Taxes

The 2022 tax season is upon us, and with it comes the typical anxieties that generally go hand-in-hand with dealing with Uncle Sam. Believe it or not, though, the IRS is not always out to get us: In some cases, it creates systems that help consumers recover from financial errors or setbacks.

One such example is known as Innocent Spouse Relief. This is a form of tax relief that can relieve you of your tax liabilities, interest payments, and penalties you may face if you file a joint tax return with a spouse or ex-spouse.

The IRS created this relief mechanism with the underlying justification of fairness: Generally, both spouses are held equally responsible for what they fie on their joint tax returns. However, arguably, it would be unfair to hold both spouses liable for an error made by only one. This is particularly applicable in situations in which the spouses separate or divorce and later, it becomes known that one spouse made an error on a tax filing, resulting in a substantial tax burden for the other spouse.

What Innocent Spouse Relief Does for Taxpayers

In short, Innocent Spouse Relief does three things – or, in other words, has three key benefits for you as a taxpayer.

1. It can relieve you from having to pay taxes, penalties, and interest stemming from a joint tax return that you filed with your spouse or ex-spouse.
2. It can help you avoid tax liability resulting from errors or mistakes that someone else made on your joint tax return.
3. Finally, it can relieve you of a financial burden if, by your spouse or ex-spouse’s fault, you’ve wound up with tax debt.

Types of Innocent Spouse Relief

Generally, both the IRS and some states offer a few different types of innocent spouse relief, namely:

Classic Relief

The most common type of innocent spouse relief, this applies to under-reported tax obligations that result in erroneously applied tax liability.

Relief by Separation

This applies in cases of separation and divorce, in other words, when an understatement of tax is allocated between you and your former spouse.

Equitable Relief

In some cases, relief is available for an understatement of tax as well as an underpayment. This type of relief may apply if someone doesn’t qualify for the first two types of relief but, nonetheless, should not be held liable for tax obligations.

How Do I Qualify for Relief?

Per the IRS, there are a few qualifications for innocent spouse relief:

First, you must have filed a joint tax return with your spouse or ex-spouse.

Second, there must have been some error on your return that resulted in an understatement of your tax liabilities. The IRS refers to these errors as “erroneous items” and in general, they include unreported income (any gross income you or your spouse received that you did NOT report), or incorrect deductions or credits claimed by you or your spouse.

Third, you must establish that at the time you signed the joint return you didn’t know (and had no reason to know) that the tax was understated. The law is unclear on what it means to “have no reason to know,” and different states hold claimants to different standards. For instance, some state laws say that the spouse is not entitled to relief unless he or she has carefully reviewed the tax returns and personally investigated any suspicious sections in it. Others, however, think this standard is too high and apply a looser standard to determining whether someone qualifies for relief. Regardless, while most tax disputes place the burden of proving noncompliance on the IRS, the “lack of knowledge” portion of the rule forces taxpayers to prove that they did not know of the errors – otherwise, they’ll likely be held liable for the tax obligations.

Fourth, considering all the circumstances, it would be unfair to hold you liable for the understatement of tax. The IRS will consider all facts and circumstances in determining whether it’s unfair to hold you liable for the tax obligations. Some factors the IRS will consider include, among others:

• Whether you received a substantial benefit from the understatement of taxable income
• Whether your spouse deserted you
• Whether you and your spouse have been separated or divorced
• Whether you received a benefit on the return from the understatement

Different courts and different states may apply different standards, however, so be sure to consult an experienced tax attorney if you think you may qualify from this type of relief or if the IRS is coming after you for alleged tax obligations.

And finally, you and your spouse (or former spouse) have NOT committed fraud in any way – for instance, by joining in a scheme to defraud the IRS. Fraud will cancel out any right to relief.

Contact The Experienced Tax Attorneys at Wilson Ratledge

If the IRS is after you for a tax debt that started when you filed a joint return with a spouse, and you don’t know what your spouse or ex-spouse did, we can help. The Wilson Ratledge team of experienced tax attorneys can help you gather the right facts, structure them into a valid case, and present evidence to the IRS to prove your statements.

