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Check out what the IRS says about the Earned Income Tax Credit:

The Internal Revenue Service wants working grandparents raising grandchildren to be aware of the Earned Income Tax Credit (EITC) and correctly claim it if they qualify.

The EITC is a federal income tax credit for workers who don’t earn a high income ($53,505 or less for 2016) and meet certain eligibility requirements. Because it’s a refundable credit, those who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund. The EITC could put an extra $2 or up to $6,269 into a taxpayer’s pocket.

Grandparents and other relatives care for millions of children, but are often not aware that they could claim the children under their care for the EITC. A grandparent who is working and has a grandchild who is a qualifying child living with him or her may qualify for the EITC, even if the grandparent is 65 years of age or older. Generally, to be a qualified child for EITC purposes, the grandchild must meet the dependency requirements.

Special rules and restrictions apply if the child’s parents or other family members also qualify for the EITC. Details including numerous helpful examples can be found in Publication 596, available on IRS.gov. There are also special rules, described in the publication, for individuals receiving disability benefits and members of the military.

Working grandparents are encouraged to find out, not guess, if they qualify for this very important credit. To qualify for EITC, the taxpayer must have earned income either from a job or from self-employment and meet basic rules. Also, certain disability payments may qualify as earned income for EITC purposes. EITC eligibility also depends on family size. The IRS recommends using the EITC Assistant, on IRS.gov, to determine eligibility, estimate the amount of credit and more.
Eligible taxpayers must file a tax return, even if they do not owe any tax or are not required to file. Qualified taxpayers should consider claiming the EITC by filing electronically: through a qualified tax professional; using free community tax help sites; or doing it themselves with IRS Free File.
Many EITC filers will get their refunds later this year than in past years. That’s because a new law requires the IRS to hold refunds claiming the EITC and the Additional Child Tax Credit (ACTC) until mid-February. The IRS cautions taxpayers that these refunds likely will not start arriving in bank accounts or on debit cards until the week of Feb. 27. Taxpayers claiming the EITC or ACTC should file as soon as they have all of the necessary documentation together to prepare an accurate return. In other words, file as they normally would.

Refunds for those claiming the EITC will be delayed until February 15.

Bonnie Lee explains a 1031 Exchange in the Realized article “Is a Reverse 1031 Exchange Right For You?”. Check it out!

I received the following question:

Bonnie the news outlets are reporting that Trump may have gotten away with not paying taxes for 18 years. Is this a loophole or the IRS not doing there (sic) job?

Loophole. if you suffer a Net Operating Loss and it’s not absorbed in the current tax year, you can carry back the loss 2 years then carry forward any remainder into future years for up to 20 years. Little guy can do it too. So say you start a biz, and use up all your savings to get it off the ground but you don’t make any money for the first 5 years. in fact, your expenses exceed your income by say $50,000. But you have no other taxable income because you are living off withdrawals from your savings account and maybe your family is helping you out – none of that is taxable. So your income tax return shows negative income of $50,000. To encourage biz, the IRS allows for the carrying of that income back two years to when you were making money. You basically redo your tax return using form 1045 and subtract that $50,000 from the income for the two years prior and get a refund of the taxes you paid that year. if you don’t use up all the loss in that year (maybe you only made $30,000 that year so you have $20,000 leftover) then you keep carrying the loss to subsequent years until you use it up.
I would love to hear your opinion of this tax law. Write to me at bonnie@taxpertise.com.

 

Some Facts About Hilary’s 2015 Income Tax Return:

Hilary Clinton has made public her income tax returns. I’ve reviewed her 2015 income tax return which is filed jointly with her husband Bill Clinton. The Clinton’s derived most of their income from self-employment activities – speech making and book sales. Only a modest amount of income was earned from passive activities – interest. No dividends or capital gains. Therefore, they did not have the advantage of the capital gains rate. In fact, due to having to also pay the self-employment tax, their effective tax rate was 35.2%.

