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Small Business Taxation

Q: Is an S-Corporation required to pay quarterly estimated tax?

Rarely does an S corporation make estimated tax payments. An S Corporation must make installment payments of estimated tax if the total of these taxes is $500 or more:

  • The tax on built-in gains,
  • The excess net passive income tax, and
  • The investment recapture tax.

Q: How do I know if I have to file quarterly individual estimated tax payments?

You must make estimated tax payments for the current tax year if both of the following apply:

  • You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.
  • You expect your withholding and credits to be less than the smaller of:
    • 90% of the tax to be shown on your current year’s tax return, or
    • 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

There are special rules for:

  • Certain small business taxpayers for periods beginning 2009
  • Certain taxpayers with higher adjusted gross income
  • Farmers and commercial fishermen
  • Aliens
  • Estates and Trusts

Q: What are the penalties for failing to make estimated tax payments?

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay enough tax, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid 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. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

Generally, the payments should be made in four equal amounts to avoid a penalty. However, if you made unequal payments because your income was received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax.

The penalty may be waived if:

  1. The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
  2. You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

Q: Do self-employment taxes need to be paid quarterly or yearly?

If you are required to make estimated tax payments, self-employment tax is paid by making quarterly estimated tax payments which include both income tax and social security tax.

Q: When are the quarterly estimated tax returns due?

  • You only make estimated tax payments using payment vouchers. There is not an estimated tax return.
  • Your first estimated tax payment is usually due the 15th of April.
  • You may pay the entire year’s estimated tax at that time, or
  • You may pay your estimated tax in four payments that are due April 15th, June 15th, September 15th, and January 15th of the following year.
  • If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday.

Q: How do partnerships file and pay quarterly estimated tax payments?

  • Partnerships file Form 1065 (PDF), U.S. Partnership Return of Income, to report income and expenses.
  • The partnership passes the information to the individual partners on Schedule K-1, Form 1065 and therefore rarely pays any tax.
  • The partners report the information from the K-1 on their individual returns and pay any taxes due on Form 1040.
  • Because partners are not employees of the partnership, no withholding is taken out of their distributions to pay the income and self-employment taxes on their Forms 1040.
  • The partners may need to pay Estimated Tax Payments using Form 1040-ES.

Q: Must a partnership or corporation file a tax form even though it had no income for the year?

A domestic partnership must file an income tax form unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal tax purposes.

A domestic corporation must file an income tax form whether it has taxable income or not.

Q: What is the difference between a Form W-2 and a Form 1099-MISC?

Both of these forms are called information returns.

The Form W-2 is used by employers to:

  • Report wages, tips and other compensation paid to an employee.
  • To report the employee’s income tax and Social Security taxes withheld and any advanced earned income credit payments.
  • To report wage information to the employee, and the Social Security Administration. The Social Security Administration shares the information with the Internal Revenue Service.

A Form 1099-MISC is:

  • Generally, used to report payments made in the course of a trade or business to a person who is not an employee or to an unincorporated business.
  • Required among other things, when payments of $10 or more in gross royalties or $600 or more in rents or compensation are paid.
  • Provided by the payer to the IRS and the person or business that received the payment.

Q: How do you determine if a person is an employee or an independent contractor?

The determination is complex, but is based on whether the person for whom the services are performed has the right to control how the person performs the services. It is not based merely on how the person is paid, how often the person is paid, or whether the person works part-time or full-time.

There are three basic categories of factors that are relevant to determining worker classifications:

  • Behavioral control
  • Financial control and
  • Relationship of the parties

For more information on employer-employee relationships, refer to Publication 15, Circular E, Employer’s Tax Guide and Publication 15-A (PDF), Employer’s Supplemental Tax Guide.

If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Generally you should report your nonemployee compensation on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit From Business. You need to pay self-employment tax (comprised of social security and Medicare taxes) on your net earnings from self-employment onForm 1040, Schedule SE (PDF), Self-Employment Tax if you had net earnings from self-employment of $400 or more.

