Understanding First-Time Penalty Abatement

Understanding First-Time Penalty Abatement - Rush Tax Resolutionn

The IRS issues millions of penalties every year. Most of these are for missed or late payments or returns, but sometimes, taxpayers incur the IRS’s ire in different ways, such as missing payroll taxes on their business or bouncing a check. These penalties add up over time – some are flat penalties, while others are calculated as a percentage of the principal debt. In addition to interest, these penalties can turn an innocuous tax debt into a hefty sum. But what happens if you can’t pay up? Well, there’s always the chance that the IRS will forgive your penalties. This is more likely if it’s been a long time since you’ve had to face off against the Tax Man. Let’s look at different penalty abatement options, including first-time penalty abatement.

What Is First-Time Penalty Abatement?

First-time penalty abatement is a somewhat misleading term. Not all taxpayers who have never run into trouble with the IRS are automatically eligible for any form of payment abatement if it’s their “first time.” Similarly, some taxpayers can still avail of first-time penalty abatement, despite a tax debt incurred some years ago. IRS tax debts are seldom forgiven unless the IRS forgets you owe anything (which is not very likely!) or decides that it has made a mistake (also rare). But penalties are a different matter. First-time penalty abatement applies to the following taxpayers:

  1. Taxpayers who only have specific penalties on certain returns. For individual taxpayers, these are only the failure to file and failure to pay penalties.
  2. Taxpayers who have a clear record for at least the last three years. This means you must be in good standing with the IRS for the previous three years before you try to avail of a first-time penalty abatement. Good standing means something other than perfect standing. You can have a minor penalty without besmirching your record, but the IRS does not indicate what counts as significant or insignificant, so err on caution.
  3. It does not matter if your penalty is for a missing tax return. Taxpayers must be entirely up to date on their tax returns. The IRS will only entertain the idea of penalty abatement if you retroactively send in the returns you’re missing – typically for the last three to six years.

When it comes to penalty abatement, the IRS can become frustratingly inconsistent. In addition to a written request via Form 843, Claim for Refund and Request for Abatement, you may need to appeal the IRS’ decision if they decide not to grant your request, and comply with requirements for additional information until your request is fully processed. Note that there are specific penalty appeal eligibility requirements that you may have to qualify for. Even with all of these requirements fulfilled, you have little guarantee of getting the IRS to remove your penalties without a little extra work.

Another notable point is that first-time penalty abatement does not apply to future penalties and interest. If you are currently paying off your tax debt, then requesting that the IRS lift your penalty may give you a get-out-of-jail-free card for what you currently owe, but not for what you will owe in the months after. To minimize what you pay – and the IRS recommends that you do this – your best bet is to request penalty abatement after you have finished paying off your tax debt. When the IRS grants your request, you will receive a tax refund for the money you paid in penalties.

What If It Isn’t My First IRS Debt?

The IRS does not track if this was the first time you’ve ever had a substantial tax debt when offering penalty abatement – what matters is that your record has been clean for three years. While taxpayers hate paying IRS penalties, most don’t request relief or are denied relief because they fail to follow the basic do’s and don’ts when requesting abatement. Fortunately, relief is available if you follow some notable steps for requesting and securing abatement.

Other Forms of Penalty Abatement

In addition to first-time penalty abatement, the IRS will offer penalty relief for three different reasons:

1. Reasonable Cause

Penalty abatement for reasonable cause is issued on a case-by-case basis, depending on the circumstances of your case and the penalty you owe. Think of missing a tax return deadline because a massive hurricane hit your state, vital records were lost in a fire, and it took extra time to retrieve copies or supporting information.

2. Statutory Exception

Under tax law, certain situations qualify for penalty relief due to statutory exception. These include being in an active combat zone, a federally-declared disaster area, having mailed a return on time (it may not have been processed yet, causing an erroneous penalty), or receiving a penalty due to false information obtained through the IRS.

3. Innocent Spouse Relief

More than just a form of penalty abatement, innocent spouse relief is rare and comes with a hefty caveat. You must prove to the IRS that you were not aware of the infraction that led to your spouse or ex-spouse’s tax debt on your joint return. The IRS must also determine that it would have been reasonable for you not to know (for example, the debt is related to your spouse’s business, which you are not involved with).