Income: Total income for the year is $28,336,212 and is comprised of:

  • $25,171 of interest income from six bank accounts held at JP Morgan Chase Bank as well as $464 interest earned from tax refunds.
  • $93 in W2 Wages for Bill from the Deb Talent Agency. I wonder what that was about.
  • $69,557 in state income tax refunds. Because state income taxes are deducted as an itemized deduction, any refunds must be included in income in the subsequent year. This is likely a declaration of their refund from 2014.
  • $28,020,811 net self-employment income earned from speaking engagements and sales of books. The expenses deducted looked in line with the type of business reporting. Bill Clinton paid wages as well as a benefit package to his employee(s). Their largest expense was commission payments to the Harry Walker Agency. Bill took a home office deduction. He is entitled to deduct a pro rata share of utilities, repairs and maintenance, property taxes, homeowner’s insurance, mortgage interest, etc. but instead he deducted only $945 in depreciation.
  • $3,000 capital loss carryforward from prior years. There were no capital gains transactions on the current year tax return; they did not play the stock market. However, their total capital loss carryforward was $702,540. At three grand a year that will take a long time to be absorbed. However, if they have future capital gains, the loss will be applied against those gains before any tax is levied.
  • $223,580 from pensions and other retirement vehicles; the main pension pay out was from GSA (Bill’s retirement pay from his presidency).

 

Deductions: The Clintons filed Schedule A with their income tax return claiming itemized deductions of $5,159,242, rather than taking the standard deduction. The deductions claimed were:

  • $2,819,599 paid in state income taxes
  • $104,303 paid in real estate taxes
  • $41,883 in mortgage interest on their principal residence
  • $3,022,700 in charitable contributions. $3,000,000 was donated to the Clinton Foundation, $2,500 was donated to St. Stephen’s Armenian Apostolic Church, $200 was donated to Hot Springs High School Class of ’64, and $20,000 to First United Methodist Church
  • No deductions were claimed for investment advice or tax preparation fees likely because the deductions would not exceed the 2% of AGI (adjusted gross income) ceiling. Also no deduction was claimed for vehicle registration fees. No deduction was claimed for medical expenses. Even if they incurred medical expenses, the ceiling is 7.5% of AGI for those aged 65 or older.

Please note: I am neither endorsing or denouncing any Presidential candidate. I am simply attempting to explain the implications of their promises about tax reform.

 

 

Donald Trump has sketched out a tax plan that he promises “will reduce taxes for everyone.” Individual rates will be trimmed to three brackets: 12%, 25%, and 33% replacing the seven current rates of 10%, 15%, 25%, 28%, 33%, and 39.6%. According to his plan, those in the lowest bracket will pay an additional 2 points or 20% while those in the highest bracket will enjoy a reduction of 6.6 points or a decrease of 18%. This is hardly a reduction “for everyone.” It appears the top one percent will benefit rather than those in the middle or lower income levels.

At the top of the list was the eye-catching promise to reduce corporate rates to 15%. Interesting. Only three points higher than the projected lowest rate for low income individuals. And the same basic rate (although thanks to Obama it could be at 20% depending on various factors) for capital gains. Capital gains tax is levied on stock and other asset profits, interest, and dividends, which is the main form of income for the wealthy. This is why Romney as well as many others in the top one percent enjoy an effective tax rate of only 13.6%.

Hardly seems fair does it?

Well, Trump believes a 15% corporate tax rate will stimulate the economy. Trickle down and all that. But historically, tax breaks for big business have only increased the gap between the top one percent and the lower income classes. Think about it; are you feeling the trickle down?

‘Stimulating investment’ by lowering taxes for the wealthy is the mantra of the wealthy. Does anyone really buy this? I’m no economist, just a lowly tax professional, but c’mon, common sense dictates that tax considerations are not the chief motivating factor in making investment decisions. The primary consideration is “Am I going to make money off this venture?” Tax implications come into play only when projecting net gain or loss. Let’s face it; the rich will always be investors. The tax rate is not the end-all for making that choice. What else are they going to do with their money? Sit on it? Only a few eccentrics will choose to hide their money in a mattress or stick it in a low paying bank account. The rest will play the stock market, develop real estate, buy bonds, become part of the Shark Tank, going for the bigger returns. If these investors make a hundred thousand dollar profit, they will pay taxes on it. Why should they enjoy paying a mere 15% on that profit while every other American making the same amount or less working for the man pays their taxes at a much higher rate?

Ultimately, it is Congress, not the President that determines changes to or creation of tax law.