Generally, there is no tax withholding on this income as long as you provide your Taxpayer Identification Number to the payer. Thus, you may have been subject to the requirement to make quarterly estimated tax payments. If you did not make timely estimated tax payments, you may be assessed a penalty for an underpayment of estimated tax. Employees pay their half of the social security and Medicare taxes (i.e., FICA tax), as well as income tax withholding, through payroll deductions.

Q: Does a small company need a tax ID number?

  • A sole proprietor who does not have any employees and who does not file any excise or pension plan tax returns does not need an employer identification number. In this instance, the sole proprietor uses his or her social security number as the taxpayer identification number.
  • If you are the sole owner of an unincorporated LLC (Limited Liability Corporation) that has employees you now need to get a separate EIN to file employment taxes for tax years starting on or after January 1, 2009.

Q: If I pay personal expenses out of my business bank account, should I count the money used as part of my income, or can I write these expenses off?

  • You would include the money in your business income.
  • You would not write off these expenses because they are not ordinary and necessary costs of carrying on your trade or business.
  • Personal, living, or family expenses which are not specifically provided by law are not deductible.
  • It is recommended that you not mix business and personal accounts as this makes it easier to keep records.

Q: For business travel, are there limits on the amounts deductible for meals?

  • Meal expenses are deductible only if your travel requires you to be away from home over night or if the meal is business-related entertainment.
  • You can figure all your travel meals expenses using either of the following methods:
    1. Actual cost. If you use this method, you must keep records of your actual cost.
    2. The standard meal allowance which is he federal M&IE rate. These rates are listed in Publication 1542.
  • The deduction for unreimbursed business meals may also be subject to a 50% limitation.

Q: We are about to hire employees and need to know how much tax to take out and where to send this money?

You will need:

  • To secure a completed Form W-4 (PDF), Employee’s Withholding Allowance Certificate, from each employee.
  • Publication 15, Circular E, Employer’s Tax Guide, and Publication 15-A (PDF), Employer’s Supplemental Tax Guide, to determine the amount of withholding and for directions on depositing the withholding amounts and other employment taxes.

Generally, employers are required to quarterly file Form 941 (PDF), Employer’s Quarterly Federal Tax Return, and annually file Form 940 (PDF), Employer’s Annual Federal Unemployment Tax Return (FUTA), and Form W-2 (PDF), Wage and Tax Statement, with Form W-3 (PDF), Transmittal of Wage and Tax Statements. Some small employers (those whose annual liability for social security, Medicare, and withheld Federal income taxes is $1,000 or less) may file Form 944-SS (PDF), Employer’s Annual Federal Tax Return, instead of Form 941, if the IRS has notified them to Form 944 instead of Form 941. New employers are also eligible to file Form 944, if they will meet the eligibility requirements. New employers filing Form SS-4 Form SS-4(PDF), Application for Employer Identification Number, must

check the “Yes” box or “No” box on line 14 to indicate whether they expect to have $1,000 or less in employment tax liability for the calendar year.

Q: We hired a nanny to look after our baby while we work. How do we pay her social security taxes and properly report her income?

A nanny is considered a household employee:

  • A household employer only has to pay social security and Medicare taxes only on cash wages paid to an employee that exceed the threshold amount for the year.
  • If the amount paid is less than the threshold, no social security or Medicare taxes are owed.
  • If social security and Medicare taxes must be paid, you will need to file Form 1040, Schedule H (PDF), Household Employment Taxes.
  • You must withhold the employee’s portion of the social security and Medicare taxes unless you choose to pay both the employee’s share and the employers share. The taxes are 15.3% of cash wages. Your share is 7.65% and the employee’s share is 7.65%.
  • You may also be responsible for paying federal unemployment taxes, reported on Form 1040, Schedule H.
  • You and your employee may agree for you to voluntary withhold income tax from wages paid to the employee, reported on From 1040, Schedule H.

Q: I use my home for business. Can I deduct the expenses?

To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited.

Your use of the business part of your home must be:

  • Exclusive (see *exceptions below)
  • Regular
  • For your trade or business, and

The business part of your home must be one of the following:

  • Your principal place of business.
  • A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business.
  • A separate structure (not attached to your home) you use in connection with your trade or business.

