Q. What is the difference between the child tax credit and the child and dependent care tax credit?
A. These credits are quite different. The child tax credit is simply to provide relief for parents, working or not, who have qualifying children under the age of 17. A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling, or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year.
If you're eligible, you may be able to take a credit on your federal income tax return of up to $1,000 per child. The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level.
The child and dependent care tax credit offers relief to working people who must pay someone to care for their children or other dependents. You may qualify for a tax credit equal to 20 to 35 percent of expenses incurred when someone cares for your dependent child (under age 13), your disabled spouse, or your disabled dependent so that you (and your spouse, if married) may work or look for work. The work-related expenses you can use when figuring the credit are limited to $3,000 for one qualifying individual, and $6,000 for more than one qualifying individual.
For married persons to qualify for the credit, both spouses must work outside the home, or one must work outside the home while the other is a full-time student, is disabled, or is looking for work (provided that the spouse looking for work has earnings during the year). Married couples must also file a joint income tax return. The credit is also available if you're a single parent or a divorced custodial parent.
For more information, contact our office.
Q. For how long should I keep my tax records?
A. You should keep your tax records for six years after you file your income tax return. The IRS has three years after you file to audit you and six years to audit you if it suspects you have underreported your gross income by at least 25%. For example, if you filed on April 15, 2011, for the 2010 tax year, keep those records until at least April 16, 2017. Also, keep in mind that although rarely done, the IRS has no time limit to audit you if it suspects fraud.
Q. What if I haven’t filed my past due income tax returns?
A. First, understand that you are not alone and this problem can be resolved relatively easily. You should make every attempt to comply with the filing requirement, especially if you have been receiving notices from the IRS or the California Franchise Tax Board. There are several reasons that filing is so important, including the following:
- If you owe taxes, the IRS will impose a failure to file penalty, along with interest on the taxes you have not paid. The longer you wait to file, the more your penalty will be.
- If you have a professional license, it could be revoked until you file your returns and pay the tax owed. This could affect your ability to earn income and pay your taxes.
- You will not receive a tax refund that may be due to you. The only way to receive your refund is to file a return within three years of the original filing date. After that, the IRS is not required to pay you your refund.
Q. I received an IRS Audit Letter. What do I do now?
A. Review the letter carefully. Typically the letter states one of two things. It may tell you that the audit process is just beginning and it will provide information on what to do next. Otherwise, it may tell you the dollar amount the IRS expects you to pay with an explanation of the suspected error. Either way, do not necessarily anticipate the worst and panic. Most importantly, do not ignore the IRS. This makes what could be a non-issue or small problem a very big one. Respond effectively to all IRS communications and keep all deadlines. It is best to contact a qualified tax attorney to speak to the IRS on your behalf.
Q. I received an IRS Notice of Deficiency. What does this mean?
A. A Notice of Deficiency is also commonly referred to as a “90 Day Letter”. The Notice is the final letter that the IRS must send before it can begin to collect the taxes owed. From the date of the Notice, you have 90 days to file a Petition with the United States Tax Court to dispute the amount the IRS says is owed.
Q. For how long can the IRS collect back taxes from me?
A. Generally, from the date you file your return or the date the tax is assessed, the IRS has 10 years to collect a tax liability. This time limit will be extended if you file an Offer in Compromise, request a Collection Due Process Hearing, file bankruptcy, or if additional tax is assessed due to an audit.
Q. Can the IRS garnish my wages or take (levy) my assets?
A. The IRS can garnish wages, levy bank accounts, levy social security and disability benefits, among other things. First, the IRS must send you a Final Notice, which gives you 30 days to respond. If you fail to respond, the IRS has authority to take further action such as garnishment and levy. Therefore, it is extremely important that you make some form of contact with the IRS within the time provided to work with them on resolving the matter.
Q. What is an Offer in Compromise? Can I negotiate this myself?
A. In certain instances, taxpayers are able to settle their tax debt, including interest and penalties, for a lump sum that is less than the total amount owed. For this to work, you must convince the IRS that it will not be able to collect the entire amount due because of your financial situation, or you must prove you do not owe the tax.
The consideration process is lengthy, typically lasting six months to a year, sometimes longer. You must make a deposit of 20% of the amount offered, plus pay a filing fee, at the time your offer is made. The IRS has no obligation to accept your offer. Therefore, to avoid wasting your valuable time and money, it is very important to evaluate your specific circumstances with a tax professional before making the offer to determine whether you are a good candidate for the program.
If you are not a fit for the Offer in Compromise program, you may still be able to enter into an agreement with the IRS to pay the taxes back in installments. The monthly installment payment is determined based on your income and allowable necessary expenses. It is important to reach an amount that you can consistently make as failure to pay will be a problem in working with the IRS going forward.
In some cases the IRS determines that you are unable to pay anything at the time of making the request and will classify you as “currently not collectible.” This does not make the taxes go away and interest and penalties continue to add up; however, the IRS will no longer take collection action against you while your financial situation remains the same.
Q. Will the IRS remove (abate) interest or penalties that it has assessed?
A. Interest will be abated only in the case of an IRS error or delay. This rarely happens. The IRS will abate penalties in the right circumstances. You may be successful if you can show that the error occurred from “reasonable cause.” There are certain criteria that the IRS must consider when assessing your specific situation and a detailed explanation must be provided for the IRS to properly evaluate the request for penalty relief.