Perhaps Congress should consider eliminating the capital gains tax rate and charge those profits according to the tax brackets for ordinary income. Perhaps they should leave corporate taxes at a max rate of 35% and get rid of corporate loopholes that allow larger corporations to pay zero. And maybe Congress should lower the tax rates for the middle class who seem to bear the brunt of the tax obligation. Maybe it should be our turn. Shall we call it the “trickle up” effect?

 

 

 

The Valley Fires in Middletown have wreaked havoc upon the landscape. We lost our home in Middletown and so did many of our friends.

The area has been declared a National Disaster area. According to a press release I received from FEMA, “the Regional Administrator for FEMA Region IX Office determined that the Valley Fire threatened such destruction as would constitute a major disaster. California’s request was therefore approved on September 12, 2015 at 21:30 PDT.  Fire Management Assistance Grants provide federal funding for up to 75% of eligible firefighting costs.”

And help is on the way from the Internal Revenue Service as well. The IRS has always gone to bat to help taxpayers affected by disasters. For one thing, filing deadlines are generally extended. I anticipate the October 15, 2015 deadline for filing 2014 individual income tax returns will be extended likely to January 15, 2016, though at this late date, nothing has come down yet.

Many who lost their paperwork to the fires will need time to reconstruct their data. If you find yourself in this situation, request a transcript of your tax documents from the Internal Revenue Service. Your W2s, 1099s, K-1s and other third party documents have been provided to the IRS and are available to you. You can make the request online at IRS Website – Get Transcript.

For data not provided to the IRS, such as payments you’ve made for property taxes, DMV fees, charitable contributions, medical expenses, and deductions, get copies of your bank statements to retrieve the amounts paid.

If you are self-employed, perhaps your data is being safely stored in the Cloud or in an on-line version of accounting software. If not, you will need to reconstruct your books to create a profit and loss statement suitable for reporting on your tax return.

There are specific guidelines in place to help those residing in the Middletown area or for anyone involved in a declared federal disaster. Refer to IRS Publication 547 to discover what you need to know with regard to your loss and your taxes.

Highlights from this publication specific to federally declared disasters:

Timing: Normally, you write off your losses in the year it occurred. “However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. If you make this choice, the loss is treated as having occurred in the preceding year.”

The reason the IRS allows this is because the loss will lower your tax liability for the previous tax year thus generating a refund which can be used to help rebuild.

Profit: If a reimbursement from your insurance company to repair or replace your main home results in a capital gain (ask your tax pro to crunch the numbers), you will be allowed to postpone the capital gain if you use the money to repair or replace that main home. Naturally, this break is fraught with rules so check out the section under “Gains Realized on Homes in Disaster Areas” in the Instructions for Form 4684.

Home made unsafe by disaster. According to Publication 547 “If your home is located in a federally declared disaster area, your state or local government may order you to tear it down or move it because it is no longer safe to live in because of the disaster. If this happens, treat the loss in value as a casualty loss from a disaster. Your state or local government must issue the order for you to tear down or move the home within 120 days after the area is declared a disaster area.” Here again, it is a good idea to ask your tax professional to crunch the numbers to accurately determine your loss. It will be reported on Form 4684.

My thoughts, and prayers go out to those who have lost everything.

Will it ever happen?

I’ve made taxation a career for more than thirty years. Over the years, my hopes have been raised by promises and proposals by Presidents and Congress of an end to the complicated maze of tax regulations that burden business and individuals. An end to complexity. The ushering in of simplification.

Milton Friedman introduced a flat tax in 1962. It didn’t take.

This concept was also proposed in 1994 when Congressman Dick Armey (R-TX) introduced a flat tax of 17% for individuals as well as businesses. Virtually all deductions, credits, exclusions, and exemptions would have been eliminated. Dividends, interest, and capital gains would have been excluded from taxable income in order to encourage savings, investments, and capital formation. The tax return would be the size of a post card. Businesses would be allowed to take deductions for certain expenses against income. Everyone was excited about it. But the legislation failed to pass.

Shortly after taking office President Obama organized an economic coalition to study tax reform and recommend a new tax system. Under discussion was the elimination of income tax deductions accompanied by a reduction across the board of income tax rates. What everyone had in mind was a flat tax. Did it happen? No, of course not.