What If I Can’t Pay?

Tax debt is not optional. If you owe the IRS money, they will eventually want to see it. It might not be today; it might not be tomorrow. But the sooner you start, the less you end up owing. In addition to penalties, the IRS levies hefty interest rates and possesses an array of collection tools with which it can coerce payment, including federal tax liens and levies. It is possible to avoid a lien or levy if your debt is low enough, even if you cannot pay it all at once; an installment payment plan can keep the IRS at bay and even reduce your total penalties. If your debt is too high, and your finances can’t keep up, you may want to talk to a tax professional about considering an offer in compromise (OIC).

How to Prevent and Remove a Federal Tax Lien

How to Prevent and Remove a Federal Tax Lien - Rush Tax Resolution

Federal tax liens are one of the IRS’ collection actions used to enforce payment for tax debt. Unlike a levy, a federal tax lien is not an actual claim of your property or assets. And unlike a levy, the IRS issues a federal tax claim on everything you own, all at once. The IRS will not issue a tax lien against you without first notifying you and giving you a chance to respond with an appeal against their decision. This appeal only happens if you have the evidence to suggest that they are making a mistake or can come to an agreement with the IRS to stop the lien.

If you fail to convince them to stop, the IRS will publicly announce the lien – in other words, a federal tax lien is known to you and your creditors. The purpose of a lien is to place a legal claim on your entire asset list so that you cannot liquidate assets, satisfy other debts, or seek financing without first dealing with your tax debt to the government. The point of a federal tax lien is to secure the government’s stake in your existing property and assets before resorting to a more serious claim. Thankfully, tax liens can be both prevented and removed, even if you are not in a position to pay off your debt.

Understanding why the IRS places and pulls liens can help you avoid getting in unnecessary trouble with the tax man and help you resolve your issues with the IRS.

Tax Lien vs. Tax Levy

First, let’s clarify the difference between a tax lien and a tax levy, the IRS’ two most potent collection actions. Whereas a tax lien effectively freezes your assets and keeps you from using them to secure another debt or seek financing, a tax levy is an invasive claim of a single asset or property or a sum of money from an account. The IRS can only enact a tax levy on your income through a form of withholding negotiated with your employer.

The IRS usually claims money out of your bank accounts when executing a tax levy if you are self-employed. Yes, the IRS can claim your primary residence, in theory. They can take your house. But speaking more practically, the IRS will usually stick to claiming investment properties and cash. You can keep them from claiming your home and cease most collection actions if the IRS declares you non-collectible.

Like tax liens, the IRS announces tax levies well before the IRS commits to them, giving taxpayers time. Taxpayers should use this time to either demand a Due Collection Process, appeal to a third-party such as the US Tax Court or the Independent Office of Appeals, or negotiate an agreement with the IRS to settle the debt.

In the not-so-distant past, receiving a tax lien also spelled doom for your credit score, dealing a blow equivalent to complete bankruptcy and lasting about as long (seven years or so). However, all three credit reporting agencies stopped taking tax liens into account against a consumer’s credit score after too many instances of penalizing the wrong person.

Ways to Deal With a Tax Lien

This does not mean that tax liens are harmless – far from it. A tax lien is not just a prelude or an ample warning for a tax levy. Tax liens can actively keep you from paying off other debts and will prevent you from seeking secured financing to cover ongoing expenses, which can be particularly detrimental in the current day and age. Thankfully, there are ways to deal with a tax lien. These are:

  • Convincing the IRS that they made a mistake.
  • Paying off your debt or getting into a payment agreement and committing to a payment plan.
  • Bringing your debt under $25,000 through lump sum payments.
  • Subordinate the lien for just one creditor so that you can pay off an urgent debt.
  • Discharging the lien off of a single property or asset, so you can sell it to pay your debt or secure a loan for your tax debt.

What Is a Tax Lien Subordination?

