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b2ap3_thumbnail_shutterstock_1627239289.jpgTaxpayers who owe tax debts to the IRS may have multiple options for addressing these issues. In some cases, a taxpayer may propose an offer in compromise that will allow them to pay less than the total amount owed and resolve their tax liabilities. While certain restrictions have traditionally applied in these cases, some recent policy changes by the IRS may provide benefits for taxpayers who make an offer in compromise. 

Changes to Tax Refund Offsets

In the past, when a taxpayer made an offer in compromise, they would agree that the IRS would be able to offset any tax refund they received for the current year and apply that amount toward their tax debt. For example, if a taxpayer had tax debts from 2017, and they proposed an offer in compromise in 2019, when they filed a tax return for the tax year of 2019, the IRS would be able to offset some or all of the tax refund they were eligible to receive for that year.

Starting on November 1, 2021, the IRS no longer offset tax refunds for the current calendar year after a taxpayer requests an offer in compromise. This means that if a taxpayer requests an offer in compromise in 2022, they will be able to receive a full tax refund after filing their tax return for 2022. However to prevent potential abuse, the IRS may offset refunds in cases where a taxpayer requests and receives an offer in compromise and then files an amended tax return that will allow them to receive an increased refund.

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b2ap3_thumbnail_shutterstock_2087322133.jpgU.S. taxpayers who own foreign investments must meet certain requirements when reporting accounts and other assets to the IRS. A Report of Foreign Bank and Financial Accounts, commonly known as the FBAR, must be filed for each year in which a person has a financial interest in one or more accounts outside of the United States, and the aggregate value of these accounts is at least $10,000. Failure to report applicable accounts on an FBAR can result in significant penalties, and due to a recent court ruling, these penalties may be even higher for taxpayers who fail to report multiple accounts.

Appeals Court Addresses Non-Willful FBAR Penalties

A recent case heard by appellate judges in the Fifth Circuit addressed penalties for non-willful violations of the requirement to file an FBAR. Non-willful violations usually involve cases in which a taxpayer failed to file an FBAR or report one or more accounts because they were not aware of their requirements. The current maximum penalty for a non-willful violation is $12,921, and this amount is adjusted every year based on inflation.

Previously, courts that have addressed non-willful FBAR violations have applied the penalty on a per-year or per-form basis. That is, a single penalty would apply for each year in which a taxpayer failed to meet their requirements. However, the Fifth Circuit reviewed the applicable laws and determined that it would be more appropriate to apply the penalty on a per-account basis. This means that for each account that a person failed to report or reported incorrectly on an FBAR, they may face a separate penalty. For those with multiple accounts who failed to meet their requirements in multiple years, the penalties may add up quickly and total a much higher amount than had been previously applied.

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san jose tax lawyerThe first few months of the year are often known as “tax season,” since this is when taxpayers will gather the necessary financial information to file their annual tax returns. While 2021 is not over yet, it is a good idea to begin preparing to address these issues, since filing a tax return as soon as possible after the new year will allow a person to receive a tax refund more quickly. When doing so, taxpayers will want to understand the changes to tax laws and IRS policies that may affect them. Some issues to be aware of include:

  • Child Tax Credit - For 2021, the amount of the Child Tax Credit was increased to $3,000 or $3,600 for children 5 years old or younger. However, the amount of the credit is reduced for taxpayers who earn more than $75,000 when filing a single tax return, $112,500 when filing as head of household, and $150,000 for married couples who file jointly. In addition, the IRS began making advance cash payments of the Child Tax Credit to parents between July and December of 2021. Taxpayers can claim any remaining amount of the Child Tax Credit that had not been paid. If a person received payments totaling more than they will be able to claim on their tax return for 2021, they may need to repay some or all of the excess amount.

  • Child and Dependent Care Tax Credit - The amount of the credit that a parent can claim for expenses related to the care of a child under the age of 13 has increased for 2021. This credit may be applied to $8,000 in expenses for one child or $16,000 for multiple children. The maximum percentage that may be applied to these expenses has been increased to 50 percent, and this percentage may be used by families who earned under $125,000 in 2021. Lower percentages will apply for families who earned more than $125,000 but less than $438,000.

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san jose business lawyerThere are a variety of reasons why the IRS may choose to perform a tax audit on a business. While some audits may be performed as a matter of routine, others may be triggered by discrepancies on tax returns or the claiming of certain types of deductions or business losses. Business owners will want to understand the procedures followed during an audit and the types of documents and information the IRS will consider. By working with a tax law attorney, a business can determine the best ways to meet the IRS’s requirements and avoid or minimize its potential penalties.

Records and Documents the IRS May Request During an Audit

In many cases, audits of businesses will be conducted by mail, although there are some situations where the IRS will choose to perform a field audit in which an agent will visit a business and review information in-person. During an audit, the IRS will review certain types of records to determine whether there are any discrepancies between the business’s finances and what was reported on a tax return. The IRS may ask a business to provide multiple different types of records, including:

  • Financial records - The IRS will review a business’s books to address any issues related to earnings, expenses, profits, and losses. Additional documents may also be provided to verify this information, such as bills or receipts for business expenses, purchase records for equipment or materials, or canceled checks for payments made to vendors, suppliers, or contractors.

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Posted on in Taxation Law

san jose tax lawyerIn today’s digital world, there are a multitude of lucrative opportunities for investors. Recently, many people have been able to make significant gains by investing in non-fungible tokens, or NFTs. These digital tokens use blockchain technology, similar to what is used for cryptocurrency, and they allow a person to maintain or transfer ownership of certain types of intangible assets, such as digital images, videos, or video game characters. As the buying, selling, and trading of NFTs has increased, the IRS has taken notice, and taxes will apply to these transactions. NFT creators and owners will need to be sure to understand what types of taxes they may be required to pay when engaging in these types of transactions.

Taxes on Digital Transactions

While the IRS has not yet issued guidance on how transactions involving NFTs will be taxed, investors will most likely be able to avoid potential penalties by treating these transactions the same as those involving virtual currencies. Since NFTs are often purchased with or traded for cryptocurrency, buyers and sellers may also need to address additional tax-related issues during these transactions. 

If an NFT is purchased using virtual currency, the buyer may need to report a gain or loss in the value of the currency. For example, if a person purchased a certain amount of virtual currency for $500, and the currency was valued at $1,000 when they traded it for an NFT, they will need to recognize a capital gain of $500.

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