In 2011, Paul Ryan (R-WI) was set to introduce remarkably similar legislation with a transition period in which taxpayers could choose the current system or his proposed system for the next ten years. Rather than an across-the-board 17% tax rate, Ryan proposed a rate of 10% for incomes up to $100,000 and 25% for incomes above that level. A generous standard deduction and personal exemption (totaling $39,000 for a family of four) would have replaced the deductions and tax credits formerly enjoyed. The alternative minimum tax and the death tax would be eliminated.

Ryan’s plan included reform for the corporate income tax, currently the second highest in the industrialized world. It would have been replaced with a border-adjustable business consumption tax of 8.5 percent. This new rate is roughly half that of the rest of the industrialized world.

Jim DeMint (R-SC) planned to introduce a flat tax in 2012 – pretty much the same principal – one rate and a postcard size tax return.

None of these proposals have received any serious consideration.

Let’s face it; the current system needs to be burned to the ground. We’ve got approximately 100,000 pages of confusing, unfair, and contradictory tax code mired in shades of gray with the word “generally” used way too many times. According to the IRS, 47% of Americans pay no income tax whatsoever. Many of these “non-taxpayers” claim the Earned Income Tax Credit (EITC) and receive refunds of upwards of $6,000 depending upon family size and income level. According to statistics gathered from 2009 income tax returns, more than 25 million people claimed more than $57 billion in EITC refunds. Are there really that many people entitled to what we call a “reverse-welfare system?”

We all recognize that behind tax legislation is a motivation for certain societal behaviors. For example, if the tax code allows a deduction for charitable contributions, then more Americans will donate to worthy causes. A deduction for property taxes and mortgage interest propel Americans into the American dream of home ownership. The IRA deduction encourages people to save for retirement.

Imagine what would happen if these deductions were suddenly removed. Many nonprofits would cease to exist for lack of funding. The housing market may experience another decline. Why not be a renter and let someone else repair the leaky roof and dripping faucets? And with society becoming more mobile – the necessity of moving for work, renting has become attractive. And if taxpayers did not make IRA contributions would they reach old age only to live in poverty, relying on Social Security and the generosity of family to survive?

And what has happened with the IRS over the years? Because of severe continuing budget cuts along with the added burden of administering Obamacare, customer service has become a joke. As a practitioner I had become accustomed to calling the practitioner hot line and getting an IRS agent on the second ring. Now there are layers of menus followed by hold times of usually more than one hour. And oftentimes after holding that long the IRS disconnects before I’m able to speak to anyone at all. And practitioners supposedly enjoy priority service. I feel bad for my fellow Americans who probably have to hold for even longer periods of time.

To effect change, please write your Congressman!

Redwood Writers Meeting 2:30-5 PM at the Flamingo Conference Resort & Spa, 2777 Fourth Street, Santa Rosa, CA 95405 • Phone: (707) 545-8530  Click here for map.
We ask for a small fee of $5 from members and $8 from non-members to cover costs.

Bonnie Lee

Bonnie Lee

Sunday, November 11th, 2012, 3-5 pm

“It’s All About the Benjamins: Taxes 101 for Writers”

Join Bonnie Lee as she brings comedy to the topic of taxes for writers. Taxes can be boring, yes…especially for artistic types who prefer to deal with word play rather than dollar signs. Do you want to keep more money in your pocket? Lee will teach you legitimate ways to do so. You will be informed and delighted by this entertaining presentation.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service.

Lee founded Taxpertise (formerly Symmetry Business Services) in 1982 to represent taxpayers in audits, offers in compromise, tax problem resolution, tax preparation, tax planning, and to help non-filers safely re-enter the tax system. For more than two decades, she has specialized in tax issues relating to entrepreneurs. Learn more at her website.

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31 of the Best Business Books for Solopreneurs and Micro Business Owners
Tuesday, July 6, 2010 at 7:00AM
Knowledge is power and this is especially true for small business owners; solopreneurs and micro business owners. Whether it’s staying ahead of the curve or operating your business with limited resources, you have to be able to make adjustments and decisions based on relevant and current information as it applies to you and your business.

We asked over 97 solopreneurs and micro business owners what business books have they read that not only have they read multiple times, but made such an impact on them or that they found it so profound, it changed the way they do business. Some of the books are well known and others are considered “best kept secrets.” One thing is for sure, these books can be powerful tools for you to build, develop and grow your business.

When you read business books, it important that you take action where necessary, delve deeper when needed and re-read for reminders.