You may subordinate a tax lien if you convince the IRS that allowing one creditor to supersede them will lead to your payment. For example, suppose you can’t pay the IRS because you have a more pressing debt that requires your immediate attention or your risk bankruptcy. In that case, you might be able to get the IRS to exempt that creditor from the lien so you can settle the debt and then focus on your tax liability.

What Is a Tax Lien Discharge?

A tax lien discharge is similar to a subordination, only that it revolves around a specific asset rather than a creditor. A tax lien discharge can exempt a single asset or property from the IRS’s claim so you can liquidate (sell) it or use it to secure a loan. As with subordination, lien discharge is usually only possible when the IRS is confident it will lead to a satisfied tax debt.

How Can I Get a Lien Released?

If neither discharge nor subordination can help you pay off your debt, your only option to get a lien released is to negotiate with the IRS. Doing this will narrow your choices to three:

  1. Pay everything upfront;
  2. In lump sums over 180 days;
  3. In monthly installments over 72 months.

Through the Fresh Start Initiative, you may discharge tax liens early if you can get your tax debt below $25,000 and agree to a direct debit plan. The IRS can automatically withdraw each monthly installment from your bank account. Sometimes, you may also get the IRS to release the lien on your invoice after a few months of making on-time payments. Defaulting your payment plan will lead to another tax lien on your account and an eventual levy.

Avoiding Liens Through Payment Plans

If you owe the IRS money, and can’t afford to pay them, then getting into an agreement plan can delay or even prevent a tax lien. A streamlined installment agreement available to taxpayers with a total tax debt of $25,000 or less can avoid a federal tax lien and a collection information statement before starting payments.

A collection information statement is a detailed financial report that the IRS requires for specific payment plans to ensure that you are financially eligible for the program. There aren’t many other ways to avoid an impending tax lien if you owe the IRS money. However, if you are convinced you do not, your priority should be to contact a tax professional immediately. Get legal representation and discuss your options before filing an appeal.

When to File a Nonresident State Tax Return

When to File a Nonresident State Tax Return - Rush Tax Resolution

The federal government requires you to report all income, calculate your total tax liability, and subtract the standard deduction (or any qualifying itemized deductions). However, most states also require you to pay additional state income taxes, which can be complicated. If you live in one state but work in another, you’ll need to fill out a nonresident state tax return.

Working in neighboring states is nothing new and familiar for residents living in regions bordering neighboring states. Thankfully, you don’t have to pay taxes twice on the same income if you live in one state but work in another. However, you must keep track of your income across state lines and fill out a nonresident state tax return to avoid owing the IRS money. How you fill out those tax returns and what you put into them depends on where you are. Let’s get into it.

What Is a Nonresident State Tax Return?

A nonresident state tax return is a unique state income tax return that nonresidents must file if they earn income in that state but are not residents. If you live in Colorado but work in New Mexico, you will need to file a nonresident state tax return in New Mexico and your tax return in Colorado. The tricky thing is that this applies to all forms of compensation. So if you aren’t working in New Mexico, you must report any income earned across state lines in a nonresident state tax return and your income tax return for your home state.

The exceptions to this rule are states with reciprocity agreements. Seventeen states currently have reciprocity agreements with certain neighboring states exempting you from filing a nonresident tax return if you’re working in one of those states and living in one of the conditional neighboring states. But not to worry – you can’t get taxed twice on the same income even if you don’t live in a state with a reciprocity agreement, thanks to a relatively recent ruling by the Supreme Court in 2015.

Meanwhile, on your home state’s income tax return, you can write off any taxes paid to the states you work in but aren’t a resident of as a tax credit. This, again, is somewhat complicated. The agreement explicitly worded that states that tax nonresidents cannot tax their residents on income earned out of state. Meaning that if your home state taxes your income – even if you made that income in a neighboring state – the neighboring state could not tax it. Meanwhile, states that taxed their residents for income earned out of state could not tax nonresidents on income earned in their state.

What this boils down to, however, is simple: You must file a nonresident income tax return if you do not live and work in states with a reciprocity agreement. If the state you work in requires you to pay those taxes, your home state must offer a tax credit. Otherwise, you might pay your home state but not need to pay in your jobs state. Depending on where you live, you will need to file a nonresident state tax return, whether you do or don’t owe any income taxes.

