credit that is refundable), amount paid with a request for extension and several other credits.

Schedule 6 Foreign Address and Third-Party Designee. This schedule is used to report your foreign address or if you would like the IRS to be able to discuss the return with a third party (e.g. your paid preparer).

Why Was This Done? Keeping politics out of the conversation, we believe that this switch was done to fulfill a campaign promises. Why so?

  • The new building block approach doesn’t actually simplify anything. If anything, it makes one have to look at additional forms/pages when one only had to formerly look at a two page document (i.e. the old “long form” 1040) to see it all.
  • Only around 13% of tax returns are file via paper as opposed to being e-filed according to the IRS statistics. With that being said, who really cares if the Form 1040 is the size of a postcard? Most people who file are using software!
  • Schedules 1 through 6 are additional to the ones that existed prior to 2018 (e.g. Schedules A, C, D, E, F, H, SE and 8812). While taxpayers can ignore them if they don’t have any lines on those schedules to fill out, they still might have to review them to determine if they are required. Simplification? We’re not so sure.

The Result? While the new form is shorter, we can’t say that it will be easier for taxpayers to understand. We have already started preparing 2018 returns and we can say that it makes it “slightly” more challenging to review. Most professional software has a view/comparison mode/worksheet that allows us to analyze variances to ensure nothing is missed. But we can say that the building block scheme takes a little extra work.

To that end, don’t expect it to cost you any less to have your “simplified” tax return prepared when compared to years past. Most paid preparers, if anything, are actually raising their prices to accommodate the extra forms and other changes such as the 20% QBI deduction.

S-Corp Automobile Deduction

Who owns the vehicle matters!

You want your S-Corporation (S-Corp) to have a nice clean set of books, and the cleaner they are, the better.  Corporate payments of personal expenses either dirty up the accounting or can create a strong impression of impropriety.  The IRS is attracted to things that look suspect, which is an even better reason for you to make sure your S-Corp has a clean set of books.  So how does one go about deducting the expenses of a vehicle that is used by a S-Corp.  Well, the answer depends largely on who the vehicle is titled to.

Vehicle Titled In Corporation’s Name.  Corporations, S-Corps, and Partnerships may only claim actual expenses for vehicles.  Thus, your S-Corp may claim depreciation, fuel expenses, oil expenses, repairs, insurance, and so forth.  But what about mileage?  When the car is owned in the corporation’s name, it is not allowed to deduct mileage, just the actual expenses incurred for it’s use in business.

Vehicle Titled Personally.  To deduct the expenses of a vehicle that is owed personally by the business owner, the S-Corp can reimburse the employee expenses under an accountable plan or a non-accountable plan.  The expenses are deductible under either methodology, but the rules are different.

Accountable Plan
When an accountable plan is used, the business only reimburses expenses that are substantiated (proved) by receipts and other documentation.  The reimbursements are not taxable income to the business owner nor are they reported on their W-2.  What the owner needs to submit to the business depends on what expenses they will be reimbursed for.  In this post about S-Corp Home Office Deductions, we provide a sample accountable plan that will give you an idea of the reimbursement language.

  • Mileage Reimbursement.  The business can reimburse at the IRS standard mileage rate.  This rate includes allowances for depreciation (i.e. wear and tear), maintenance, repairs, gas, insurance, and a host of other things.  The proof the business owner would need to provide for reimbursement would be a mileage log.  This log would need to show the date, business purpose of the trip, miles driven and should be submitted to the business on a routine and timely fashion (e.g. once a month).  One important thing to note is that the standard mileage method only applies to passenger vehicles with a gross weight of less than 6,000 pounds.
  • Actual Expense Reimbursement.  The business can also reimburse for the actual expenses the business owner incurs.  The business does not have to reimburse for every expense, for example, you could reimburse gas and insurance and not tires and oil changes.  However, for any expenses the business does reimburse, it must have adequate proof.  Adequate proof means you need to see all the receipts for the expenses that will be covered.  In addition to the expenses, the owner also needs to supply the total vehicle mileage for the year as well as the mile log.  Why?  So it can determine the number of business miles and the number of personal miles to compute the percentage of business use.  This percentage is then applied to the total amount of expenses incurred to determine how much is reimbursed to the employee.

