Filing Extensions Without Penalties and Interest

Can’t file your tax return by the April 15th deadline?

Taxpayers can request an automatic six-month extension of time to file the tax return.  But, taxpayers beware, there is a catch!  An extension is just an extension on the time to file the return; it is NOT an extension on the time to pay!

Taxpayers are required to estimate the amount of tax that may be due with the tax return and remit payment with the extension to avoid Failure to Pay penalties.  These penalties, plus interest, could accrue from April 15 until the tax is paid, regardless of the extension.  If a balance is still owed when the actual tax return is filed, at least the penalties and interest will have been minimized.

If taxpayers are unable to file their tax return by April 15, there are several ways to request an automatic extension of time to file an individual return.  Enrolled agents and other tax professionals can e-file the Application for Automatic Extension of Time to File US Individual Tax Return (Form 4868) for taxpayers.  Or, the application can be found on the IRS website (www.irs.gov), printed and mailed to the IRS, or e-filed.  Whether taxpayers use a tax professional or submit the application themselves, all or part of the estimate of the income tax due can be paid with a check, credit/debit card, or by using the Electronic Federal Tax Payment System.

Information regarding remitting payment may be found on Form 4868. Be sure to record the confirmation number provided upon payment.

If a taxpayer estimates that they will owe taxes and is unable to pay, it is important that they file their returns timely.  Put another way, either file an extension or your completed return by April 15, even if you cannot pay the full balance due.  If you do not, Failure to File penalties will be assessed (at 5% per month times the balance not paid by April 15 up to a maximum of 25%) in addition to Failure to Pay.  You may establish a payment plan to pay the balance due.

If you receive a notice from the IRS at any time during the year, contact your tax preparer immediately.  If you did not hire one to prepare your tax return, you should then contact a licensed tax professional.  Only enrolled agents (EAs), CPAs and attorneys have unlimited rights to represent you before the IRS.  The term enrolled agent reflects that an EA can act as your “agent” before administrative levels of the IRS–meaning he or she can talk to or meet with IRS in your stead.  To find an enrolled agent in your area, visit the searchable “Find an EA” directory at http://www.naea.org.

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Five Key Tax Tips about Tax Withholding and Estimated Tax

If you are an employee, you usually will have taxes withheld from your pay. If you don’t have taxes withheld, or you don’t have enough tax withheld, then you may need to make estimated tax payments. If you are self-employed you normally have to pay your taxes this way. Here are five tips about making estimated taxes:
1. When the tax applies. You should pay estimated taxes in 2015 if you expect to owe $1,000 or more when you file your federal tax return next year. Special rules apply to farmers and fishermen.
2. How to figure the tax. Estimate the amount of income you expect to receive for the year. Also make sure that you take into account any tax deductions and credits that you will be eligible to claim. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax.
3. When to make payments. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 15 and Sept. 15 in 2015, and Jan. 15, 2016.
4. When to change tax payments or withholding. Life changes, such as a change in marital status or the birth of a child can affect your taxes. When these changes happen, you may need to revise your estimated tax payments during the year. If you are an employee, you may need to change the amount of tax withheld from your pay. If so, give your employer a new Form W–4, Employee’s Withholding Allowance Certificate. You can use the IRS Withholding Calculator tool help you fill out the form.
5. How to pay estimated tax. Pay online using IRS Direct Pay. Direct Pay is a secure service to pay your individual tax bill or to pay your estimated tax directly from your checking or savings account at no cost to you. You have other ways that you can pay online, by phone or by mail. Visit IRS.gov/payments for easy and secure ways to pay your tax. If you pay by mail, use the payment vouchers that come with Form 1040-ES.

Additional IRS Resources:
Publication 505, Tax Withholding and Estimated Tax
Estimated Tax – frequently asked Q & As
Tax Topic 306 – Penalty for Underpayment of Estimated Tax

Warning! Form 1099-MISC and Payments to LLCs

By Gary A. Hensley, MBA, EA

Most of you are aware that you need to issue a Form 1099-MISC to independent contractors you paid $600 or more for services (not goods) during 2014 no later than February 2, 2015 (also you send a copy to the IRS by March 2, 2015).  The payments reported cover only those payments made in the course of your trade or business.

Many entrepreneurs believe (incorrectly) that if a vendor has LLC or L.L.C. after their company name (meaning limited liability company) that no Form 1099-MISC is required to be sent.  Compounding this belief?  The member(s) of many LLCs will tell those that they have rendered services to that it isn’t necessary or required to send them a Form 1099-MISC.  The requirement to file Form 1099-MISC is the government’s attempt to reduce the multi-billion underground (untaxed) economy.  Thus, if you are required to file a Form 1099-MISC and do not, a penalty will be assessed for each form not filed.  The penalty for not filing or filing late depends on the extent of tardiness.