At Wilson Ratledge, the tax controversy attorneys represent taxpayers in disputes with the IRS and the North Carolina Department of Revenue. They regularly handle disputes involving tax liens, audits, and collections, as well as other various aspects of tax controversy and litigation. For assistance, contact one of the experienced North Carolina tax attorneys today at 919-787-7711 or via the contact form below.

North Carolina is a great state to live in. Whether you are an individual who has just moved here or a business owner, some changes to the tax law that you may not be aware of could affect your finances. This blog post will introduce those changes and offer advice on how to adapt after moving to the Old North State.

1. Sales tax

In a move to make the sales tax system fairer, effective October 1st, 2020, North Carolina State Sales and use tax is currently at 4.75% plus an applicable local rate ranging between 6.75% to 7%. Additionally, items or goods at the general rate attract an additional local option sales tax rate capped at a flat rate of 2.25% for all counties in North Carolina.

Under the NC sales tax, goods subject to this levy include physical property, like furniture, home appliances, and motor vehicles. On the other hand, groceries, prescription medicine, gasoline fall, electricity storage, and consumption are sales and use tax exempted. 

Sales Tax on ‘Remote Sales’ in NC is also capped at 4.75%. However, the levy applies if the cumulative sales exceed $100,000. You are also required to charge sales tax if you did 200 or more separate transactions in North Carolina within the tax year understated or the previous year. 

2. Income tax for new NC residents

Under North Carolina law, a person who moves to the State for a “definite term or particular undertaking” and abandons the intent to return to their original state of residence is subject to North Carolina income tax. This provision covers all income earned or derived from any source in North Carolina after all applicable deductions and exemptions. This includes salary, wages, commissions, and self-employment such as business income. The new resident’s income is reported on Form D-400, Part B.

The exemptions under North Carolina law that may affect your tax bracket include retirement income received during the year but did not work in NC all year round, or if you worked fewer than 6 months in the state. You’ll only be taxed on the income earned in NC. Other exemptions include unemployment benefits and qualified military wages earned outside North Carolina.

According to the 2020 Personal Taxes Bulletin, a taxpayer can also take credit for personal income taxes paid to their previous state of residence. However, the amount of the credit cannot exceed the North Carolina tax liability. 

3. State income tax deduction for federal taxes paid

The state income tax deduction for federal taxes paid is limited to $10,750 per individual or $16,125 for the head of household and $21,500 for married taxpayers filing jointly. This restriction applies only to the extent that the taxpayer itemizes deductions on Schedule A (Form D-400). It should also be claimed in the taxable year 2017 and each taxable year after that.

4. NOL carryover deduction

As of June 30th, 2020, Governor Cooper assented into law Session Law 2020-58 House Bill 1080. The new Notice under the State and Federal provisions suspended the 80% NOL carryforward deduction limit until the end of the tax year 2021. This suspension also covers NOLs incurred during the tax years 2018, 2019, and 2020.

For this reason, filers can now carry over NOLs indefinitely without worrying about the 80% limit. This reduces tax liability by allowing the business owners (S-Corps & C Corps) to file for NOL deductions on their personal income tax returns.

5. Corporate income tax

The North Carolina Senate, on June 10th, 2021, passed House Bill 334 with their own amendments. The amended Bill that seeks to reduce the state’s 2.5% corporate income tax, provide a moratorium of three years between 2024-2026 before the rate is reduced by 0.5% and completely phased it out by 2028. This law is meant to attract foreign investments, resulting in job creation and growth for the state’s economy.

Contact Our North Carolina Tax Attorneys

The tax attorneys at Wilson Ratledge can help you navigate all your tax issues. We understand that it can be very complicated or stressful to deal with tax controversies or tax planning. This is why we do all we can to help our clients and ensure that they have nothing to worry about. Contact us today for more help in adjusting to the local tax laws as you continue settling in North Carolina.

Tax season can be one of the most stressful seasons for individuals and business owners. While some may perceive the IRS as always being out to get them, this perception is not based on facts. In some cases, the IRS creates systems aimed at helping the taxpayer recover from tax errors that could otherwise result in hefty fines.