Non-accountable plan
If a non-accountable plan is used, then the business does not need to keep or see any vehicle records.  They can reimburse any amount, from below the IRS standard rate, or above the IRS standard rate.  They can reimburse for gas and insurance but not oil changes, or anything else that it wants to pay for (that is vehicle related).  But under this method, all the reimbursements get included in the employee’s box 1 W-2 wages and are subject to income and employment tax withholding.  The non-accountable plan is less beneficial to the employee because of the inclusion of the amounts on their W2 as income.

Could you be paying more in taxes than you should?

As a business owner, there are some tax benefits to being structured as a S-Corp.  The biggest one (that almost everyone knows) is the potential to reduce/minimize their employment taxes.  But did you know that through some deliberate and diligent tax planning, you could be able to legally reduce your tax burden further?

If your business does $100K (or more) in revenue, you would be a perfect candidate for our S-Corp Tax Reduction Analysis.  This analysis (a package valued at $1097, but $345 to you for a limited time), includes the following:

  • One hour investigative session to understand your business operations and potential tax levers
  • Review of the past 3 years of filed Form 1120S tax returns to unearth potentially missed deductions or tax savings
  • Formulation of potential tax strategies that if implemented could reduce the underlying tax liability
  • Comprehensive report indicating findings, tax strategies and steps to implement
  • Complementary copy of Jared’s book How to Slash Your Taxes Legally and Ethically

Furthermore, this analysis is guaranteed by our 100% ironclad money back guarantee.  If we can’t find any tax savings that equal or exceed the cost of the analysis, we’ll refund your money, no questions asked!

To claim your analysis, simply email us via the address in the footer on this page or give our office a call at 773-239-8850.  We only have capacity to perform so many of these analysis per month so get yours NOW.  We look forward to working with you!

Should I Hire a Tax Professional For My Small Business?

Do I really need a tax professional?

For taxpayers with the simplest income tax returns, do-it-yourself software and websites often seem like the way to go.  These individuals often have only one source of income (i.e. W2 from their employer),  may have a home mortgage with interest, some student loan debt and maybe some childcare credits.  But for those with more complex situations, such as revenue from businesses, income from interest and dividends, capital gains on a home sale or foreign assets, seeking the expertise of a professional can save time, money and potential legal complications.

For small business owners, and many other taxpayers, there are several reasons why seeking a tax professional might be better than going it alone.  In this post, we’ll discuss some of the most common and influential drivers that typically signal it’s time to make the switch.

Types of Tax Advisors
The first thing to know is that anyone can claim to be a tax expert.  Furthermore, there is no requirement that people who prepare tax returns have to be licensed by the IRS.  With that being said, note that there are (generally) three designations when it comes to tax professionals:

  • Enrolled agent (EA).  An EA is licensed by the IRS and has either passed a difficult test or has at least five years of experience working for the IRS.  EAs are “generally” the least expensive of the tax pros and often offer bookkeeping and accounting assistance.
  • Certified public accountant (CPA) and other accountants.  CPAs are licensed and regulated by each state.  They perform sophisticated accounting and business-related tax work and prepare tax returns.  Larger businesses or businesses with complex business tax returns often use CPAs. The larger CPA firms (e.g. The Big 4) are expensive.  Smaller CPA firms and practitioners can be less expensive and may be better suited for the typical small business.
  • Tax Attorneys.   Tax Attorneys are lawyers with a special tax law degree (called an L.L.M. in taxation) or a tax specialization certification from a state bar association.  Tax attorneys can be expensive, but you should consult one if you have a tax problem, are in criminal trouble with the IRS, need legal representation in court, or need business and estate planning.

