Category Archives: Tax Talk

What Is Depreciation Recapture?


The term “depreciation recapture” refers to the amount of gain that is treated as ordinary income upon the sale or other disposition of property.  Gain that is treated as capital gain is not depreciation recapture.  If you do your own taxes and you never heard of “depreciation recapture” – it’s time to get an accountant. If you already have an accountant and they never discussed “depreciation recapture” with you – you need a new accountant!  Either way, this post will walk you through some of the basics.

A Simple Example
Let’s begin with an example. You bought a rental property in 2007 for $200K. True, this was right before the “great financial crisis” and your property is worth less, but that is besides the point (for the moment).  In 2014, you manage to sell it for $175K. If life was simple, you could get away with the following calculation: your loss is the $175K sales prices less the $200K purchase price, or $25K. You held the property more than a year, therefore it’s “long-term.” Done right?  Not so fast my friend.

Unfortunately, it is not so simple, and instead of having a loss, you actually have a gain. How come? Because of depreciation. Every year since 2007 you were depreciating the property, correct?  Well, that depreciation lowered your tax bill and you received a benefit because of it.  But if you think you got a free ride from the government, think again.  What you were saving on depreciation comes back to haunt you now when you sell the property. So (for simplicity) let’s assume that each year you received $7,272 in depreciation. This is approximately $51K of depreciation over the 7 years.  Thus, the building wasn’t really wrth $200K for tax purposes, but only $149K.  SInce you sold the building for $175K, you really had a $26K gain!

It gets worse. Under “normal” circumstances, the tax rate on most net capital gain is no higher than 15%. Some may be taxed at 0% if you are in the 10% or 15% ordinary income tax brackets. However, a 20% rate on net capital gain applies in tax years 2013 and later to the extent that a taxpayer’s taxable income exceeds the thresholds.  Furthermore, there are a few other exceptions where capital gains may be taxed at rates greater than 15%:

  1. The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
  2. Net capital gains from selling collectibles (like coins or art) are taxed at a maximum 28% rate.
  3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

In case you missed it, it’s that last bullet that refers to depreciation recapture.  And yes, it’s taxed at 25% versus 15%!

The actual calculations can get quite involved depending on the amount of the gain, the amount of depreciation taken and the tax bracket you fall into.  But once again for simplicity (and illustration), since you took $51K of depreciation, the entire $26K gain would be considered depreciation recapture and you could pay $9K in taxes related to it.

If you’re tired at this point, we don’t blame you. Albert Einstein is quoted as saying that the hardest thing in the world to understand is the income tax.  As seen above, the IRS does a pretty good job proving his point!

Tax Planning Tips for Depreciation Recapture
So just how can you get out of depreciation recapture?  The short answers is you can’t, but there are things that can help or delay it’s payment.  For example, when a rental property is sold, any passive activity losses that were not deductible in previous years become deductible in full. This can help offset the tax bite of the depreciation recapture tax.

By the way, you’ve heard of 1031 exchanges, haven’t you?  Next time, you may want to think about using one before you sell your property.  When a rental property is sold as part of a like-kind exchange, both capital gains and depreciation recapture taxes can be deferred until the “new” property is disposed of.

There’s one tax strategy, however, that will not help. Since depreciation is recaptured when the asset is sold, it is reasonable that some people would think that by avoiding claiming depreciation they can also avoid the recapture tax. This strategy does not work, because the tax law requires depreciation recapture to be calculated on depreciation that was “allowed or allowable” (Internal Revenue Code section 1250(b)(3)).

Deducting Business Start Up Cost

Business organizational costs are amounts paid, or incurred, to create a corporation or partnership business entity.  Start-up costs are those paid or incurred for investigating or creating an “active” trade or business. Start-up and organizational cost include:

  • Analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
  • Expenses incurred while investigating the purchase of a business.
  • Training wages for employees who will work in the business.
  • Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
  • Cost of professional services, such as executives and consultants.
  • Legal fees incident to the organization
  • Accounting fees incident to the organization
  • Filing fees.