NOTE: You do not have to meet the exclusive use test if you satisfy the rules that apply in either of the following circumstances:

  • You use part of your home for the storage of inventory or product samples.
  • You use part of your home as a day-care facility.

Form 1040, Schedule C (PDF) filers calculate the business use of home expenses and limits on Form 8829 (PDF). The deduction is then claimed on line 30 of Schedule C.

If you are an employee and you use a part of your home for business, you may qualify for a deduction. You must meet the tests discussed above plus:

  • Your business use must be for the convenience of your employer.
  • You do not rent any part of your home to your employer and use the rented portion to perform services as an employee.

Employees claim deduction for business use of home as an itemized deduction onForm 1040 Schedule A (PDF). There is a worksheet in Publication 587 to calculate the amount of the deduction.

NOTE: Whether the business use of your home is for your employer’s convenience depends on all the facts and circumstances. Business use is not considered to be for your employer’s convenience merely because it is appropriate and helpful.

Q: If you lease a vehicle, can you deduct the cost of the lease payments plus the standard mileage rate?

If you lease a car you use in business, you may use either:

  • The standard mileage rate. If you choose this method then you must use the standard mileage rate method for the entire period (including renewals).
  • Claim actual expenses, which would include lease payments. If you choose this method only the business-related portion of the lease payment is deductible. This deduction is reduced by an income inclusion amount.

Q: Are business gifts deductible?

If you give business gifts in the course of your trade or business you can deduct all or part of the costs subject to the following limitation:

  • You can deduct no more than $25 for business gifts you give directly or indirectly to any one person during your tax year.
  1. If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
  2. Incidental costs such as engraving, packing or shipping do not have to be included in the $25 limit.
  3. Gifts costing $4.00 or less that have your business name permanently engraved on the item, and which you distribute on a regular basis is excluded from $25 per person limit.

You need to have records that prove the business purpose of the gift as well as the details of the amount spent.

Q: I am self-employed. How do I report my income and how do I pay Medicare and social security taxes?

Your self-employment income is reported on Form 1040, Schedule C (PDF), Profit or Loss from Business, or on Form 1040, Schedule C-EZ (PDF), Net Profit from Business, and on Form 1040, Schedule SE (PDF), Self-Employment Tax.

Form 1040, Schedule SE (PDF), Self-Employment Tax is the form that individuals who are self-employed use to compute their liability for social security and Medicare tax.

As a self-employed person:

  • You pay your Medicare and social security taxes the same way you pay your income taxes.
  • You can pay them when you file your income tax return if you expect to owe less than $1,000 in total taxes.
  • You will need to make estimated tax payments if you expect to owe $1,000 or more in total taxes. These payments are made quarterly using Form 1040-ES(PDF), Estimated Tax for Individuals. You will need to figure these taxes at the beginning of the year.

Q: If you have run a small business in the past, but this year there is no income or expenses, is it necessary to file a Schedule C?

If your sole proprietorship business is inactive during the full year, it is not necessary to file a Form 1040, Schedule C (PDF), Profit or Loss from Business, for that year.

Q: What is the due date for business returns?

Some forms and entities have due dates other than the April 15th due date. The instructions for the each type of form used will have the appropriate due date(s) noted:

  • The sole proprietor’s Schedule C of income and expenses is attached to the Form 1040 (PDF). Therefore, the due date is the 15th day of the fourth month following the end of your tax year. For most taxpayers who are on a calendar year, this is April 15.
  • A partnership generally must conform its tax year of the partners unless the partnership can establish a business purpose for having a different tax year. The definition generally states that you must file your return by the 15th day of the fourth month following the end of your tax year.
  • A corporation may use either the calendar year, or a fiscal tax year. The corporate tax return is due by the 15th day of the third month following the end of the tax year.
  • An S corporation generally must use the calendar year, unless the entity can establish a business purpose for having a different tax year. The due date is the 15th day of the third month following the end of the tax year.

Q: Are partners considered employees of a partnership or are they self-employed?

