What to Do If You Owe Taxes to the IRS

What happens when you file your taxes and discover that you owe money to the IRS? What are your options? What about when the amount owed is greater than you can afford at the moment? Luckily, there are several options for both scenarios.

Before we get into the different options for making payments to the IRS, remember that your payment has to be received by the IRS no later than the April 15th tax deadline, or be prepared for IRS-issued tax penalties and interest. This deadline applies to those who filed for a tax extension as well.

Below are the different payment options available to pay the IRS.

Automatic Withdraw

If you have the funds available when you file, you can have them automatically withdrawn from your bank account when you e-file and choose the e-pay option. This is available whether you use tax preparation software or an accounting professional to do your taxes.

Direct Pay

The IRS has a “Direct Pay” service through its website, where you can pay from your checking or savings account at no cost. In order to track your payment, use the “Look Up a Payment” tool on the website or enable email notifications.

Credit or Debit

The IRS provides three third-party payment processors on its website through which you can pay your balance using a credit or debit card either online or by phone. They do charge a small service fee, which may be tax-deductible, and your credit card company may charge a fee as well.

Check or Money Order

Make checks payable to the United States Treasury and include your social security number or employer identification number, phone number, related tax form or notice number, and the tax year in the memo field. Send your check with a Form 1040-V, which is a payment voucher found on the IRS website, but don’t paperclip or staple your check to the voucher. You’ll find the correct mailing address for your check on page two of Form 1040-V.

Pay in Person

If you want to be absolutely sure that your payment is getting to the IRS on time, you can pay in person at your local IRS Taxpayer Assistance Center, which can be located on the IRS website. You will need to schedule an appointment before you go.

Wire Service

Check with your bank to see if they offer same-day wire transfer payable to the IRS. Be sure to ask about cut-off times and fees for this service.

What if you don’t have the full amount now? Luckily, the IRS offers two installment plans – a short-term plan and a long-term plan – which you can apply for online with the Installment Agreement Request (Form 9465). Which plan you qualify for depends on how much you owe and your specific tax situation. There is an application fee, and once approved the IRS can void the agreement if you don’t stay on schedule with payments.

Another option is to request a temporary delay from the IRS. You might have to fill out a Collection Information Statement and provide transparent information on your personal finances, and penalties and interest will factor in until the amount is paid in full.

Finally, you can offer to settle for a smaller amount than what’s owed, but the IRS encourages taxpayers to consider all other options before submitting an offer to settle. If you decide to go this route, you will need to be current on your tax filings and not involved in an open bankruptcy proceeding. To determine if you qualify, the IRS will take into account your income, expenses, ability to pay, and asset equity.

Clarifying the 199A Deduction

The Internal Revenue Service (IRS) recently released a new document clarifying the new rules related to section 199A. If you’re unfamiliar with 199A, this section is a part of the tax code that references a new deduction of up to 20 percent of qualified domestic business income (QBI) for pass-through entities such as sole-proprietorships, partnerships, S-corporations, trusts, or estates.  This section is extremely intricate, but the newly released regulations have cleared up many of the questions raised by the original legislation.

Like many of the other provisions of the Tax Cuts and Jobs Act (TCJA), the rules for 199A are effective for the tax year 2018. This particular deduction will go away unless further action is taken, expiring in 2025. This particular deduction allows business entities to take up to a 20% deduction of QBI. Qualifying for this particular deduction can be tricky as it is only for pass-through entities. Other information about your business (what kind of work you do, wages paid, etc.) may also preclude you from some or all of the deduction.

In order to be deemed a section 162 business that would qualify for the 199A deduction, you must be involved hands-on with the activity of your business on a consistent basis. Typically, if you think you’re running the business, you are most likely involved enough to be qualified. In regards to rental property, this gets a little more complicated. Under Revenue Procedure 2019-7, the IRS claims that rental property is a qualified business if 250 hours or more of rental services are provided for the year and separate books and records are kept for each rental. However, you can’t qualify and lose the deduction if you use the rental for yourself more than two weeks of the year. Matters get even more complicated when the IRS requires you to handle each business (even if operating under the same legal entity) separately with the ability to calculate a QBI for each individual business.

Furthermore, you must know the business owner’s taxable income. If the business owner’s income falls above the thresholds listed below, the next matter is determining whether the business is a specified service trade or business (SSTB).

Business Owner’s Income Thresholds

  • Single
  • 2018: $157,500 – $207,500
  • 2019: $160,700 – $210,700
  • Married Filing Jointly
  • 2018: $315,000 – $415,000
  • 2019: $321,450 – $421,450

Many questions around the 199A deduction that remain unanswered. In the foreseeable future, the 199A deduction will require professional attention as we adapt to the new tax laws. According to the IRS, 95 percent of business owners fall below the threshold amounts and don’t need to worry about the limitations of the deduction. As always, it is crucial to work with tax professionals, such as MKR CPAs, to ensure that your business isn’t missing out on important deductions and properly filing for your business’ needs.

Essential Money Moves to Make Before the Year’s End

The end of 2018 is quickly approaching, but there are a few key money moves you should make before the new year, especially in light of the Tax Cuts and Jobs Act. The higher standard deduction means more Americans will ditch itemizing their 2018 federal tax returns.

That means you should probably focus on year-end tax strategies that first lower taxable income, rather than maximize tax deductions. Here are a few key items to tackle before the ball drops on the new year.

Take Stock of Losses

If you follow the stock market, you know that the last few months have been volatile, so there’s a good chance that some of your investments have become losses. That might sound bad, but any losses that are in a taxable account, such as an investment account, bank account, or money market mutual fund, can be sold to offset other taxable investment gains in the same year. Furthermore, if your losses exceed your gains, you can apply up to $3,000 to offset ordinary taxable income from this year.