If you need a template to track your startup or organizational cost prior to deducting them, use this one from the fine folks over at

Unlike expenses incurred as part of the normal ongoing operations of a business, one must “elect” to amortize (i.e. deducted over a period of time) organizational and start up cost  in order for them to be deducted.  The current rules allow for the following:

  • You are able to deduct up to $5,000 of your qualifying start-up costs in the first year.
  • The first-year deduction starts to phase-out $1 for $1 when your expenses reach $50,000.  Once your expeneses reach or exceed $55,000, the first year deduction is fully phased out.
  • Up to $55,000 of start-up expenditures can be deducted ratably over a 180-month period beginning with the month in which the active trade or business begins.

To aid in understanding how the above works, here is how you would make your first year deduction:

If start-up costs are $52,000, $3,000 can be deducted in the first year.  You can amortize the remaining start-up costs over 180 months starting with the month business begins.

Making the Election Electing the deduction.
The election to currently deduct up to $5,000 of start-up or organizational costs (or both) is made by claiming the deduction on the tax return for the tax year in which the trade or business begins.  Note that the tax return must be timely-filed, including extensions.  Furthermore, no separate statement is required for making this election.

Electing to amortize.
The election to amortize start-up or organizational costs (or both) is made by filing Form 4562, Depreciation and Amortization, and completing Part VI. Make sure that you:

  • Attach a statement listing a description and amount of each cost, date incurred (for organizational costs), month the business began or was acquired, and the amortization period (generally 180 months).
  • Use separate statements for start-up costs and organizational costs.

Correcting an omitted election.
An election to deduct or amortize costs that was omitted on a timely-filed return (including extensions) can still be made by filing an Amended Return within six months of the original due date of the return (excluding extensions).

Home Office Tax Deduction Requirements

Home Office

If you use part of your home for business, the IRS will generally allow you to deduct certain expenses come tax time. The home office deduction is available for homeowners AND renters, and applies to all types of homes.   In order to take the deduction, there are two basic requirements that you must satisfy:

Regular and Exclusive Use
You must “regularly” use part of your home “exclusively” for conducting business.  For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.  The exclusive portion of the equation usually means that you can’t use that room for other things.  Meaning, if the room is your den and you also use it for entertainment or other social activities, then the deduction will not be allowed.  Also, if the room or space isn’t used on a regular basis (i.e. you only have business meetings in that room once a quarter), the deduction will also not be allowed.

Principal Place of Your Business
In addition to the above, you must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business.

How to claim the deduction
Generally, deductions for a home office are based on the percentage of your home devoted to business use.   Thus, if you use whole or part of a room for conducting your business, you will generally need to figure out the percentage of your home devoted to your business activities.  However, note that there are TWO methods for you to determine the deduction:

Simplified Method
For taxable years that started on or after, January 1, 2013 (filed beginning in 2014), taxpayers have the option of using the simple method per IRS Revenue Procedure 2013-13.  The standard method (discussed next) has some calculation, allocation, and substantiation requirements that some consider complex and burdensome for small business owners. The simplified option can significantly reduce the recordkeeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office.   In most cases, the deduction is calculated by multiplying $5, the prescribed rate, by the area of your home used for a qualified business use. However, note that the area you use to figure your deduction is limited to 300 square feet.  So if your office is larger than this number, you may want to take the time to use the next method.

Regular Method
Taxpayers who use the regular method (required for tax years 2012 and prior), must determine the actual expenses associated with their home office.  These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.  Once the amount spent on each category is determined, one must then allocate them between the space used in connection with their business and the rest of the dwelling.  To do this, one will use IRS Form 8829.

Where to deduct
Where you take the deduction on your tax return depends on how you conduct your business:

  1. If you are self-employed: report the entire deduction on line 30 of Schedule C (Form 1040). Whether you need to complete and attach Form 8829 to your return depends on which method you used above to perform your calculation.
  2. If you are an employee: you must itemize deductions on Schedule A (Form 1040) to claim the deduction, generally on line 21 (unreimbursed employee business expenses).
  3. If you are a member of a partnership, multimemeber LLC or S-Corp: take a look at this post for more information on how to claim the deduction.

To learn more about the following, we suggest that you take a look at IRS Publication 587:

  • Types of expenses you can deduct.
  • How to figure the deduction (including depreciation of your home).
  • Special rules for daycare providers.
  • Tax implications of selling a home that was used partly for business.
  • Records you should keep

What moving expenses can you deduct?