  • Partners of a partnership are considered to be self-employed.
  • The partnership must furnish copies of Schedule K-1 to the partners by the partnership information return due date or extended due date.
  • If you are a member of a partnership that carries on a trade or business, your distributive share of the income or loss from that trade or business is net earnings from self-employment.

Q: I recently formed a limited liability company (LLC). The LLC has no employees. Do I need a separate Federal Tax ID number for the LLC?

If you are the sole owner of the LLC and the LLC has no employees, you will not need a separate Federal Tax ID number.

If you are not the sole owner of the LLC, you will need a separate Federal Tax ID number for the LLC.

Q: For IRS purposes, how do I classify a limited liability company? Is it a sole proprietorship, partnership or a corporation?

A limited liability company (LLC) is an entity:

  • Formed under state law by filing articles of organization as an LLC.
  • Where none of the members of an LLC are personally liable for its debts.
  • Must be classified for Federal income tax purposes as if it were a sole proprietorship (referred to as an entity disregarded as separate from its owner), a partnership, or a corporation. However, if the LLC has employees, for employment tax purposes the LLC will be treated as a corporation.

If the LLC has:

  • Only one owner, (see Publication 555, on community property states), it will automatically be treated as if it were a sole proprietorship (a disregarded entity), unless an election is made for it to be treated as a corporation.
  • Has two or more owners, it will automatically be treated as a partnership unless an election is made for it to be treated as a corporation.

If the LLC does not make a classification election, a default classification of disregarded entity (single-member LLC) or partnership (multi-member LLC) will apply. The election referred to is made using the Form 8832 (PDF), Entity Classification Election. If a taxpayer does not file Form 8832 (PDF), a default classification will apply.

Taxable Income

Q: Is unemployment compensation considered taxable income?

Unemployment compensation is includible in gross income. You must report unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. However, for 2009, the first $2,400 of unemployment compensation is excluded from income and should be excluded from the amount reported on your tax return.

If you received unemployment compensation during the year, you should receive Form 1099-G (PDF) showing the amount you were paid. Any unemployment compensation received during the year must be included in your income, unless you contributed to the fund. See Below. In addition, for 2009, the first $2,400 of unemployment compensation is excluded from gross income.

If you received unemployment compensation, you may be required to make quarterly estimated tax payments. However, you can choose to have federal income tax withheld. For more information, refer to Form W-4V (PDF), Voluntary Withholding Request.

Q: I retired last year, and started receiving social security payments. Do I have to pay taxes on my Social Security benefits?

Social Security benefits include monthly retirement, survivor, and disability benefits. They do not include supplemental security income (SSI) payments, which are not taxable. The amount of social security benefits that must be included on your income tax return and used to calculate your income tax liability depends on the total amount of your income and benefits for the taxable year.

To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of half of your benefits and all of your other income, including tax-exempt interest. The base amount for your filing status is shown next:

  • $25,000 if you are single, head of household, qualifying widow(er) or married filing separately living apart from your spouse at any time during the tax year.
  • $32,000 if you are married filing jointly.
  • $-0- if you are married filing separately living with your spouse at any time during the tax year.

Q: Are Social Security survivor benefits for children considered taxable income?

The person who has the legal right to receive the benefits must determine whether the benefits are taxable. If you and your child receive benefits, but the check for your child is made out in your name, you will use only your part of the benefits to see whether any benefits are taxable to you. The amount of income tax that your child must pay on that part of the benefits that belong to your child depends on the total amount of income and benefits for the taxable year.

Tax Procedure and Administration

Q: Can I make installment payments on the amount I owe?

Yes. If you cannot pay the full amount due as shown on your return, you can ask to make monthly installment payments. If your request to pay in installments is granted, the following conditions apply.

  • You will be charged a one-time user fee of $105.00, for direct debit agreements, the fee will be $52.00.
  • Interest is charged on any tax not paid by its due date, and
  • You will be charged a late payment penalty unless you can show reasonable cause for not paying the tax by the due date (April 15) for individual income tax returns Penalty will be charged until it reaches 25% of the original balance due and interest will be charged until the account is fully paid.