Do I Need to File a Nonresident State Tax Return?

The answer is maybe. It depends on where you live and where you work. So far, seventeen states have signed a reciprocity agreement that allows employees who work in their state but live in a neighboring state to get away with just one tax return based in their home state. Furthermore, nine states don’t have state income taxes (with a rule of exception in New Hampshire). The seventeen (working) states that have reciprocity agreements include:

  • Arizona
  • DC
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Maryland
  • Michigan
  • Minnesota
  • Montana
  • New Jersey
  • North Dakota
  • Ohio
  • Pennsylvania
  • Virginia
  • West Virginia
  • Wisconsin

Remember that New Jersey temporarily ended its reciprocity agreement with Pennsylvania in 2016 and reinstated it in 2021. For any tax years, you need to file retroactively between those years; you may need to file two returns. Furthermore, the nine states that do not impose any income tax include:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire (still taxes investment income)
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

In other words, working in any of these states will not require you to file an additional state income tax return. You will still need to report that income in your home state tax return; however, if your home state charges income taxes.

Where Do I Start?

Is a reciprocity agreement in place between the state you work in and your home state? Start by determining where you live and where you work. Then decide whether you’ve used that agreement by submitting a state-specific form to your employer. This is crucial to ensure that your employer properly withholds your state taxes. If you haven’t, you must file a nonresident state income tax return or risk a hefty and unexpected tax bill.

Assuming you did, you could continue filing a single state tax return for your income at home. If you did not file that form yet, or if you do not live and work in states with reciprocity agreements, you will need to acquire a nonresident tax return from the state you work in. The next step involves determining your income in that state. Figure out exactly how much you earned working in your work state. In addition to salaries and paychecks, other types of taxable income include:

  • Gambling and lotto winnings.
  • Income from selling property.
  • Income as a partner in a corporation, LLC, or partnership.
  • Compensation and income for carrying out a trade in a different state.

To make things easier on you, consider having your prepared federal tax return at hand. Many nonresident tax return templates refer to the figures calculated on your federal tax return to simplify things. Calculate the percentage of your nonresident income versus your total income. This percentage will be your nonresident percentage. You can use this percentage to determine your tax liability, state-specific tax deductions, etc. Your nonresident tax return will have a column for your total income (as per your federal return) and a total for your state-specific earnings as a nonresident.

The process differs from state to state, so it’s essential to refer to your work state’s tax authority and download the respective tax forms for an accurate estimate of your total tax liability in that state. Due to the complexity, many people opt to hire a tax professional to assist in the process. Once you’ve determined your tax liability in your work state, you can file your nonresident tax return. You will need to report all income in your home state tax return – but you are eligible for a tax credit on income already taxed in your work state, as mentioned previously.

What If I Just Moved to a New State?

If you’ve moved to your work state or simply moved from one state to another, your income is still split between two states. However, instead of using a nonresident form – if you began working in your new shape after moving there – you will need to complete a part-year return. This is another type of tax return that calculates your tax liability in your new state after a move.

IRS Statutes of Limitations for Tax Refunds, Audits, and Collections

IRS Statutes of Limitations for Tax Refunds, Audits, and Collections - Rush Tax Resolution

One of the functions of the IRS is to ensure that taxpayers adhere to their tax liability. To that end, the IRS attempts to combat the so-called “tax gap”, an estimated gap in the nation’s total tax liability and the money the IRS is pooling together from estimated payments and withheld taxes. To reduce that tax gap, the IRS must audit taxpayers, especially those with the potential to limit or skirt their tax liability the most. But there are limits to the IRS’s power, reach, and timing. Thanks to statutes of limitations, the IRS cannot audit taxes from ten years ago nor demand that debt be owed on tax refunds from the 1990s. Understanding these limits can help taxpayers better navigate their current tax situation and redirect more useful energies to maintaining a healthy record of the past several years, knowing how far back the IRS may reach.