Get the most from your business books:

Read one business book a month or quarter, implement one or two new practices and see where your business ends up after a year.

Create a business book club within your network. Each person reads a business book shares or reports back to the group key insights and tips or the most important aspects of the book.

Swap or trade business books with your network, colleagues and friends.

Many of the tips, tools and techniques found in the following books have been found to be useful, empowering and inspiring. Here are 31 of the best business books for solopreneurs and micro business owners:

1. 4-Hour Work Week by Tim Ferris – Provides a variety of tips and practices to achieve the 4-hour workweek the title refers to; however, it is NOT a get-rich-quick-scheme book. Submitted by R. Kaplan, www.surfohio.com

2. 9 Lies That Are Holding Your Business Back by Steve Chandler and Sam Beckford – Helps shed light on some of the biggest mistakes that entrepreneurs make and how to prevail. Submitted by T. Scarda, www.franchoice.com

3. 80/20 Principle by Richard Koch – A little-known must-read. I took it out of the library 4 times before I realized I had to buy it, have multiple copies, and distribute to everyone I know. Submitted by L. Enock, www.CUcontent.com

4. 163 Ways to Pursue Excellence by Thomas J. Peters – Reference for business practices that produce immediate results. Great for those with short attention spans. Submitted by L. Baer, www.baerdesign.com

5. Become Your Own Boss In 12 Months by Melinda Emerson – Step-by-step guide for stepping out on your own the SMART way, the PRACTICAL way… the ONLY way. Submitted by A.Michelle Blakeley,www.simplicitymastered.com

6. Book Yourself Solid by Michael Port – (Received numerous amounts of submissions for this book) A must read for solopreneurs and micro business owners. Submitted first by M. Tremblay

7. Coherent Strategy and Execution: An eye-opening parable about leadership and management by Ravi Kathuria – Part fiction but based on real business, not just theory. Ultimately, the company is a success, but only because the CEO was willing to let down his guard, listen to a mentor and realize that he still had a lot to learn – a lesson many small business owners still need to learn. Submitted by B. Price, www.AgamaAdvertising.com

8. Crush It by Gary Vaynerchuk – Teaches honesty and transparency above all else, as well as “getting into the trenches” through social media to effectively interact with customers, peers and the media. Submitted by B. MacGregor, www.costrefuge.com

9. Dig Your Well Before You’re Thirsty: The only networking book you’ll ever need by Harvey Mackay – Details what it means to network and the types of people one should have in one’s network. Submitted by T. Lobell, Ph.D., http://drthea.com

10. E-Myth by Michael Gerber – (Received numerous amounts of submissions for this book) A must read for solopreneurs and micro business owners. Submitted first by H. Cohen, www.trainingsolutions-hlc.com

11. Four Steps To The Epiphany by Steve Blank – A heavy focus on truly understanding customer needs before you determine the business model that is right for your business. Submitted by A. Rodnitzky, www.reteltechnologies.com

12. Getting Real by 37 Signals – Learn how to limit your hours to 40 hours maximum every week to maintain steady, sustainable motivation. Submitted by D. Croak

13. Getting to Yes: Negotiating agreement without giving in by Roger Fisher and William Ury – Negotiate fees and terms that benefit you, your company and your clients. Submitted by S. Bender Phelps, www.OdysseyMentoring.com

14. Go Givers by Bob Burg and John David Mann – This book gives new relevance to the old proverb, “Give and ye shall receive.” Submitted by C. Hasbrouck, www.intentionallivingonline.com

15. How to Become a Rainmaker by David Fox – Recommended reading for all my existing and new clients. Submitted by N. Anderson, www.thecouragegroup.com

16. Interview Tactics: How to survive the media without getting clobbered by Gayl Murphy – Helpful guide to learning how to make the most of media interviews. Submitted by S. Levin, www.speakerservices.com

17. Made to Stick by Chip and Dan Heath – Teaches one how to convey ideas in very powerful ways that “stick” in your listener’s brain. And what’s more important than that when you’re trying to sell an idea, a service or a product? Submitted by M. Lindenberger, www.bocacommunications.com

18. Making a Living Without a Job by Barbara Winters – A hand-holder for when you want to give up on the “solopreneur” thing. Submitted by K. Caterson, http://squarepegpeople.typepad.com