One example of such a system is the innocent spouse relief. Innocent spouse relief is tax relief provided by the IRS to offer individuals relief from the responsibility of paying taxes, accrued interests, and penalties resulting from inaccurate reporting on their taxes by their ex-spouse or current spouse. 

If the IRS is coming after you for underreporting errors made by your spouse or ex-spouse, working with an experienced tax controversy attorney can improve your chances of getting innocent spouse relief. 

Understanding North Carolina’s Innocent Spouse Relief 

If you live in North Carolina with your spouse or if your spouse lives outside North Carolina but has taxable income in North Carolina, you are allowed under the law to file a joint single tax return. By filing a joint tax return with your spouse, you expressly agree to pay all taxes, accrued penalties, and interests due on your joint tax return.

Oftentimes, individuals who file their tax returns jointly with their spouses find themselves being held responsible for the mistakes of their ex-spouses by the IRS.  If you find yourself in such a situation, applying for innocent tax relief can absolve you of the consequences of the mistakes made by your spouse or ex-spouse.

Classification of Innocent Spouse Relief According to the IRS

Innocent spouse relief can be classified into three types:

• Basic innocent spouse relief
• Separation of liability relief
• Equitable relief

1. Basic Innocent Spouse Relief

This type of relief is designed to relieve you of the responsibility of paying taxes, interest, and penalties resulting from the mistakes of your spouse or ex-spouse. This form of relief applies if you can establish that you didn’t know or have reason to know that the filed returns were erroneous.

2. Separation of Liability Relief

Under this form of relief, the taxes, penalties, and interests owed to the IRS are divided equitably between you and your ex-spouse. This type of relief applies if you are no longer married to your spouse and are not living in the same household for 12 or more months, from the date of separation to the date you file for innocent spouse relief.

3. Equitable Relief

If you don’t qualify for either of the two options listed above, you may still apply for innocent spouse relief by electing equitable relief. This option applies if the underreported or unreported item is attributed to your spouse, or the reported tax is correct but wasn’t paid in full with the returns.

Innocent Spouse Relief Application Process

On the IRS website, you will find a questionnaire that can help you determine eligibility for the relief. Alternatively, a tax lawyer can guide you through the process. 

After establishing that you qualify for innocent spouse relief, the next step is correctly filling out Form 8857 and submitting it to the IRS. After submitting the form, the IRS will take time to review your case and contact your spouse before making a determination. 

How the Innocent Spouse Relief Works

After the IRS approves your innocent tax relief, the interests, penalties, and taxes directly related to items on your tax returns that are underreported or unreported items will be collected from your spouse or ex-spouse. However, not all taxes qualify for innocent tax relief. Items such as shared responsibility payments, household employment taxes, business taxes, and penalties on trust fund recovery for employment taxes do not qualify. 

Our Raleigh Tax Controversy Team Can Help

If you are experiencing a tax issue where you may qualify for innocent spouse relief, Wilson Ratledge can help. Our team of experienced tax controversy attorneys can review your situation and help plan the best path forward to help resolve your tax issues. Contact us today to schedule a consultation!

IRS audits are thorough and often result in penalties (and prosecutions in cases of criminal conduct). Consequently, many people are alarmed when they get a letter from the tax man notifying them of an audit of their taxes. 

There is nothing to be worried about if you don’t have anything to hide. However, it is still important to prepare properly for the audit to expedite the process and avoid harsh consequences. Here is a brief guide on what to do if the IRS is auditing you. 

Know What to Expect 

One of the first questions that will pop up in your mind when you receive the audit notification is, “what will happen now?” It’s easy to start to worry about worst case scenarios – instead, conduct quick research to familiarize yourself with IRS tax audits. 

Start by reading the audit letter from the IRS carefully. The letter will contain important information regarding the audit, including:  

• Why you have been selected for the audit 
• The steps to take to comply with the audit 
• The deadline for complying with the request 

It is important to find out how the IRS intends to conduct the audit. The IRS can take one of three approaches: 

• Correspondence audit (by mail)
• An office or desk audit (at the local IRS offices)
• A field audit (in person at your home or business) 

Finally, don’t hesitate to ask as many questions as you may have regarding the process and why you were selected for the audit. Ensure that you get your information from trustworthy sources to avoid potentially costly confusion. 