Before requesting an installment agreement, you should consider less costly alternatives such as a bank loan.

Q: What is an Offer in Compromise?

An offer in compromise is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC.

Q: What kind of interest and penalties will I be charged for filing and paying my taxes late?

Interest is compounded daily and charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is the federal short-term rate plus 3 percent. That rate is determined every three months. For current interest rates, click here.

In addition, if you filed on time but didn’t pay on time, you’ll generally have to pay a late payment penalty. The late payment penalty is one-half of one percent of the tax (0.5%) owed for each month, or part of a month, that the tax remains unpaid after the due date, not exceeding 25 percent. You will not have to pay the penalty if you can show reasonable cause for the failure.

The one-half of one percent rate increases to one percent if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy.

Currently, if you filed a timely return and are paying your tax via an installment agreement, the penalty is one-quarter of one percent for each month, or part of a month, that the installment agreement is in effect.

If you did not file on time and owe tax, you may owe an additional penalty for failure to file unless you can show reasonable cause.

The combined penalty is 5 percent (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your return was late, up to 25%. The late filing penalty applies to the net amount due, which is the tax shown on your return and any additional tax found to be due, as reduced by any credits for withholding and estimated tax and any timely payments made with the return.

After five months, if you still have not paid, the 0.5% failure-to-pay penalty continues to run, up to 25%, until the tax is paid. The total penalty for failure to file and pay can be 47.5% (22.5% late filing, 25% late payment) of the tax owed. If your return was over 60 days late, the minimum failure-to-file penalty is the smaller of $100 ($135 for returns required to be filled after December 31, 2008) or 100% of the tax required to be shown on the return.

Q: What should I do if I made a mistake on my federal return that I have already filed?

It depends on the type of mistake that you made. Many mathematical errors are caught in the processing of the tax return itself. If you did not attach a required schedule, the IRS will contact you and ask for the missing information. If you did not report all your income or did not claim a credit, you should file an amended or corrected return using Form 1040X, Amended U.S. Individual Income Tax Return.

When filing an amended or corrected return:

  • Include copies of any schedules that have been changed or any Form W-2 you did not include.
  • Generally, to claim a refund, the Form 1040X must be received within three years after the date you filed your original return or within two years after the date you paid the tax, whichever is later.
  • Please allow the IRS 8-12 weeks to process an amended return.

Q: What should I do if I haven’t filed a tax return for one or more prior years?

Regardless of your reason for not filing, file your tax return as soon as possible.

If you are not sure you are required to file a return, refer to Publication 17, Your Federal Income Tax. If you cannot pay all of the tax due on your return, the IRS may be able to assist you with arranging payments. For additional information on what to do if you cannot pay your income tax, refer to Topic 202, Tax Payment Options.

If your return was not filed by the due date (including extensions), you may be subject to the failure to file penalty, unless you have reasonable cause for your failure to file timely. If you did not pay your tax in full by the due date of the return (excluding extensions), you may also be subject to the failure to pay penalty, unless you have reasonable cause for your failure to pay. Additionally, interest is charged on taxes not paid by the due date, even if you have an extension of time to file. Interest is also charged on penalties.

There is no penalty for failure to file if you are due a refund. But, if you want to file a return or otherwise claim a refund, you risk losing a refund altogether. A return claiming a refund would have to be filed within 3 years of its due date for a refund to be allowed.

After the expiration of the three-year window, the refund statute prevents the issuance of a refund check and the application of any credits, including overpayments of estimated or withholding taxes, to other tax years that are underpaid. On the other hand, the statute of limitations for the IRS to assess and collect any outstanding balances does not start until a return has been filed. In other words, there is no statute of limitations for assessing and collecting the tax if no return has been filed.

Q: What should I do if I have not received my Form W-2 or Form 1099?

If you do not receive your Form W-2 or Form 1099-R by January 31st , or your information is incorrect, contact your employer/payer.