Understanding IRS Statutes of Limitations

A statute of limitations is a time limit imposed on any claims or actions the IRS may take against taxpayer accounts. If you’ve heard of the statute of limitations, it may have been in a legal context. For example, if a person commits a certain crime with a statute of limitations, they may not be prosecuted for that crime. Some crimes have no statutes of limitations, such as murder, famously. Tax issues are far, far less serious than a murder charge. And as such, there are fairly strict time limits imposed on the IRS (and the taxpayer) to follow through with these issues. In general, there are three significant statutes of limitations that you will want to remember:

  1. Statute of limitations on claiming a tax refund from the IRS;
  2. Statute of limitations on performing and completing a tax audit, and;
  3. Statute of limitations on collection actions against a tax debt.

Statute of Limitations on Tax Refunds

A tax refund is composed of any excess money the IRS has received from you that will not go towards your tax liability. Tax refunds can also be earned through refundable tax credits, such as the revised child tax credit or the earned income tax credit – meaning, even if your estimated payments or tax withholding was not enough to cover the entirety of your tax liability for the last year, your tax credits might have taken care of the remainder, and left a little bonus. Generally, the IRS sends any tax refunds on your account back to you as soon as possible.

Failing to do so would mean paying interest on overpayment – yes, the IRS imposes interest on its debt to you the same way interest is applied on taxpayer debts. But just because you may be potentially entitled to a tax refund does not mean that you automatically receive one. If you are eligible for a refund the IRS had not assessed, you must claim your tax refunds through IRS Form 843 or risk losing hundreds or thousands of dollars of potential money back from the IRS. Your time limit for doing so is three years from the date you filed your original tax return or two years from the date you paid the excess tax.

If you miss these deadlines, you may no longer be eligible to receive the tax credits or tax refund for that particular tax return. There are certain exceptions. If you have a tax refund due to tax deductions caused by bad debt, you have up to seven years to claim it. The statute of limitations also does not apply if you cannot take care of your financial affairs at the time due to mental or physical disability. The other two significant statutes of limitations are imposed on the IRS rather than the taxpayer.

Statute of Limitations on Tax Audits

Audits are the IRS’ way of double-checking tax accounts that are more likely to make mistakes on their taxes or lead to lost taxes. In some cases, the IRS will automatically audit more taxpayers that qualify for certain tax credits, such as the EITC, to ensure that all applicants are properly found eligible. In other cases, the IRS picks up on potential accounts to audit based on a computer algorithm that crawls through millions of tax returns and corresponding information returns from businesses, banks, and other institutions, to determine discrepancies and send out red flags. Sifting through millions of tax returns is difficult, and auditing all the ones that stand out is impossible.

This is why the IRS only performs audits sparingly – for example, only about 0.25 percent of all tax returns sent to the IRS in 2019 were subject to an audit versus about 0.9 percent in 2010. That number is slated to increase as the IRS receives more funding and agents. Still, your chances of being audited by the IRS remain relatively slim each year – and are increasingly slim if you do not fall into the top or bottom most tax brackets and review your returns carefully. For taxpayers who do find themselves on the business end of the IRS’ magnifying lens, it may be of some comfort to know that the IRS has a strict time limit for when any given tax audit must be completed.

That time limit, under most circumstances, is three years from the date your tax return is due. If you file your tax return on Tax Day 2022, the IRS has until Tax Day 2025 to complete its audit of that return. There are exceptions to this rule, as well. The IRS has up to six years from the date you filed your tax return to audit it if you omitted a substantial amount of income, at least 25 percent of your total income for that year. The IRS also has up to six years to audit your return if you have income related to undisclosed foreign assets of more than $5,000. Finally, the statute is lifted for tax fraud and other crimes, meaning the IRS can investigate your return at any time.

Statute of Limitations on Collection Actions

Last but not least, the IRS can go after a taxpayer for having a substantial tax debt, to the point that the IRS can make a legal and physical claim on the taxpayer’s income and assets if need be. Yet, despite these collection actions, the IRS limits how long it can pursue a tax debt before that debt must be resolved. This statute of limitations is ten years plus tolling periods.