Over the past year or so we’ve had a few of our clients move to another state.  In addition to knowing if their new city imposes an income tax the next question usually is “What moving expenses can I deduct?”   The answer is really a two part matter of can I deduct my moving expenses AND what expenses can be deducted.

Who can deduct moving expenses?  In order to deduct your moving expenses, you must meet the following three requirements:

  1. Your move must be closely related, both in time and in place, to the start of work at your new job location.
    • Time:  Moving expenses incurred within 1 year from the date you first reported to work at the new location can “generally” be considered closely related in time to the start of work.
    • Place:  If the distance from your new home to the new job location is not more than the distance from your former home to the new job location, you can “generally” consider yourself as satisfying this test.
  2. You must meet the distance test.  Your move will meet the distance test if your new main job location is at least 50 miles farther from your former home than your old main job location was from your former home.  See the illustration below for an example.
  3. You must meet the time test. If you are an employee, you must work full time for at least 39 weeks during the first 12 months after you arrive in the general area of your new job location (39-week test). If you are self-employed, you must meet the above AND work a total of at least 78 weeks during the first 24 months after you arrive in the general area of your new job location (78-week test).


What moving expenses can be deducted?  Once you determine that you qualify to deduct your expenses, you should keep track of the cost related to the following (which are deducted on IRS Form 3903):

  • Moving your household goods and personal effects (including in-transit or foreign-move storage expenses), and
  • Traveling (including lodging but not meals) to your new home.

Moving household goods and personal effects. You can deduct the cost of packing, crating, and transporting your household goods and personal effects and those of the members of your household from your former home to your new home. For purposes of moving expenses, the term “personal effects” includes, but is not limited to, movable personal property that the taxpayer owns and frequently uses.

Travel expenses. You can deduct the cost of transportation and lodging for yourself and members of your household while traveling from your former home to your new home. This includes expenses for the day you arrive.

If you use your car to take yourself, members of your household, or your personal effects to your new home, you can figure your expenses by deducting either:

  • Your actual expenses, such as the amount you pay for gas and oil for your car, if you keep an accurate record of each expense, or
  • The standard mileage rate per the IRS for the tax year of the move (as it is indexed annually)

Nondeductible expenses.  The following expenses are not deductible:

  • Pre-move househunting expenses
  • Return trips to your former residence
  • Any part of the purchase price of your new home
  • Expenses of buying or selling a home (including closing costs, mortgage fees, and points)
  • Expenses of entering into or breaking a lease
  • Home improvements to help sell your home
  • Loss on the sale of your home
  • Mortgage penalties
  • Real estate taxes
  • Security deposits (including any given up due to the move)
  • Storage charges (except those incurred in transit and for foreign moves)
  • Car tags
  • Driver’s license

If you need more information feel free to give our office a call, shoot us an email via the address in the footer or check out IRS Publication 521.

Avoiding 401(k) Early Withdrawal Penalties

The point of investing in a 401(k) plan is to build your savings for retirement.  Generally, if an individual withdraws from their 401(k) plan before reaching age 59½ they are taking what are called ”early” or ”premature” distributions. As such, individuals must pay an additional 10% early withdrawal tax, unless an exception applies, AND include the amount of the distribution in their income when they file their income tax return.

Sometimes you have no choice and are forced to tap into your account.  Here are some ways that you can make withdrawals and avoid getting hit with penalties for doing so.

Age – Begin after age 59½ once you leave your employment (at any age).

Separation From Service – Begin after you separate from service during or after the year you reach age 55 (age 50 for public safety employees in a governmental defined benefit plan).

High Unreimbursed Medical Expenses – If you, your spouse, or your qualified dependent face these expenses, you may be allowed to withdraw a limited amount (the actual expenses minus 10% of your AGI) without penalty.

Death – If you die, your beneficiaries are able to take distributions from your 401k without penalty.

Disability – If you are “totally and permanently disabled” by IRS definition, you may be able to take distributions from your 401k without penalty.

Series Of Substantially Equal Periodic Payments –  Essentially you agree to continue taking the same amount from your plan for the greater of five years or until you reach age 59½. There are three methods of doing this:

  1. Required Minimum Distribution method – This uses the IRS RMD table to determine your Equal Payments.
  2. Fixed Amortization method – Under this method, you calculate your Equal Payment based on one of three life expectancy tables published by the IRS.
  3. Fixed Annuitization method – This uses an annuitization factor published by the IRS to determine your Equal Payments.