Reasons to Hire A Tax Professional
So when is the right time to hire one of the individuals listed above? Typically, it’s once one of the following items below occurs:

  • Your tax situation exceeds your expertise or your software.  Even what may seem like a “straightforward” situation can quickly turn into more than one bargained for.  For example, let’s say that you drive for one of those ride share companies.  At tax time, you receive a Form 1099-K, a Form 1099-MISC and a Yearly Summary.  Some of the documents include numbers from one of the other documents, and some documents appear to have totally different numbers.  Some have fees that “may be deductible” but you aren’t sure which ones to include.  Do you add them all?  Do you only include some?  What if you leave a number off that should have been reported?  A tax professional can help ensure everything is reported correctly and that you don’t wind up getting an IRS Automated Adjustment Notice for under reporting your income.
  • Your time is valuable and you’re spending too much of it preparing your return.  While you may be able to prepare your taxes yourself for $100 or less online, many do-it-yourself filers spend an enormous amount of time when doing so.  According to the 2018 Form 1040 Instructions per the IRS, the average taxpayer will spend 11 hours preparing their return. 
    Average Taxpayer Burden for Individuals
    Average Time (Hours)
    Type of TaxpayerPercentage
    of Returns
    Total
    Time
    Record
    Keeping
    Tax
    Planning
    Form
    Completion &
    Submission
    All
    Other
    Average
    Cost
    (Dollars)
    All taxpayers100%115241$200
    Nonbusiness70%72131$110
    Business30%1910351$400
    Estimated Average Taxpayer Burden for Individuals by Activity per 2018 Form 1040 Instructions
    This number jumps to 19 hours if you have a business!  Hiring a professional can reduce that to the time it takes to gather your tax documents and forward them to their office, go over a few items with them and then review the final return for accuracy.  If your time is better spent closing sales deals, running your business or spending it with family and friends, then hiring a tax professional can make perfect cents (pun intended).
  • You could be missing out on valuable deductions.  In addition to saving you countless hours of painfully boring and costly tax guessing, experienced preparers know the deductions that you may qualify for, and which items are tax deductible if you own a business.  They can also easily tell you if it’s more beneficial to itemize or take the standard deduction.  Even if you just earn only a little income on the side, a professional may be able to find you deductions or credits that will more than pay for their services and keep more of your hard earned money out of the pockets of Uncle Sam.  Lastly, the cost of having your taxes prepared by a professional can also be tax deductible as a professional fee if you have a business.
  • The tax law is constantly changing.  Adding to the complexity, new tax laws are enacted every year that affect virtually everyone, making it tough to keep up with changes and how they might affect you.  For example, the new 20% Qualified Business Income Deduction will no doubt cause some frustration for those this tax year (especially if you in the “phase in” range for a partial deduction).  For small businesses that have to manage income tax withholding and reporting for their employees, taxes are even more complex.  While tax software can help, an experienced professional that “has seen it all before,” and also keeps up with tax law changes through educational courses, can make the process easy peasy lemon squeezy!
  • A mistake was made in the past.  If you do your taxes yourself, you are much more likely to make a mistake.  Mistakes happen, but when they happen to you, it may feel like they are costing you big time.  A simple math error can cause a return to be inaccurate, leaving you liable for unpaid taxes and interest.  For errors the IRS believes are not accidental, such as failing to report income, taxpayers can also face large fines and even criminal prosecution.  A skilled tax professional can not only help ensure that your returns are accurately prepared, but they often can help you rectify a past mistake.
  • You want peace of mind.  The only people that look forward to an IRS audit are IRS auditors!  The best way to avoid their scrutiny is to make sure your tax return is in compliance with the tax laws.  To do that, why not hire a professional who lives, works and breathes taxes every day (or at least a lot more frequently than you do)?  There is still a chance than any taxpayer will get audited, but if you use the services of a professional CPA, Enrolled Agent or Tax Attorney, and your return is selected for further inspection by the IRS, those professionals can typically help represent you on your behalf before the IRS.  Don’t go before a court without a lawyer, and don’t go before the IRS without a professional.

How much does it cost to hire a tax professional? 
According to the 2018 survey by the National Society of Accountants, the average federal tax return in the U.S., including the tax return for the person’s state of residence, cost $294 for a professional preparer to handle if the taxpayer itemizes and $188 if they don’t.  If you own a business that needs to file a Schedule C (for business income and expenses) that will tack on $187 more.  But as outlined above, there are numerous reasons why this cost can be well worth it.

Do you need help with your business taxes this year?
If you don’t want to deal with the hassle and headache of navigating the new tax law, or simply don’t have the time, we’d be happy to assist you!  Call the office now to schedule your appointment or request your complementary tax situation analysis (valued at $197 but free if you mention this blog post).  We are a year round practice and can even help you file your state taxes no matter where you are located.