Tolling periods, in this sense, are extensions levied by the IRS onto a debt timer due to uncollectibility, such as an ongoing bankruptcy case, being outside of the country for extended periods of time, or military service. The statute of limitations on tax debt also serves as a timeframe for taxpayers who cannot pay off the entirety of their tax debt but can still make monthly payments to pay off most of their debt. For these partial payment plans or potential offers in compromise, keeping the ten-year rule in mind helps.

Taxpayers cannot bury their heads in the sand for ten years and expect the IRS to disappear. The IRS’ interest in closing your case grows over time, and they can levy your home, property, assets, and paychecks to pay for your debt. If you agree you owe the IRS but can’t pay due to your current financial situation, it may place your account in currently not collectible (CNC) status. Statutes of limitations help taxpayers manage their expectations when working with the IRS and offer you more options throughout the process. However, no two cases are entirely alike.

Seeking Trusted Tax Expertise

At Rush Tax Resolution, we counsel individuals and businesses on understanding and navigating the legal complexities of tax liability, helping to negotiate with the IRS to dispute or resolve tax debt. Whether it’s an IRS audit, penalty, collection, or another tax-related issue, we have the tax professionals and expertise to meet your needs. Contact us today to learn more about Rush Tax Resolution and what we can do for you.

What Is a Notice of Deficiency?

What Is a Notice of Deficiency? - Rush Tax Resolution

While receiving an IRS notice of deficiency in the mail will make anyone’s knees quiver, most tax discrepancies result from honest errors and can be resolved in short order. Here’s what to know.

When the IRS establishes that your tax account owes money – perhaps due to a missed tax payment, an incorrect calculation on your part, or an error on your return – it will inform you of the discrepancy on your tax account through the mail. One of the first things the IRS will do is send you 
a 30-day letter. It is called a 30-day letter because you have a whole month to respond to the IRS before it will process the discrepancy and put it froth on your account. This means you have a month to challenge the IRS’ findings – failing will officially put you in tax debt. At this point, the IRS will send you a notice of deficiency (NOD). But, this is the IRS informing you that you owe them income tax money, and you should pay them as soon as possible.

Understanding Your Notice of Deficiency

A 30-day letter should alert you to the problem the IRS has discovered. A notice of deficiency should go on to inspire even further agency. One way or another, the IRS will do its best to get its hands on the money owed – and in the meantime, it will begin to levy penalties on your tax account for every month that your debt goes unpaid. From the day you were issued your notice of deficiency, you have 90 days to respond with evidence disputing the IRS’ decision or take them to tax court over the matter.

If you do not believe that you owe additional taxes or are underpaid and have the evidence to prove it, take this opportunity to call a tax professional and schedule a consultation. You may have a chance at appealing the IRS’ decision – but only a trained attorney or tax professional can make the call on that based on your circumstances. If you cannot dispute the IRS’ claims and do owe a tax debt, then contacting the IRS to resolve the matter as soon as possible is within your best interests. Otherwise, things can change quickly and go from bad to worse. If you agree with the IRS’ estimation, the notice will instruct you to sign a Waiver Form 4089.

What Will the IRS Do Next?

The notice of deficiency itself is not a tax bill. It does precede your tax bill, however, and after either the entire 90-day period has elapsed, or after the IRS has received your waiver form in writing, they will be able to charge you for the tax due. Your failure to respond to the IRS at this point will result in collection actions. Don’t worry – the IRS will continue to take its time here unless your tax debt is substantial or you are a flight risk. Tax debt doesn’t disappear overnight, unfortunately.

It is difficult to get rid of, and even if you are in a financially dire situation, bankruptcy might not be the best way out. Tax debts do expire, but it takes ten years (plus any applicable tolling periods or extensions) – and the IRS, as a powerful creditor backed by the government, has several ways to claim your wealth involuntarily. Then there’s also the fact that intentionally avoiding your tax debt can give the IRS grounds to charge you with a crime. All in all, one way or another, you must deal with your tax debt and ideally do so quickly.