IRC Section 72(t) provides additional methods for taking a distribution from your 401k which can occur before leaving employment (if the plan allows).  However, note that the following are NOT applicable to a 401(k), but DO apply to an IRA withdrawal:

  1. Qualified higher education expenses
  2. Qualified first-time homebuyers, up to $10,000
  3. Health insurance premiums paid while unemployed

So if you are considering using your 401(k) funds for any of the above, you might want to make a “trustee-to-trustee” transfer to an IRA account first and then take the distribution from that account.

2015 IRS Dirty Dozen

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As the tax season gets under way, the IRS does us all a public service by posting a list of the top tax scams currently making the rounds.  Typically this is done by posting one scam per day over a two to three week period; usually right as the filing season opens up.  The IRS recently finished releasing their list, which can be found here.

As we often see some of these scams impacting clients that visit our office, we figured we would post a quick summary.  So without further adieu here is the…

Recap of the 2015 IRS “Dirty Dozen” scams:

  • Phone Scams: Aggressive and threatening phone calls by criminals impersonating IRS agents remains a threat to taxpayers. Callers often state that they are IRS agents and mention police arrest, deportation, license revocation and other things if the taxpayer doesn’t immediately pay their bill (i.e. as in on the phone right now as we speak). Remember, the IRS typically contacts taxpayers via letter (not phone) and don’t show up unannounced.  If someone is asking for payment over the phone, tell them to give you a phone number, that you are calling your lawyer or simply hang up!
  • Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. If you believe that a fraudulent return has been filed by someone using your Social Security Number, we urge you to follow the steps we outlined in this identity theft blog post.
  • Return Preparer Fraud: Taxpayers need to be on the lookout for unscrupulous return preparers. Most tax professionals provide honest high-quality service. But there are some dishonest preparers who’s actions hurt you and the entire profession.  Check out this post for the questions you want to ask any tax professional that you are thinking of using.
  • Inflated Refund Claims: Taxpayers should be wary of anyone who asks them to sign a blank return, promise a big refund before looking at their records, or charge fees based on a percentage of the refund.
  • Falsifying Income to Claim Credits: Taxpayers should avoid inventing income to erroneously claim tax credits (e.g. the Earned Income Credit or EIC).
  • Claims for Fuel Tax Credits:  The fuel tax credit is generally limited to off-highway business use, including use in farming.  Consequently, the credit is not available to most taxpayers.
  • Hiding Income with Fake Documents:  The mere suggestion of falsifying documents to reduce tax bills or inflate tax refunds should be a huge red flag when using a paid tax return preparer.
  • Phishing: Fake emails or websites looking to steal personal information continue to be a problem. The IRS will not send you an email about a bill or refund out of the blue.
  • Fake Charities: Taxpayers should be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Follow the 10 steps in this post to ensure that you are giving to a “real” organization and not someone trying to steal your money.
  • Offshore Tax Avoidance: Anyone suggesting that you can avoid paying tax by hiding it in an “offshore” account is selling you lies.  Just research FACTA and you’ll see what the IRS has to say about the topic.
  • Abusive Tax Shelters: The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true.
  • Frivolous Tax Arguments:  Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. Just know that the penalty for filing a frivolous tax return is $5,000.

Marijuana, The IRS and Taxes


It’s almost impossible not to notice the wave of marijuana legalization spreading across the country.  Even Congress is getting into the act.   Research hemp crops were recently included in the 2014 Farm Bill.  Furthermore, Congress defunded DEA raids on state-legal marijuana facilities in the 2015 stop-gap funding bill.

Regardless of one’s personal feelings on this topic, it’s obvious that voters, legislators, and Congress are, for the most part, on board for the ride.  In some states, this is driven by the expected tax revenue.  The IRS, however, still has a few things to say when it comes to marijuana.

First of all, for those folks out there that are already medical marijuana patients or have considered getting their “card,” you should know that the costs of obtaining medical marijuana are NOT deductible as a medical expense on Schedule A of your personal income tax return.  The reason for this is that marijuana is still classified as a Schedule I drug by the United States Controlled Substances Act.