Q. What is innocent spouse relief?
A. Married couples filing a joint tax return are jointly and severely liable for the tax owed on that return. In certain instances, an “innocent” spouse may request that the tax burden be shifted from him or her to the responsible spouse. Depending on the level of involvement of the requesting spouse in filing the return, he or she may be eligible for one of three types of relief: Innocent Spouse Relief; Separation of Liability Relief; or Equitable Relief.
Q. What are the consequences of delinquent taxes?
A. The loss of your house and property could happen if your taxes are delinquent for two years, and you cannot get it back after it has been foreclosed. You can also face a year in prison and a fine of $25,000 for each unfiled tax year. Though the prison term doesn't usually happen, the fine is strongly enforced. If you do not file a final return, you could lose your refund. You could be contacted by phone or through a letter, or you may also be visited in person by an IRS agent.
Q. Do IRS Payment Plans Really Work?
A. It depends. If the size of the tax debt is small, and the size of the monthly payment on the proposed installment agreement is relatively large, then yes, it can work.
However, the fact is most people who get into tax trouble also have other financial pressures making it difficult to come up with a payment large enough to actually pay down the taxes.
The reason you need a large payment: A tax debt not only accrues interest, it also accrues penalties. When the penalties are added to interest, the effective growth rate can be on the order of about 25%!
Most people do not bother to run the numbers, or ask IRS how long it will take to pay down the tax based on the monthly payment they propose.
There are almost always better alternatives than an installment agreement with the IRS or state tax agency. If you know you owe the tax and there is no dispute as to the amount, among the alternatives are paying off the tax debt in a lump sum using lower-interest credit lines or borrowed money from friends and family, or paying off the tax debt interest-free in a Chapter 13 bankruptcy plan.
Be careful with installment agreements. They can be misleading. Run the numbers and get help from a qualified tax professional if necessary.
Q. Can individuals negotiate with the IRS?
A. As an individual taxpayer not familiar with the maze of complicated federal tax laws you should not attempt to negotiate directly with the IRS. It is essential you retain a qualified tax attorney to negotiate for your behalf. Steve has successfully negotiated many cases for his clients and the client has not needed to directly communicate with the IRS - lifting the stress of a face to face meeting with IRS agents off their shoulders.
Q. Can Bankruptcy Help?
A. Yes. Bankruptcy is one way to deal with a serious tax problem. Bankruptcy can be a very effective forum in which to deal with tax issues for a number of reasons:
Some taxes can be discharged in bankruptcy. For income taxes, to be discharge-eligible, they must meet a three-part test:
- Relate to a tax year more than three years old.
- A tax return must have been filed for that tax year by the taxpayer more than two years before the bankruptcy was filed.
- The IRS or state tax agency must have assessed the tax more than 240 days before the bankruptcy was filed.
Other taxes sometimes can be discharged if the government fails to file its proof of claim by the deadline date set by the court and the debtor completes his plan as confirmed by the court in Chapter 13.
Tax liens can be contested, and determinations made by the court as to the validity, or value of the taxpayer’s property that is covered by the lien. If there is a dispute as to legal liability for the tax or the amount due, the bankruptcy court is a forum in which this can be determined by a judge.
The bankruptcy judge is:
- Independent and not employed by the IRS or state tax agency.
- A specialist in financial matters, including tax.
- The debtor is protection by the court from enforcement action by the IRS or state tax agency while the case is pending. The government must seek permission from the court, for which the taxpayer will get notice and the opportunity to object, before it can proceed on any enforcement action.
- The taxpayer is put on equal footing with the government before the court.
- The type of relief available can vary depending on the bankruptcy chapter selected by the tax debtor.
Sometimes, however, bankruptcy may not be a viable option, particularly if the taxpayer is solvent, has valuable assets that would be at risk in bankruptcy, significant cash-flow, or the size or type of tax owing is not one that can be easily addressed in a bankruptcy proceeding. The options should be thoroughly discussed with experienced counsel. Please contact our office to discuss your bankruptcy options.
Q. How Can I Remove a Tax Lien?
A. Once a tax debt has progressed to the point that the agency has filed a tax lien on the public record, the tax problem takes on another, more serious, layer of complexity. A tax lien generally attaches to ALL of the tax debtor’s assets, including some that may have been exempt under state law.
Unless you can contest the validity of the tax itself or the amount due, you will have to pay it in full, plus any accrued interest and penalties. Tax liens can be dealt with, using a variety of tactics, but generally it’s better to seek help early before they are issued and resolving the problem becomes more challenging.
Attorney Steve Vasquez works with individuals, estates and businesses to effectively and efficiently resolve their tax controversy disputes with the Internal Revenue Service and California Franchise Tax Board. Steve Vasquez, Esq. has also been admitted to practice before the United States Tax Court.
Steve can assist you with the following types of tax controversy and bankruptcy matters:
- Collection problems
- Liens, levies, and garnishments
- Installment agreements
- Offers in Compromise
- Innocent spouse relief and allocation
- Abatement of penalties and interest
- Unfiled tax returns
- Business related sales and employment tax issues
- Chapter 7 and Chapter 13 Bankruptcy Petition Filing