John D. Teter Law Offices

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During the COVID-19 pandemic, many individuals, families, and businesses have experienced financial difficulties, and to help avoid additional strain that would affect the national economy, the IRS temporarily suspended some of the activities it usually takes to collect unpaid taxes. However now that the United States is emerging from this national emergency with many businesses reopening and people returning to work, the IRS has stated that it will be resuming its regular collection programs. Taxpayers who are facing tax audits or who have unpaid taxes will need to be aware of the potential types of actions that the IRS may take against them.

IRS Tax Enforcement Operations

san jose tax lawyerAs of June 15, 2021, the IRS has begun to return to its normal practices of collecting taxes. Typically, the IRS sends notices to taxpayers who have tax debts, informing them of the balance that is due. The IRS will be following up with those who have not responded to these notices. Those who have tax liabilities from tax returns filed for 2019 or 2020 are required to respond to notices from the IRS within 30 days, either by paying the amount due or requesting an offer in compromise or other forms of relief. This window is extended to 45 days for those who reside outside the United States. Beginning August 15, 2021, anyone who has failed to respond to a notice from the IRS may be subject to tax liens or levies.

Other tax levy programs will resume on July 15, 2021, including:

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San Jose, CA tax audit attorney for high income taxpayersThe Internal Revenue Service (IRS) regularly conducts tax audits of individual taxpayers and businesses. During an audit, it will seek to collect taxes that were underpaid due to misreported income, improper deductions, or other issues, as well as any applicable penalties. Under the administration of President Joe Biden, these efforts may increase, and the IRS will be looking to conduct more audits of individuals who earn high incomes or own significant assets, as well as large partnerships and corporations.

Increased IRS Budget and Focus on Closing the Tax Gap

President Biden recently announced the American Families Plan, a proposal that would increase infrastructure spending and provide aid to families with middle to low incomes. This proposal also included an increase in the IRS’s budget by $80 billion over 10 years. This increase would allow the IRS to conduct more audits and narrow the “tax gap,” or the difference between what U.S. taxpayers owe and what is actually collected. Experts believe that the tax gap is close to $1 trillion per year.

This proposal came on the heels of a report by the IRS and other economists which stated that taxpayers with income levels in the top 1% do not report 21% of the income they earn. This results in around $175 billion of taxes that go unpaid each year. In addition, the number of audits of taxpayers who earn at least $1 million per year has fallen by 80% over the past 10 years, making it less likely that the IRS will be able to collect the taxes owed by these taxpayers. Increased audit and collection efforts aimed at this top 1% may assist in narrowing the tax gap without additional tax increases.

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San Jose, CA tax debt relief attorneyWhen a married couple files a joint tax return, “joint and several liability” will apply to any tax debts related to that return. This means that if the Internal Revenue Service (IRS) conducts a tax audit and determines that the couple owes taxes due to erroneous information on their joint tax return, the spouses will be equally liable for paying these tax debts. This can sometimes come as a surprise, especially if a couple has gotten divorced since filing the joint tax return in question. Even if a divorce decree addressed tax issues and states that one spouse will be responsible for paying joint tax debts, the IRS can still pursue repayment from both spouses. However in some cases, a person may receive innocent spouse relief if they were not responsible for the tax debts.

Innocent Spouse Relief Eligibility Requirements

Innocent spouse relief may be available in situations where individual income taxes or self-employment taxes are owed to the IRS based on incorrect information on a couple’s joint tax return. To be eligible for innocent spouse relief, a person must be able to show that errors on a tax return were solely attributable to their current or former spouse. They will need to verify that when they signed the joint tax return, they did not know or could not reasonably have known about the errors.

A person may receive innocent spouse relief based on errors on a tax return related to unreported or misreported income or claiming of improper tax deductions, credits, or property basis. For example, if a person’s ex-spouse was a business owner, and they did not report all income earned through their business in a certain year, while also claiming tax deductions for business expenses without actually paying for those expenses, a tax audit may determine that taxes are owed. If the other spouse was not involved in the business and had no knowledge of the business’s finances, they may be eligible to receive innocent spouse relief, and the other spouse will be solely responsible for paying the tax debts.

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San Jose tax penalty notice attorneyTaxes are a reality that most U.S. citizens and residents need to deal with, and understanding the various tax laws that apply to a person or business can often be a complicated matter. If a taxpayer makes mistakes or oversights when filing tax returns or other tax documents, they could face penalties from the Internal Revenue Service (IRS). Being contacted by the IRS may cause taxpayers to worry that they will be subject to these types of penalties. However, not every piece of communication from the IRS will result in penalties, and taxpayers will want to understand the different types of notices that the IRS may send and their options for responding and addressing or correcting tax issues.

IRS Letters and Notices

Communications from the IRS can generally be grouped into one of the following categories:

  • Soft letters - In some cases, the IRS may identify potential issues that may affect certain taxpayers and send notice reminding the taxpayer of the actions they can take to ensure that they are in compliance with tax laws and avoid potential penalties. In some cases, the IRS may request that a taxpayer provide certain types of information or file amended tax returns. In recent years, the IRS has sent soft letters related to issues such as reporting virtual currency transactions or filing the proper forms related to foreign accounts or investments.

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San Jose, CA cryptocurrency tax lawyerThe IRS pays close attention to taxpayers’ income and financial transactions, and there are a variety of reasons it may conduct tax audits. In recent years, virtual currencies such as Bitcoin have been a growing concern for the IRS, and many cryptocurrency owners have received notices regarding their requirements for reporting transactions involving these currencies. This scrutiny is likely to increase in the future as the use of virtual currencies becomes more widespread. In fact, the IRS released a draft of the 1040 tax form for 2020, and one of the first questions that is included on this form is “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This indicates that those who own or trade cryptocurrency may face audits if they do not meet their requirements for reporting transactions and paying applicable taxes.

Tax Issues Related to Virtual Currency

Even though cryptocurrencies may be used similarly to currency issued by the United States or other countries, they are not recognized as legal tender. Instead, virtual currencies are considered property, and taxes may apply to transactions involving these currencies. If a person receives virtual currency in exchange for performing services, either as an employee or an independent contractor, this will be considered taxable income.

When virtual currency is sold or exchanged for other property, a taxpayer will be required to report gains or losses on a federal income tax return. These gains or losses are calculated by comparing the taxpayer’s basis in the virtual currency, or the fair market value of the currency at the time it was acquired, with the amount received in exchange for the virtual currency. Capital gains taxes may apply to gains made when selling virtual currency, and a taxpayer may be able to deduct losses in these transactions.

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