If you have deducted your medical marijuana expenses in the past, and you ever get audited, do note that this deduction will be disallowed, and you’ll be subject to paying taxes, penalties, and interest as a result.  In order to claim a deduction for this in the future, Congress will need to reclassify cannabis as, at the least, a Schedule II drug.  If this is an important personal issue to you, your best course of action right now is to lobby your representative and senator, rather than testing this in tax court (it’s already been tested, and the IRS won).

On the business side of things, it gets even more complicated.  Under Internal Revenue Code Section 280E, dealers of Schedule I controlled substances are not permitted to deduct the ordinary business expenses involved in selling their products.  This means that recreational and medical marijuana dispensary owners cannot deduct the most common business expenses incurred in running a business, such as rent, utilities, wages, marketing, security, etc.  To get an idea of how the tax court is thinking about this subject, feel free to take a look at the Olive v. Commissioner case and the ruling of Judge Diane L. Kroupa.

Marijuana businesses are still allowed to take a Cost of Goods Sold (COGS) deduction from gross revenue.  COGS includes the hard cost of acquiring marijuana for resale, for example.

Businesses that provide other services beyond just selling marijuana are allowed to deduct reasonable business expenses for those other services and products.  For example, many medical marijuana stores also offer various naturopathic services, yoga classes, massage, etc.  Expenses related to those services are deductible (reference: 128 TC 173 (2007)).

Whether you’re a medical marijuana patient or contemplating opening a marijuana related business, it’s important to seek proper legal, tax, and accounting counsel to make sure you stay on the right side of the law.

New Site For Filing Old Tax Returns

He's Back. Uncle Sam Wants You!!!!

He’s Back. Uncle Sam Wants You!!!!

Sometimes things happen.  Life get’s in the way.  Your health takes an unexpected turn for the worse.  You have the best intentions of getting out of the financial hole you are in, but the hole just seems to keep getting deeper.  No matter what the reason is, sometimes the tax returns just don’t get filed on time.  And sometimes they don’t get filed for a few years.  But don’t worry, now you have an option to get back on track.  Introducing! is our recently developed sister site to helps those who specifically have unfiled tax returns from previous years.  Why create a separate website; especially if the services are provided the same fine professionals who run Wilson Rogers & Company?  Keep reading.

Software availability.  If you have old tax returns to be filed and are the DIY type, you’ll quickly stumble onto something.  Software providers typically STOP offering tax software for a particular year once the IRS has shut down the e-file platform.  Thus, if you want to prepare your return electronically, there are a limited number of online sites you can use or you have to manually fill out the forms once you download them from the IRS website.  But what if you don’t want to prepare the return?

Real people available year round.  It’s no secret that most retail tax offices close up shop once the tax season is over.  If you have a deadline to provide a tax return to someone (e.g. loan officer for that new home you’re trying to purchase), you might find it hard to locate anyone who can prepare it for you, when YOU need it.  Thus, was created as a option so that taxpayers could get these old returns prepared all year round.  Depending on the situation, you may be able to get them done in as little as 24 hours!

Real people available year round!

Real people available year round!

Repository of tax law.  Tax laws are constantly changing.  Even if you don’t want to have someone prepare your return for you, what laws and tax rates were in effect back when your tax return was due?  Not to worry, has a tax help blog that has all of the historical information that you would need to ensure that your return was done right.  While only containing historical tax rate tables at the moment, it will soon be expanded to include tax law summaries for each year as well as specific information on various credits, deductions and other items.

Help with IRS debt.  It’s not uncommon for those who have unfiled returns to also have amounts owed to the IRS.  Sure, you’ve seen all those companies with the late night infomercials telling you how you can settle your debt for pennies on the dollar if you owe more than $10,000 to the IRS.  But can you trust them?  How do you know if they are reputable?  Well, has a dedicated Got IRS Debt page that will not only inform you of your options when it comes to settling your tax debt, but inform you of your rights!

So there you have it.  If you have (or know someone who has) unfiled tax returns, why not pay a visit to the site?  If you need to speak to someone, you can call the site’s dedicated support number at 844-TAXES88 or 844-829-3788.  Plus, when you visit the site, you can sign up and save 30% off current year tax preparation rates.