A LLC can fall into three different categories:  (1) a single-member LLC which is a sole proprietorship (filing Schedule C as part of the individual’s personal Form 1040); (2) two or more members organized as a partnership LLC (filing Form 1065); and (3) one or more members filing as a corporate LLC (either a “C” corporation or a “S” corporation, filing Form 1120 or Form 1120-S, respectively).  Categories (1) and (2) should always be sent a Form 1099-MISC if they provided $600 or more in services to you in 2014.  With very few exceptions, you are not required to send Form 1099-MISC to category (3) organizations.  Most LLCs choose to be taxed as sole proprietors (commonly referred to as a “disregarded entity” in tax-speak) and partnerships.  When in doubt, send a Form 1099-MISC to all vendors you paid $600 or more for services in 2014.  There is no down side in doing so.

One exception that will be relevant to writers, literary agents and publishers:  Any amount you pay in royalties of $10 or more, in the course of your trade or business, requires you to send a Form 1099-MISC.  [Please refer to my article on properly reporting royalties.]

The following steps will help you nail down your compliance in this area:

  1.  Review all your payments for services to each vendor during 2014 and determine who received $600 or more in payments from you.
  2. Review your vendor records to determine if you have the complete name and address for those identified in step 1 above and also that you either have the vendor’s Social Security Number (SSN) or Employer Identification Number (EIN).  If you are lacking any of these critical items, you will need to mail a Form W-9 to the vendor requesting this information.  Keep a copy of the W-9 in your vendor file documenting your attempt to get the needed information along with the date you mailed it.  A USPS Certificate of Mailing is an inexpensive way to show proof of mailing.  In the future, obtain the W-9 information at the time you retain the vendor.  If the vendor refuses to furnish the information or sign the form—buyer beware!
  3. Next, you will use the official IRS Form 1099-MISC for each vendor.  The form is in triplicate with the top copy (shaded in red) going to the IRS and the other two copies going to the vendor and your vendor file.
  4. Finally, you will summarize your Form 1099-MISC information on IRS Form 1096 which you can mail to the IRS or file electronically along with the red copy(ies) of Form 1099-MISC.

You may wish to engage a local accountant or payroll processing specialist to help you with steps 3 and 4.

For additional IRS information on this topic, you may refer to IRS Form 1099 at the IRS website—www.irs.gov.

I hope this article will clarify your reporting requirements and further audit-proof your returns.

 

Surprise IRS Victory in IRA Rollover Case

Recent Tax Court Decision

In fact, the surprise victory is in direct conflict with IRS Publication 590, the bible for Individual Retirement Accounts (IRAs). Here it is, in a nutshell: starting in 2015, no matter how many IRA accounts you have, you will only be allowed one rollover per year (no longer one rollover per year per account) [Bobrow v. Commissioner, T.C. Memo. 2014-21, filed January 28, 2014].

“Industry leaders, financial advisers, and everyone else who handles IRAs are stunned,” said Denise Appleby, the editor and publisher of The IRA Authority.
According to Appleby, there are two ways to move money between IRAs:

1. Transfers, which are not reported to the IRS and not reported on a tax return. The IRA owner never touches the money. You can do this as often as you like, whenever you like, Appleby said.
2. And rollovers. With this method, the IRA owner takes the money as a distribution and they have 60-days to rollover (put back) the amount in an IRA. And this, you can do only once per 12-month period, said Appleby.

According to Appleby, the IRS, through their publications and regulations, has said for at least 20 years that the rollover method applies on a “per-IRA” basis. In other words, if you have 12 IRAs, you can do 12 rollovers for the year (12-month period) as long as each IRA does it only once.

In 2008, Alvan Bobrow, who had a few IRAs, rolled over two distributions from his IRAs and took the position that the rollovers were valid because they were done in a timely manner, and involved different IRAs, Appleby wrote in her analysis of the court case. His position was that he had not broken any rules, as explained by the IRS in their publication for the past 20 years.

The IRS disagreed and determined that only one of the two rollovers was valid. So, the IRS and the Bobrows went to court. And the Tax Court—much to the amazement of all IRA experts—agreed with the IRS.

The mistake cost the Bobrows an additional $51,298 in income tax and a penalty of $10,260.

Per the Tax Court, only one of the Bobrow’s distributions was eligible for rollover during the 12-month period. The Tax Court concluded that the Internal Revenue Code Section 408(d)(3)(B) limitation—the relevant section of the federal tax code—applies to all of a taxpayer’s retirement accounts and that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover contribution within each one-year period.

The Bobrow case highlights, according to Appleby, an important rule that we sometimes overlook: “If conflicting information is provided in multiple sources, one must consider the hierarchy and reliability of such sources. In this case, Publication 590 is not authoritative and is not considered official guidance. The Tax Code is the more authoritative, and supersedes any other guidance in the event of conflict.”

What Now?
Well, according to Appleby, the IRS will be changing its publications, changing what they have been saying for 20-plus years. The IRS will implement this change for everyone, everyone except the Bobrows who still have to pay the tax and penalty, starting January 1, 2015.

Appleby said individuals should start moving money via transfers and not rollovers. “There are too many pitfalls with rollovers and none with transfers,” she said.

Starting in 2015, make sure you only do one rollover per year.

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Click here for Reference:  IRS Announcement 2014-15

 

My First Video Credit! Mike Martin’s “How to Do Your Taxes EXPLAINED!”