Prepare Your Responses & All Relevant Documents 

The IRS will include instructions in the notification letter on what to do to comply with the audit. These instructions mostly entail providing the IRS agents with receipts and other financial documents relevant to the audit process. 

Some of the common documents required in an IRS audit include: 

• Bills 
• Receipts 
• Bank statements 
• Copies of old tax returns 
• Tickets 
• Canceled checks 
• Medical records 
• Loan agreements 

Please ensure that these documents are authentic and up to date. Whether you’re being audited or not, it is a good idea to properly store and retain your financial records and documents in preparation for situations such as these. 

It is important to comply with these requests on time to expedite the process and avoid harsh penalties – don’t hesitate to request a postponement to collect and organize all of the requested documents. Additionally, it is advisable to avoid providing more documents than requested (some people do this to try to prove their innocence), as this may send the auditor looking for more errors.

Hire a Tax Attorney 

The IRS uses complex algorithms to identify potentially fraudulent practices that warrant an audit. Additionally, tax law and calculations are just as complex – often too complex for the ordinary person to follow. It is easy to make mistakes that warrant harsh penalties, such as expensive fines and prosecution (with the potential for serving time in jail in some of the worse cases). 

Many times, it is advisable to hire a tax attorney familiar with these types of proceedings before starting correspondence with the IRS. Tax attorneys are intimately familiar with tax law, and so your attorney will do their best to shield you from unfair treatment from the IRS. Other benefits of hiring a tax attorney include: 

• Helping you find and prepare all documents requested by the IRS 
• Reducing the risk and severity of tax liabilities, penalties, and other charges resulting from the audit 
• Defending you against allegations of wrongdoing and filing an appeal when necessary 

It is especially important to hire a tax attorney if the audit will be held at the local IRS office or at your home or workplace, or if you often engage in large and complex financial transactions.

Wilson Ratledge has helped clients of all sizes with tax audits and other tax controversy situations with the IRS – call us today at 919-787-7711 today to schedule a consultation!

The tax season can be a challenge for most businesses and individuals. Filing taxes is a daunting task, especially if you are unsure of what to include. It’s therefore essential to get the right help when you find yourself in this position.

The two most popular options are a Certified Public Accountant (CPA) or a tax attorney. However, it can be challenging to know if a CPA or a tax attorney is the right choice. The right choice depends on your goals, unique needs, and your status with the Internal Revenue Service.

Hiring the right professional is crucial to ensure you don’t fall behind with tax filing and payments for your North Carolina business. Read on to learn the difference between a tax attorney and a CPA and who best suits your case.

Tax Attorney

A tax attorney is an expert in legal matters related to filing taxes. They understand the ins and outs of the IRS tax code and can help you with anything from developing a plan for your business taxes to representing you in court.

Tax attorneys offer business guidance and represent you in legal matters like audits and disputes with the IRS and other federal tax authorities. They can provide advice and guidance on complicated legal issues, including estate planning, tax disputes, business law, and trusts. Just as most other attorneys specialize in working with certain types of clients, tax attorneys can specialize in certain verticals or types of clients, so make sure the tax attorney you choose is a good fit for your organization.

One common skill between tax attorneys is expertise in dispute resolution. Tax lawyers undergo years of training to help you go up against federal tax authorities like the IRS during adverse tax actions. Although most are skilled in dispute resolution, if you are in a tax controversy situation, it’s important to find an attorney that specifically works in that area like Wilson Ratledge.

The following are various reasons why you may need to consult a tax attorney:

• Criminal tax investigation and defense
• IRS tax audits
• International business transactions
• When starting a business and require legal guidance on the tax treatment and your company structure
• You have a lawsuit against the IRS

Certified Public Accountant

Unlike tax attorneys, CPAs are educated in maintaining business and financial records. They help you avoid tax filing problems while tax attorneys work to help you straighten problems that have already occurred.

CPAs help you follow the tax code, file and correct your tax returns. They know how to abide by federal laws and will help you maximize your tax benefits while lowering your tax liability.

It’s essential to develop a strong relationship with a CPA, especially when you have a large amount of money coming in and out.