Until next time…


10 Options For Solving Your IRS Debt

When it comes to settling your tax debt, there are 10 options “commonly” employed by resolution professionals (such as ourselves) or the individual taxpayer (see full explanations below):

»          Full pay the tax owed
»          File unfiled returns to replace Substitute for Returns (SFR’s)
»          Dispute the tax on technical grounds
»          Currently Not Collectable
»          Installment Agreements
»          Offers In Compromise
»          Penalty Abatement
»          Discharging taxes in bankruptcy
»          Innocent Spouse relief
»          Expiration of the Collection Statute

OPTION ONE – Full pay the tax owed
While seldom a popular option, sometimes the taxpayer does have the ability to pay the tax outright or borrow against an existing asset e.g. refinance a home mortgage or take out a home equity loan.

Surprisingly, in this situation, this option is usually the least costly of viable options available to the taxpayer. The reason for this is two-fold:
»         The taxpayer’s equity in assets will usually disqualify the taxpayer from benefiting from options which grant debt forgiveness.
»         Until the tax debt is paid in its entirety, it will continue to accrue additional penalties and interest.

OPTION TWO – Filing unfiled tax returns and replacing Substitute for Returns
When resolving a tax problem, it is relatively common to find that the taxpayer has back tax returns which have not been filed. There are three reasons why it is necessary to file the required back tax returns and get the taxpayer “Current” so to speak:
»         Failure to file tax returns may be construed as a criminal act by the IRS and can be punishable by one year in jail for each year not filed. Filing unfiled returns brings the taxpayer “Current”
»          Filing unfiled returns to replace “Substitute for Returns” may lower the tax liability owed and the associated interest and penalties
»          A settlement cannot be negotiated with the IRS until the taxpayer becomes “Current”

OPTION THREE – Dispute the tax on technical grounds
If there is a technical basis to dispute the amount of tax owed, there are a number of paths to consider, including:
»         Filing an amended return if the statute of limitations to file has not expired
»         Filing an Offer In Compromise – Doubt as to Liability

OPTION FOUR – Currently Not Collectable Status
If a taxpayer does not have positive cash flow above the level to pay their necessary living expenses or have equity in assets to liquidate, the taxpayer may qualify for Currently Not Collectable Status (CNC). This is most commonly seen when the tax payer is unemployed or underemployed. In this situation, the IRS places a temporary hold on the collection of the tax owed until the taxpayer’s financial situation improves. If over a longer period of time, the tax payer’s financial situation does not improve, the taxpayer may then become a viable Offer In Compromise candidate.

OPTION FIVE – Installment Agreements
In most cases, the IRS will accept some type of payment arrangement for past due taxes. In order to qualify for a payment plan the taxpayer must meet set criteria. They include:
»          The taxpayer must be current- all returns must be filed
»          Disclose all assets owned
»          The difference between the taxpayer’s monthly income and allowable monthly expenses will be the amount that the IRS will request that the taxpayer pay on a monthly basis
»          Monthly payments will continue until the taxes owed are paid in full

OPTION SIX – Offers In Compromise
The IRS Offer in Compromise program provides taxpayers that owe the IRS more than they could ever afford to pay, the opportunity to pay a small amount as a full and final settlement.

»          This program also allows taxpayers that do not agree that they owe the tax or feel that the tax has been incorrectly calculated, a chance to file an Offer in Compromise and have their tax liabilities reconsidered.
»          The Offer in Compromise program allows taxpayers to get a fresh start.
»          All back tax liabilities are settled with the amount of the Offer In Compromise.
»          All federal tax liens are released upon IRS acceptance of an Offer In Compromise and payment of the amount offered.

An Offer in Compromise filed based on the taxpayers inability to pay the IRS looks at the taxpayer’s current financial position and considers the taxpayers ability to pay as well as the taxpayers equity in assets. Based on these factors, an Offer amount is determined.

»          Taxpayers can compromise all types of IRS taxes, penalties and interest.
»          Even payroll taxes can be compromised.

If the taxpayer qualifies for the Offer In Compromise program, they may be able save thousands of dollars in taxes, penalties and interest.