18. Making a Living Without a Job by Barbara Winters – A hand-holder for when you want to give up on the “solopreneur” thing. Submitted by K. Caterson, http://squarepegpeople.typepad.com

19. Million Dollar Consulting: The Professional’s Guide to Growing a Practice by Alan Weiss – Recommended for anyone starting of any type of business. Worth re-reading at least once a year. Submitted by C. Smith, www.magnusco.com

20. Mommy Millionaire: How I turned my kitchen table idea into a million dollars and you can too! by Kim Lavine – Step by step guide. Unlike other books that are just motivational, Kim describes her personal experiences with buyers, how to get their numbers, how to determine pricing, how to manufacture your product, etc. Submitted by S. Krikelis, www.relaxmissy.com

21. Never Eat Alone by Keith Ferrazzi – A book full of strategies, advice and confidence builders for networking, connecting and building your brand. Submitted by B. Carnduff, www.echelonseo.com

22. Off the Wall Marketing Ideas by Nancy Michaels and Debby J. Karpowicz – Full of fun success stories and anecdotes. The book never gets old; its lessons are just as applicable in everyday life as they are in business. Submitted by A. Fisher, www.growyourbusinessnetwork.com

23. Permission Based Marketing by Seth Godin – Marketing in the modern environment. How to focus not just on selling your products but on gaining permission for further contact through newsletters, blog subscriptions, e-blasts, etc. Submitted by L. Sanders, www.blackvelvetseductions.com

24. Predictably Irrational: The hidden forces that shape our decisions by Dan Ariely – This book makes behavioral economics fun, interesting and even laugh-out-loud funny while providing real world examples. It also saves you from making poor buying decisions because you’ll soon know why the human mind really wants things like that free gift with purchase–even when you know you don’t need it. Submitted by S. Karacostas www.theunchainedentrepreneur.com

25. The Art of the Start by Guy Kawasaki – The phases a startup company should go through to be a successful company. Essential for creating a progressive company focused on excellence instead of marginal company. Submitted by Ellen Lytle, M.A., M.Des.

26. The Heart of Marketing: Love Your Customers and They Will Love You Back by Judith Sherven, Ph.D., and Jim Sniechowski, Ph.D. – It is the solopreneur’s guide to heart-based, client-oriented, soft-sell marketing. Submitted by S. Dayhoff, Ph.D, www.getyouridealclient.com

27. The Long Tail: Why the future of business is selling less of more by Chris Anderson – Shows the power of the Internet to sell products and services that would never have been viable on the offline world. Submitted by B. Fuhrmann, www.ownapainting.com

28. The Success Principles by Jack Canfield – Following along with the adage “how you do anything is how you do everything,” I’ve slowly incorporated many of the lessons in the book into my life and my business has flourished because of it. Submitted by A. Faiola, www.BrambleBerry.com

29. The War of Art: Break through the blocks and win your inner creative battles by Steven Pressfield – Hits head-on so many of the excuses used in small business and how to change and adjust your mindset. Submitted by W. Riggens-Miller, www.wendiriggens.com

30. Think and Grow Rich by Napoleon Hill – (Received numerous amounts of submissions for this book) A must read for solopreneurs and micro business owners. Submitted first by R. Williams, www.greenwaycapitalmanagement.biz

31. To the Rescue: The small business survival guide by Ray Silverstein – How to translate “tighten your belt,” “do more with less” and “think creatively” into specific actions. And what do you do if you are already in trouble. Submitted by J. Levine, www.lekasandlevine.com

BONUS:

Make Today County by John C. Maxwell – Get your personal priorities in order and your business priorities will follow.

Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know by Bonnie Lee – In a conversational tone, tax issues for small business from what you can or cannot deduct to self-employment tax (the big hit that can put even low income entrepreneurs into a 50% tax bracket) to home office, to IRS problem resolution including the formula the IRS uses to determine an acceptable offer in compromise on delinquent tax liabilities (pay pennies on the dollar!) are addressed.