You need a CPA in the following situations:

• Filing taxes
• Managing payroll
• Creating financial risk management strategies
• Undergoing an IRS audit
• Finding tax credits and deductions, you qualify for
• Acquiring, merging, or selling a business
• Determining the proper business structure
• Choosing between accrual or cash accounting
• You need help figuring out a long-term tax plan

Do You Need a Tax Attorney or CPA?

If you still are unsure whether you need a tax attorney or CPA, consider your tax situation. If you have complicated business or personal taxes and want to minimize tax liability, hire a CPA. If you are in trouble with the IRS or dealing with a tax controversy issue, a tax attorney is your best fit. Remember, don’t hire a tax attorney when you need a CPA. This will create more trouble and will cost you more than it would initially.

A tax attorney will help you in tax planning to minimize your tax liability by structuring your assets. If you only need help with tax preparation and filing and have no trouble with the IRS, consider hiring a CPA.

Confused and Overwhelmed? Wilson Ratledge Can Help

Taxes can be daunting. Understanding your tax situation will help you choose between a tax attorney and a CPA. While tax lawyers provide legal advice, CPAs help you in tax preparation and avoid tax filing problems. If you have an overwhelming tax situation that you don’t understand, contact Wilson Ratledge today to schedule a consultation.

The Paycheck Protection Program (PPP) is one of the ways the United States government helped small businesses during the pandemic. In 2020 alone, the program distributed over $500 billion in loans. Businesses that were struggling because of the COVID-19 pandemic had the option of using the Paycheck Protection Program.

The PPP loan was, therefore, the most popular way for small businesses to recover. There is no doubt that the PPP loan has been helpful for small businesses, but its tax implications have been confusing for most business owners. If you are wondering how the PPP programs work and if a PPP loan is taxable in North Carolina, then continue reading.

How do PPP loans work?

The Paycheck Protection Program (PPP) is one of the relief measures in the Coronavirus Aid, Relief, and Economics Security Act (CARES Act). The PPP loan program has been authorized to provide billions in forgivable loans to small businesses. The main aim of the PPP loan is to ensure employees remain on the payroll and fill gaps in mortgage interest, rent, supplier costs, and other related expenses.

The PPP was meant to assist both nonprofit and for-profit organizations to maintain their payroll during the COVID-19 crisis and to keep the economy afloat. Under the PPP program, the Small Business Administration (SBA) provides federally insured loans for the covered expenses. 

How to get PPP loan forgiveness

You would benefit from the loan forgiveness if your business meets the eligibility requirements. If you had a PPP loan, it can be forgiven as long as you have used 60% of the loan on employee payroll costs. You are allowed to use the other 40% on rent obligations, mortgage interest, utility costs, supplier costs on essential goods, and personal protective equipment.

Forgiveness of the PPP loan is based on your continuing to pay your workers at the normal levels for eight to 24 weeks after getting the loan. If you are seeking PPP loan forgiveness, you have to fill in the applications and submit them to the private lender where you got the loan. 

Are PPP loans taxable in North Carolina?

After the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) was passed into law, forgiven PPP loans are tax-exempt and not considered part of the taxable income. At the federal level, the forgiven PPP loans are tax-free, which is different from how such loans are normally treated. If your business received the Paycheck Protection Program (PPP) loan, it’s not considered income for federal income tax purposes. The expenses covered by using the PPP loan are also deductible under federal tax purposes.

Traditionally, that was not the case at the state level. In North Carolina, prior to June 2020, you would have to pay tax on forgiven loan proceeds.

The state, however, has taken steps to address the issue of forgiven PPP loans being taxable. North Carolina’s governor, Roy Cooper, signed House Bill 1080 to incorporate loan forgiveness under section 1106 of the CARES Act. Under the new Bill, North Carolina will improve cash flow for organizations that have been impacted by the pandemic. Therefore, North Carolina now joins the list of states that have to provide tax relief for small businesses with PPP loans.

Contact Our North Carolina Tax Attorneys

If you have questions about loan forgiveness or other business tax-related issues, contact our North Carolina tax attorneys today – call us at 919-816-2683 or fill out our online contact form to schedule a consultation with our team.