Max Out Retirement Savings

As close as possible, that is. The more money you put into your 401(k), the more financial security you’ll have in the long run, but a lot of these contributions also reduce your taxable income. At this point you probably only have one or two more paychecks from which to have funds withheld, but even a few hundred dollars more can provide some near-term tax relief as well as bolster your retirement savings.

Fund Your HSA

You have until the 2018 tax-filing deadline to fully fund your health saving account (HSA) in order to get a bigger deduction. The maximum limits are:

  • Individuals: $3,450
  • Families: $6,900
  • 55 or older: an additional $1,000 catch-up contribution

These accounts can roll over indefinitely, so they’re a smart way to save for future medical expenses. HSAs also have a triple tax benefit: contributions are tax-deductible (even if you don’t itemize), earned interest is tax-free, and withdrawals are tax-free as long as they’re used to pay for qualified medical expenses.

Use Up Your FSA

The funds in a flexible spending account typically don’t roll over to the next calendar year. However, some employers allow $500 to carry over into the new year or grant employees until March to spend FSA funds. Even so, now is a good time to use the pretax dollars for doctor appointments, flu shots, and even some “everyday” drugstore items, such as non-prescription reading glasses, contact lenses and solutions, and reading glasses.

Maximize Deductions

If you’re wondering whether you should itemize your 2018 tax returns or take the standard deduction, here are a few last things to keep in mind:

  • Medical treatment: If you spend more than 7.5 percent of your adjusted gross income this year on medical expenses, you can deduct those costs.
  • Property taxes: If you paid less than the $10,000 limit for state and local taxes, your state may allow you to prepay 2019 property taxes. This way you’ll get the most from the state and local taxes deduction.
  • Mortgage Interest: Provided you’re not near the cap on the mortgage interest deduction, which is $750,000 after the new tax law, you can make your January mortgage payment in December to boost the amount of interest you paid during the 2018 tax year.
  • Charitable donations: If you routinely give to charities, double up on contributions and make your 2019 donation before year’s end. If you put the double donation into a donor advised fund, which is like a charitable investment account, you’re eligible to take an immediate tax deduction. That means you can take the deduction for 2018 while your funds are invested for tax-free growth, allowing you to make distributions to charity next year or beyond.

The Effect of the Tax Cuts and Jobs Act on Employee Reimbursement

Are your employees reimbursed for work-related travel expenses? If not, you might want to reconsider. Changes under the Tax Cuts and Jobs Act make reimbursements even more attractive to employees.

The new tax code implemented significant changes to moving and travel expenses, including business-related travel expenses incurred by employees. Under the previous law, work-related travel expenses that weren’t reimbursed were generally deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to take advantage of the deduction because they a) didn’t itemize deductions, or b) didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.

With the new tax code, business travel is still entirely deductible, but not by individual taxpayers because miscellaneous itemized deductions, including employee business expenses, are no longer permitted to be claimed on individual tax returns. Instead, only businesses are able to deduct these expenses, which is why business travel expense reimbursements are now more significant to current employees and more attractive to prospective employees.

In order to be deductible, travel expenses must be valid business expenses and the reimbursements must adhere to IRS rules – either with an accountable plan or the per diem method.

Accountable Plan

Employee expenses reimbursed under an employer’s accountable plan do not contribute to the employee’s income. The accountable plan is a formal agreement to advance, reimburse or grant allowances for business expenses. To qualify as an accountable plan, it must meet the following criteria:

  • Payments must be for “ordinary and necessary” business expenses
  • Employees must substantiate these expenses (including amounts, times, and places) monthly
  • Employees must return any advance or allowances they can’t substantiate within a reasonable time, typically 120 days

Plans that fail to meet these guidelines will be treated by the IRS as “non-accountable”,

and reimbursements will be included in the employee’s gross income as taxable wages subject to withholding and employment taxes (employer and employee).

Per Diem

In some cases, the per diem method may be used. Instead of tracking actual business travel expenses, employers use IRS tables to determine reimbursements for lodging, meal, and incidental expenses. Substantiation of time, place, and amount must still be provided, and the IRS imposes heavy penalties on businesses that routinely pay employees more than the appropriate per diem amount.

If you have any questions about the TCJA’s impact on your business, please feel free to reach out to me at sreed@mkrcpas.com.

Why American Workers Could See an Increase in Tax Refunds Next Year

The majority of American taxpayers typically receive a refund from their federal tax returns, and in 2019 those refunds could increase by 26 percent, which is higher than previous years.

The jump in expected refunds is most likely a result of the recent tax overhaul that cut personal income tax rates so that workers can keep more of their income. Theoretically, such a change in taxes should prompt American workers to adjust their withholding rates accordingly through a Form W-4 with their employer. However, research shows that roughly 75 percent of tax payers, who historically over withhold from their paychecks anyway, only partially adjust those rates when new tax laws are introduced, or they don’t adjust them at all. This means that even more taxes are withheld from their paychecks than necessary, which results in a heftier refund.

The prospect of a bigger tax refund is enticing, and tax refunds are typically used to boost savings, pay down debt, and pay for vacations. But for those Americans who fall within the 75 percent of workers living paycheck to paycheck with little to no money in savings, over withholding is probably not the best move.

If Americans withhold more than necessary from their paychecks, they have less funds to apply to everyday expenses, financial goals, and life emergencies that pop up. If you are someone who might be over withholding and could benefit from an increase in your paycheck rather than waiting to see that money in your tax refund, see about submitting a new Form W-4 with your employer.