If you do not receive the missing or corrected form by February 14th from your employer/payer, you may call the IRS at 800-829-1040 for assistance. You must provide your name, address (including zip code), phone number, Social Security Number, dates of employment, your employer/payer’s name, address (including zip code), and phone number. The IRS will contact the employer/payer for you and request the missing form. IRS will also send you a Form 4852 (PDF), Substitute for Form W-2 or Form 1099-R.

If you do not receive the missing form in sufficient time to file your tax return timely, you may use the Form 4852. If you receive the missing or corrected Form W-2 or Form 1099 after you file your return and a correction is needed, use Form 1040X (PDF), Amended U.S. Individual Income Tax Return. For additional information on filing an amended return, refer to Topic 308, Amended Returns.

Q: What is Innocent Spouse Relief?

Many married taxpayers choose to file a joint tax return because of certain benefits this filing status allows. Both taxpayers are jointly and severally liable for the tax and any additions to tax, interest, or penalties that arise as a result of the joint return even if they later divorce. Joint and several liability means that each taxpayer is legally responsible for the entire liability. Thus, both spouses are generally held responsible for all the tax due even if one spouse earned all the income or claimed improper deductions or credits. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. In some cases, however, a spouse can get relief from joint and several liability.

Q: How long should I keep my tax records?

Well organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination, or to prepare a response if an IRS notice is received.

Records such as receipts, canceled checks, and other documents that support an item of income or a deduction appearing on a return should be kept until the period of limitation expires for that return. For assessment of tax you owe, this generally is 3 years from the date you filed the return. Returns filed before the due date are treated as filed on the due date.

There are no periods of limitations to assess tax when a return is fraudulent or when no return is filed. If income that you should have reported is not reported, and it is more than 25% of the gross income shown on the return, the time to assess is 6 years from when the return is filed. For filing a claim for credit or refund, the period to make the claim generally is 3 years from the date the original return was filed, or 2 years from the date the tax was paid, whichever is later. For filing a claim for a loss from worthless securities the time to make the claim is 7 years from when the return was due.

If you are an employer, you must keep all your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.

If you are in business, there is no particular method of bookkeeping you must use. However, you must use a method that clearly and accurately reflects your gross income and expenses. The records should substantiate both your income and expenses. Publication 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses, provide additional information on required documentation for taxpayers with business expenses. Publication 552, Recordkeeping for Individuals, provides more information on recordkeeping requirements for individuals.

Common FAQs: OVDI

Q: What Is OVDI?
A: The Offshore Volunteer Disclosure Initiative, also known as the Offshore Volunteer Disclosure Program, is a program created by the IRS to give those with unreported offshore bank accounts a chance to report the funds without facing criminal prosecution. The program was created in 2009 and has been updated a couple of times since then.Q: What is the object of OVDI?
A: The ultimate objective is to bring taxpayers into compliance with U.S. tax laws without the fear of being accused of tax evasion or other criminal charges.

Q: Why should I make a voluntary disclosure?
A: If for no other reason, you avoid criminal prosecution as well as some hefty civil penalties. Although you will be facing a penalty, it is no where near as large as the one you would face by not disclosing your accounts. And don’t think that the IRS won’t find you if it hasn’t already – it always gets its money. And once you’re under examination, you won’t be able to apply for OVDI.

Q: Can I still apply for the program if I can’t pay the penalties in full?
A: Absolutely. First know that by voluntarily disclosing these accounts, the penalties you will be facing are not as severe if you don’t apply. And just like anyone facing a penalty or back taxes with the IRS, there are numerous programs that can help you pay what you owe, such as payment plans, settlement plans, and offers in compromise. Remember, it’s better to disclose your assets now than wait until the IRS catches up with you.

Q: Do I qualify for the program?
A: If you have an offshore account or assets that are worth more than $10,000 and you haven’t disclosed this to the IRS, then you are eligible for the program. You are only ineligible if you are currently being investigated by the Department of Justice.

Q: What are the steps to applying for an OVDI?
A: First, it’s best to hire an experienced OVDI attorney to help you with the process since it can get pretty complicated. First, you need to request pre-clearance from the IRS. If you are accepted, then you can make a disclosure statement, along with various attachments.