WANT TO RE-POST THIS ARTICLE ON YOUR BLOG OR USE THIS ARTICLE IN YOUR EZINE, E-NEWSLETTER OR WEB SITE? You may, as long as you include this complete blurb with it:

A.Michelle Blakeley is in the listening business. As a Micro Business Therapist, she provides an open-minded and non-judgmental ear to listen to the real issues and concerns that start-up, emerging and women entrepreneurs experience and negotiate solutions through comprehensive discussions and practical micro business plans. She is featured in Forbes.com and the Financial Post as one of 30 Women Entrepreneurs to Follow on Twitter, contributor for the San Francisco Examiner and Fearless Woman Magazine; the host of Simple Truths for Women Entrepreneurs on BlogTalkRadio.com and author of the NEW e-book: “Get it Right and Move Along… a collection of practical tips, tools and techniques for small business owners.”

The economy is swimming madly back to the surface. Yet many folks, especially business owners, are still suffering. A lot of you have delinquent income tax liabilities. And if the amount owed is unmanageable, staggering, you might feel overwhelmed. Perhaps you believe that you will never be able to repay the debt. You fear liens and levies and knocks on the door.

Then one day you hear a radio commercial: Step right up! Pay pennies on the dollar to get rid of your tax liabilities! Sounds good, a miracle answer. A solution is at hand. But if you’re smart, you’re skeptical. Does the IRS really compromise with taxpayers? Will they really let you off the hook that easily? And can these firms who make this claim really help or are they scamming taxpayers out of their money?

The answer is: it depends. In the next several segments, I will educate you on this topic so that you will know whether your offer will fly before paying good money to a professional.

Five years ago, the IRS issued a warning (IR-2004-17) to taxpayers to check carefully before applying for Offers in Compromise. The IRS commissioner at the time, Mark W. Everson said, “This program serves an important purpose for a select group of taxpayers. But we are increasingly concerned about unscrupulous promoters charging excessive fees to taxpayers who have no chance of meeting the program’s requirements. We urge taxpayers to not be duped by high-priced promises.”

As of this writing, the IRS accepts only 24% of all presented offers. Here’s how to determine whether or not you meet the program’s requirements.

First of all, if you are looking to compromise payroll tax liabilities, forget about it! The payroll taxes you failed to pay are considered a “trust” fund. They are made up of the employee’s withholding taxes, which was never your money to begin with. For that reason, the IRS will not compromise. If you have a choice, always pay your payroll tax liabilities before you pay your income tax liabilities. And if you can only pay part of a payroll tax liability, add up the trust fund portion (the withholdings) and pay for those. Be sure to indicate “trust fund-employee withholdings” on the memo line of your check.

Secondly, you need to determine the reason for the compromise request. There are two categories the IRS looks at: 1) Doubt as to collectibility and 2) Doubt as to liability. The first category is obvious – you don’t have the money now nor will you have it by the time the statue of limitations runs. The second category regards innocent spouse issues (my flaky ex owes this, not me!). Or involves changes to your tax return creating a new liability that are the result of an audit or other adjustments. You disagree with the changes but the statute period to prove your case has run out. Most offers in compromise fall under the heading of doubt as to collectibility.

The IRS expects you to pursue other routes before trying for an offer in compromise. If you have room on a credit card, they expect you to use it up to pay them. They want you to tap into family members and friends for loans, or refinance the house (which is probably still swimming madly toward the surface as well). They want you to try for an installment agreement with the IRS. This involves completing IRS form 9465, Request for Installment Agreement, and form 433-A, Collection Information Statement for Wage Earner’s and Self-Employed Individuals. From the data collected here, the IRS will determine if you can comfortably make monthly payments toward your tax liability.

If they decide you cannot afford an installment agreement, they may deem you uncollectible. When that official designation comes down, you will be left alone for an entire year. No collection efforts, no garnishments, no liens, no levies; you enjoy a reprieve. Penalties and interest will continue to accrue, of course. But you won’t have to worry about Roscoe and Vinnie showing up at your door. Once the year is up, they will send you a threatening letter, designed to make you shudder and cry. But don’t be alarmed. It’s spit out from a computer and it’s just their way of getting your attention, of making you respond. Do so. Reevaluate your financial status and go for the installment agreement if you’re able, or get deemed uncollectible again or if it looks like your dire straits will continue unchecked forevermore, consider an offer in compromise.

Stay tuned. In the next segment I will discuss how to complete form 433-A. You might be surprised to find that the IRS has a different take on your finances than you do. If you’re hell bent on getting this information immediately, purchase my book Taxpertise, The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know, available at www.entrepreneurpress.com.

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