Just released today!

Mike Martin’s “How to Do Your Taxes EXPLAINED!” debuted today on YouTube.

Mike is also a Young Adult novelist. His book, THE END GAMES, is available at all online booksellers, including Amazon: http://dft.ba/-theendgamesmartin

This video covers “employee” tax issues and general information applicable to all taxpayers.

I was fortunate to be a co-writer and tax adviser for this video. Look for my name “in lights” at the end of the video (it’s even in large type).  To view it, click here.

I hope your tax preparation and filing is going well this year and that some of my blogs have been helpful to you.

 

 

The Giving and Receiving of Form 1099-MISC

A Low Filing Threshhold

As an independent writer, illustrator, author, editor or researcher filing a Schedule C as a sole proprietor, you are likely to receive one or more Form 1099-MISC’s from your customers/clients (those that paid you $600 or more during 2012) shortly after the year-end. You also will need to prepare and issue this form to any subcontractor (if they are unincorporated) you paid $600 or more during the year for services received and rents paid for the use of business propertyThis form is also used to report royalties paid to authors of $10 or more (see below).  Copies of the form are sent to the IRS and will be matched to the recipient’s tax return to check reporting compliance.  If your gross receipts reported on Schedule C are less than the total amount of 1099-MISC income reported to the IRS, you can expect a letter of inquiry.

Author Royalties

Box 2 of the form is used to report royalty payments from intangible property such as patents, copyrights, trade names, and trademarks.  The reporting threshhold here is $10 or more.  Publishers are required to report gross royalties (before reduction for fees, commissions, or expenses) paid directly to an author or literary agent, unless the agent is a corporation.  The literary agent (whether or not a corporation) that receives the royalty payment on behalf of the author must report the gross amount of royalty payments to the author on Form 1099-MISC (whether or not the publisher reported the payment to the agent on its Form 1099-MISC).

Your Reporting Requirements

You are required to file Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid at least $600 in the course of your trade or business.  You report the amount paid in box 7 of the form. Box 7 is labeled “Nonemployee Compensation.”  According to the IRS, if the following four conditions are met, you must report a payment as nonemployee compensation:

  1. You made the payment to someone who is not your employee;
  2. You made the payment for services in the course of your trade or business;
  3. You made the payment to an individual, partnership, estate, or, in some cases, a corporation; and
  4. You made payments to the payee of at least $600 during the year.

At year-end, it is your responsibility, even if you hire your accounting firm to prepare Form 1099-MISC, to provide the information needed, from your books and records, to do that.  You will need the name, address and tax-identifying number (usually the person’s Social Security Number [SSN]) of the individual and the amount they were paid during the year.  The forms must be distributed to payees by January 31, 2013 for payments made during 2012.  You have until the last day of February to file them with the IRS (or March 31 if filing electronically).  If you need extra time to file these, file Form 8809.  All of your 1099’s going to the IRS will be summarized on Form 1096, Annual Summary and Transmittal of U.S. Information Returns.   There is a penalty for each Form 1099-MISC filed late.  Penalties are not only expensive, they’re not deductible either.

Recommended Documentation

As a business, you should have vendor files.  Independent contractors that you hire should have a folder as a vendor.   Before you engage or make a payment to an independent contractor, you should make sure they have supplied you with a completed Form W-9 – Request for Taxpayer Identification Number and Certification.  You should supply this form at the beginning of the relationship and indicate that you must receive it back before services begin and also indicate that no payments will be made until it is received (if you have a contract, this provision should be included).   If the subcontractor refuses to give you a completed W-9, you may want to select another vendor (for various reasons).  View and print Form W-9.

In the subcontractor vendor file, you should have the original completed W-9, a business card or letterhead from the vendor, any advertisements or brochures from the vendor and a copy of the contract (if used).   You may need to prove that the payments were to a subcontractor (and not a disguised employee) and these documents will help greatly in that regard.  This employee/independent contractor issue will be covered in a future blog.

Remember, all business income needs to be reported on your tax return whether you receive a Form 1099-MISC or not.  It’s amazing how one IRS audit will “flush out” payments made to others.  I know of one case where the taxpayer, as part of the examination, had to prepare approximately 100 Form 1099-MISC’s for the current year and the same amount for two prior years.  Now, those 100 forms per year were put on the IRS data base and into each taxpayer’s record for each year.  Then, all the income for each year, including the added 1099 income, was compared to their original return to see if the 1099 income had been included.  One possible clue that there might be an income reporting problem for some of the 100 recipients was the fact that they were fighting the taxpayer’s representative before giving up their Social Security Numbers.

You’ve Still Got Time

That’s right.  You’ve still got time in 2012 to get this business requirement in top-notch order.  Of course, the preferred method of documenting independent contractor services was discussed above.  However, it’s not too late to secure those Form W-9’s from this year’s independent contractors that you have or will pay $600 or more.   By reviewing copies of invoices, credit card statements, and your check register, you will be able to identify the “600 and over” club.   Be ready to hear some moanin’ and groanin’ from those that like to stay under the radar.