If you have any more questions about the OVDI program, visit the IRS website. However, if you plan on applying, don’t do it alone! Contact the OVDI tax attorneys at Pro Tax Councel for a free consultation of your case.

Why You Must Pay Your Taxes

It is every American’s responsibility to pay your income tax by a certain deadline. But sometimes we are unable to make the deadline and soon we find ourselves in a hole, scrambling to get out. Many believe that by ignoring the problem, like a pain in your body, it will eventually go away. However this isn’t the case. The IRS wants what’s due and will use all its tools against you.

Here’s what will happen if you fail to pay taxes at a timely schedule:

    1. If you fail to pay taxes with your tax return, the IRS will send you a notice in the mail. This notice will explain how much you owe in taxes and can include any penalties and/or interest that may have accrued since the IRS discovered the error. This notice is a essentially a bill, demanding payment in full.
    2. If you ignore the notice and fail to pay the IRS, then you will be penalized. The IRS will start adding interest to the bill. This interest is compounded daily based on the federal short-term interest rated plus an extra 3 percent. In addition, you may receive a .05 percent late payment penalty which increases over time. There will also be a combined 5 percent penalty for both paying late as well as failing to file your income tax return on time.
    3. If you still fail to pay taxes, then you will soon receive in the mail a Notice of Federal Tax Lien or you may be served a Notice of Levy. With a tax lien, the IRS will claim your property to use as payment for your tax bill. With the tax levy, the IRS will physically take away your property until the debt is paid. This could mean the following: your wages could be garnished; your retirement fund could be used to pay your debt; your credit will be damaged; and criminal charges could arise.
    4. By still failing to pay taxes, the IRS could file tax evasion charges against you, which will result in jail time.

If you cannot pay your taxes, the IRS doesn’t accept this an excuse not to pay at all. With many programs available to help you pay your tax bill, there should be no reason to not pay.However there is help. Before the IRS places a lien or levy on your property, it is best to contact an experienced tax attorney who will negotiate on your behalf to help pay your taxes. The Houston tax attorneys at Pro Tax Councel are prepared to work with you to make sure you don’t have to go through this situation. Contact us today for a free consultation.

Tax Liens vs. Tax Levies: What’s the Difference?

It’s a question that we get asked a lot: What’s the difference between tax liens and tax levies? Why are these two the most affective tools in the IRS arsenal? And how can you protect yourself from having this happen to you?

What is a Tax Lien?

The definition of a tax lien is a lien that is placed your property by the government in order to secure the payment of delinquent taxes. After the IRS sends you a bill of how much you owe and you fail to pay the debt, the IRS will the file a Notice of Federal Tax Lien. This alerts your creditors that the government now has a legal claim to all your property.

How will this affect you? The simple answer is all your assets now belong to the government. This includes any business property you may have, as well as any accounts receivable. In addition, a lien will show up on your credit report which could affect any ability you have of getting credit. Even if you file for bankruptcy, your lien could continue. The only way to get rid of a lien is to pay the bill.

What is a Tax Levy?

Unlike a tax lien, which just stakes a claim on your property, a tax levy takes it one step further and takes away your property in order to pay the debt. Like a lien, a levy will come after you fail to pay your delinquent tax bill and you receive a Final Notice of Intent to Levy. You have 30 days to respond to this notice; if you fail to do so, then you can say goodbye to your property.

The big difference between tax lien and tax levy is that a lien just says what’s yours is mine whereas a tax levy actually takes what’s yours away from you. So for example, if there is a lien against your property and you decide to sell your home, that money will go to the IRS. Meanwhile, if you are slapped with a tax levy, then you no longer have a home to call your own.

How the IRS Uses Tax Lien and Tax Levy

The IRS uses these tools in order to pay a debt. If you fail to pay your taxes in a reasonable time, the IRS will then either put a lien or a levy on your property as payment. But there are ways to prevent this from happen. Before the IRS hands you a notice, get a tax lawyer. Contact the Houston tax attorneys at Pro Tax Councel today for a free consultation we can prevent your property from becoming the IRS’.