OPTION SEVEN – Penalty Abatement
In most cases, penalties make up 10-30% of the total tax obligation. A penalty abatement request can eliminate some or all penalties if the taxpayer has reasonable cause for not paying the tax on time or paying the appropriate amount of tax.

Reasonable cause includes:
»         Prolonged unemployment
»         Business failure
»         Major illness
»         Incorrect accounting advice
»         Incorrect advice from the IRS

To prevail in a penalty abatement request, as in most tax matters, the burden rests with the taxpayer to be able to adequately document the reasonable cause.

OPTION EIGHT – Discharging Taxes in Bankruptcy
Bankruptcy can discharge federal income taxes if certain requirements are met. However this depends upon both the type of bankruptcy and the type of tax owed.

Chapter 7 is the chapter of bankruptcy law that provides for the liquidation of non-exempt assets and the discharge of dischargeable debts. Chapter 11 and Chapter 13 provide for repayment of debt in whole or in part.

To discharge taxes in bankruptcy, a number of criteria must be met including:
»         36 months have expired from the tax return due date
»         24 months have expired from the date the tax was assessed
»         240 days have passed since the tax was assessed and filing bankruptcy
»         All tax returns must have been filed

OPTION NINE – Innocent Spouse relief
Sometimes a taxpayer will find themselves in trouble with the IRS because of their spouse’s or Ex-spouse’s actions. The IRS realizes that these situations do in fact occur.

In order to help taxpayers that have tax problems which are due to the actions of their spouse, the IRS has developed guidelines for taxpayers to qualify as an innocent spouse. If a taxpayer can prove they meet these guidelines, then the innocent taxpayer may not have to pay some or all the taxes caused by their spouse or ex-spouse.

OPTION TEN – Expiration of the Collection Statute
The IRS has 10 years from the date of assessment (usually close to the filing date) to collect all taxes, penalties and interest from the taxpayer. The taxpayer does not owe the tax after the 10-year date has passed.

Listed below are some of the most common exceptions to this rule:
»          If the taxpayer agrees in writing to allow the IRS more time to collect the tax
»          If the taxpayer files bankruptcy during the 10 year period
»          If the taxpayer files an Offer In Compromise.

Understanding The Gift Tax

Gift Tax

So a few weeks ago, someone posed the following question to us regarding gift giving:

Can you please explain how the gift-tax system works and what its rationale is? I know that if I give someone a gift below a certain amount, then I don’t have to pay gift tax. But what happens if I give over that amount? My contribution was made with after-tax money. Why do I have to pay a gift tax? It just feels like I am being double taxed.

We thought it was a good question, so let’s explain what the so-called gift tax is really all about.

Lifetime Exclusion
Our current tax system essentially treats the transfer of wealth the same whether the transfer was made during the donor’s lifetime or posthumously.  However, the IRS grants taxpayers a life time exclusion (also called the lifetime exemption) that allows them to give away $5,340,000 (in 2014) at either stage or a combination of the two.  Thus, a taxpayer can give up to this amount during their lifetime or after death without either the recipient or the donor owing any tax on that transfer.

Annual Exclusion
A common source of misunderstanding surrounding gift tax has to do with how the lifetime exclusion amount relates to the annual exclusion.  The annual exclusion allows a taxpayer to give $14,000 (in 2014) to another person per year without it counting against the lifetime exemption.  You and your spouse can combine this annual exclusion to double the size of the gift to a done if you would like (up to $28,000).  So what happens when you give more than the above amounts?  Well, you then have to deduct the difference against your $5,340,000 lifetime exclusion.  Just how do you do this?

You, or your estate if the taxpayer is deceased, must file Form 709 United States Gift Tax Return by the same date that your Individual Tax Return is due (April 15th).  You will owe no tax on your gifts unless you have already given more than the lifetime exclusion. Once you file Form 709, the government notes what your remaining exemption is. The same process is followed every time you exceed the annual exclusion limit (e.g. $14,000). Then at your death, any bequest beyond the remaining limit is subject to taxation.  Thus, it’s not until you reach this point that your gift is subject to double taxation so to speak.

If you want more information on the gift tax and reporting, check out this nifty little IRS site
on the topic.  Still have questions?  Why not give us a call or shoot us an email via our contact information below and we’d be happy to chat with you.