Notice of Federal Tax Lien and Levies

Let’s say you received your notice of deficiency about a month ago. You know you owe the IRS money, and the IRS knows it too. It hasn’t heard back from you. Can you expect a SWAT team to knock down your doors and arrest you? No, not quite. If you do not intend to let the IRS know that you agree with their assessment, they can continue to penalize your tax account and add to your debt at a steep rate.

Interest rates are also applied to underpayment and overpayment of tax (i.e., tax refunds), so time is of the essence here. Once the IRS establishes that you do not intend to pay your tax debt back as soon as possible, it can begin to apply pressure on your tax account via a public notice of a federal tax lien. Tax liens are a creditor’s legal insurance of their claim on your wealth over that of other creditors.

When a creditor applies a lien, they effectively tell further potential and current creditors that their debt supersedes the others and must be paid off first. Furthermore, a lien keeps you from selling or liquidating any of your assets without first satisfying your debt with the government. It is a financial ball and chain. It is also a public ball and chain. All creditors can see whether a person is under a federal tax lien, which massively undermines their ability to seek credit or get financing.

It also makes it harder for you to secure a debt, as the IRS technically claims everything you own. In the past, tax liens imposed an even harsher punishment on taxpayers in the form of a black mark on your credit score, roughly on the same level as a bankruptcy. This mark would last about seven years, affecting your ability to seek financing, lease cars or property, or get a mortgage even after you’ve paid off your debt.

Thankfully, all major credit reporting agencies have stopped lowering credit scores in response to a federal tax lien. But that does not make them any less public. Levies are something else. When people talk about the IRS claiming houses and cleaning out your bank accounts, they talk about a levy. However, it isn’t something the IRS does lightly. Levies are the IRS’ last resort to satisfying your debt and only an option when all attempts at establishing a payment plan have been exhausted.

There’s no other way to secure your tax liability. The IRS can theoretically even claim your home but will usually avoid it. Instead, the IRS cleans out bank accounts, investment properties, and rental properties, and if you own nothing else, you can begin claiming a portion of your monthly wages through your employer.

What If You Can’t Pay?

The IRS is not entirely inflexible. If your financial situation is dire enough, you can negotiate a more feasible payment plan over the long term, usually about six years. If you cannot pay off your entire debt over 72 months and can prove that you do not have the financial means, the IRS may lower your debt through an offer in compromise (OIC) settlement. However, you must make that offer yourself, and the IRS can reject it. It is in your best interests to deliver a realistic offer that matches the IRS’ expectations based on your financial information, as provided through a Collection Information Statement.

When even an offer in compromise isn’t on the table, you can seek low-income taxpayer help to declare yourself temporarily not collectible. This forces the IRS to cancel collection actions until your financial situation improves (your debt will still incur applicable penalties and interest, however). Liens and levies are powerful collection tools. But you can stop them. Talk to a tax professional about establishing a payment plan or negotiating with the IRS.

Tax Credit vs Deduction: What’s the Difference?

Tax Credit vs Deduction: What’s the Difference? - Rush Tax Resolution

Taxes are simple in concept. A portion of the money you earn will be paid to the government for essential services, including the upkeep and construction of roads and bridges, the defense of the nation, investments in education or work programs, and social welfare. However, what you owe and calculating your taxes can be pretty complicated. There are payroll taxes that you and your employer both pay. The portion of your paycheck dedicated towards income taxes is separate from the money for Medicare and Social Security. Then there are indirect taxes on imported goods or certain services and taxes paid on property, investment income, or foreign assets. 

Your tax liability depends mainly on what you earn and what you owe. But many factors can alter that tax liability. If you make a high income but don’t own any properties, you may pay fewer taxes than someone with a more modest income but multiple properties. Given certain circumstances, you may be eligible for tax credits, which is money the government gives you to pay for some of your tax liabilities. Multiple dependents entitle you to a more significant tax break than a bachelor without children, for example. Larger cars with more hefty emissions might command more significant vehicle taxes than a small hybrid. 

Then, there are deductions. The standard deduction is available as an option for every taxpayer. Taxpayers who might stand to benefit more from going into detail with itemized deductions can opt out of a standard deduction and itemize instead. Your tax credits and your tax deductions are two of the most common ways to reduce your tax liability each year, come Tax Day. Both are applied for through your tax return. Understanding the difference – and knowing which applies to you – can help you save more money and avoid the unwanted scrutiny of the IRS. 

What Is a Tax Credit?

The IRS is not just in the business of collecting taxpayer money – it can also give money back under certain circumstances. The IRS will “pay” you through tax credits or tax refunds. The difference between the two is simple: a tax credit is money the IRS adds to your tax account to be deducted from your current taxes. This means that your tax credits are the first to go after all is said and done and the amount of money you owe the government has been established. They can help reduce what you owe the government at the end of the day, leading to a greater tax refund. 

If the money you send the IRS with every paycheck through withholding (or through voluntary quarterly/monthly tax payments) amounts to more than you end up owing, the IRS will issue a tax refund, giving you money back. A tax refund is money the IRS gives you to cover overpayment. Your tax payments are based on an estimate determined through your last tax year. Your tax credits can lead to a tax refund because they further reduce what you owe the IRS. This means your account with the IRS goes further into the black, and they owe you a bigger refund. 

Tax credits also act as a cushion against unexpected tax costs. If you made a mistake on your return, for example, or forgot to report certain income, it may be that you owe more than you expected to, and the money you withheld through your paychecks or sent in every month doesn’t cut it. At this point, any tax credits you claim and qualify for can help reduce that tax debt and even turn it back around into a modest refund. Tax credits are generally applied to alleviate pressure on individual taxpayers who might be more susceptible to financial struggle.

For example, the Earned Income Tax Credit is a standard tax credit for which low- and moderate-income taxpayers can apply. It helps further reduce the tax burden on poorer families. The amount of tax credit awarded to each qualifying taxpayer depends on their income and the number of dependents. Similarly, many taxpayers are also eligible for the Child Tax Credit. As the name implies, this tax credit cuts your tax liability based on the number of qualifying children you care for. These are just two common examples. There are a few others

What Is a Tax Deduction?

Unlike a tax credit, every American taxpayer is eligible for a tax deduction. However, individual taxpayers must choose between the standard default and the more nuanced itemized deductions. A tax deduction lowers your taxable income for the year. The way it works is this – the IRS determines what you owe based on your adjustable gross income, subtracting all applicable deductions from said income. Standard deductions are a flat amount, the same for every taxpayer. Itemized deductions allow you to go into details, deducting from your taxes based on things like:

  • Donations to charity.
  • Unreimbursed business expenses.
  • Contributions to a retirement account.
  • Qualifying medical expenses.
  • Tuition and school fees.
  • And more. 

How Are They Similar?

Both tax credits and tax deductions ultimately reduce what you owe in taxes. While tax deductions reduce your taxable income, tax credits are applied to the final tax bill you owe each year. Keeping track of your deductions and income is essential, especially over time. As your children grow older, you may lose your tax credits related to childrearing. Similarly, while a standard deduction would have made more sense for you last year, perhaps you’re better off going for an itemized deduction given all the changes you’ve gone through this year – especially if you had to change jobs, move around a lot due to work, shoulder multiple business-related travel costs, or struggled with certain medical expenses.

Beware of Too Many Itemized Deductions

Itemized deductions may or may not make the most sense for you, but if they do, you need to be both confident in your math and prepared to defend your decision. Keep any applicable receipts and documents related to your expenses and deductions for at least the last three years. Itemized deductions are more likely to trigger the IRS’s interest and lead to an audit into your financial status, requiring you to back up your claims. 

What If I Made a Mistake on My Taxes? 

We’re only human, and we all make mistakes. If you mess up your taxes, the IRS won’t launch a crusade against you. In most cases, the IRS will automatically rectify inevitable errors and send you a corrected tax bill, even if you forget to report income or took one too many deductions. If more information is needed, the IRS will let you know via mail and ask you for certain supporting documents to prove your claims. A professional tax preparation service and the help of a qualified tax professional can avoid any awkward moments with the IRS by keeping your records safe and organized and creating a straightforward tax plan that minimizes IRS scrutiny.

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