Raleigh Estate Planning and Corporate Law Attorneys

Taxes

Offers In Compromise And How They Help With Tax Debt

By

It can feel a little overwhelming when you owe the Internal Revenue Service (IRS) or the North Carolina Department of Revenue (NCDOR) money. The IRS is one of the few entities to have inordinate power to reclaim funds owed, including placing a lien on your bank accounts, home, and businesses.

You may find that they’ve garnished your wages, reducing your paycheck. They can also seize items of value, sell them, and use the proceeds to pay off your debt. Yes, there is good reason to worry when you owe money to the IRS. However, an offer in compromise might help you settle the debt. This guide can help you understand your options.

What is an Offer in Compromise?

With an offer in compromise, you’re able to settle your tax debt by paying a lower amount than you owe. The IRS accepts an offer in compromise when it’s an amount that they can reasonably expect to recoup over a reasonable amount of time even though it isn’t the full amount. 

When deciding whether to accept an offer in compromise, the IRS and NCDOR consider several things about your unique circumstances, including:

  • Income
  • Living and other expenses
  • Equity available in assets
  • Ability to pay the amount owed

If you qualify for an offer in compromise, you can lower your tax bill and get out of debt. There are a few basic requirements to even begin to be considered eligible. These include:

  • You can’t currently be in bankruptcy.
  • You need to have filed all of your most recent tax returns.
  • You need to have made some estimated tax payments.
  •  If you’ve filed for an extension for the current year’s tax return, it isn’t considered. 

When you file an offer in compromise, it’s important to have a tax attorney on your side to help you navigate the procedure. The application requires a fee to process and might require a payment on your current debt. Here’s a look at the most commonly asked questions:

FAQs

If the IRS accepts my offer in compromise, do I need to pay back all the money at one time? 

No, the IRS will accept either a lump sum or monthly payments. However, if you opt for monthly payments, make sure you don’t miss any. When the NCDOR accepts an offer in compromise, you must pay the full amount minus any payment you made with the application within 30 days. 

While the offer in compromise is considered, will interest continue to accrue on my account?

Yes, both the IRS and NCDOR debts will continue to accrue interest while your offer is considered. 

How much money should I offer? Is there a percentage or formula?

No, there isn’t a set percentage or formula that the IRS and NCDOR use to determine if the offer is reasonable. You need to determine how much you can afford to pay based on your income, assets, and expenses. If the offer is too low and gets denied, you can always reapply with a larger offer. 

What happens if my offer in compromise is declined? 

If you filed the offer in compromise with the IRS, you have 30 days to appeal the decision. You can even file an application for a new offer in compromise. The NCDOR doesn’t offer an appeals process, and the decision is final. However, the NCDOR can make a counter offer that you can either accept or reject. 

An offer in compromise is a legal way to lower your debt to the IRS and the NCDOR, so you can repay it and escape any liens placed on your property. It’s a complicated application process, and you’ll need to provide financial documentation.

If you have questions about the offer in compromise process, contact our North Carolina tax attorneys today – call us at 919-787-7711 or fill out our online contact form to schedule a consultation with our team.

What Is An “Offer In Compromise?”

By

irs-tax-lien

IRS tax debts can be a source of frustration, uncertainty and stress. If you’re facing a tax burden that you can’t pay, an Offer in Compromise may be one way to settle your debts. When the IRS accepts your offer, the Offer in Compromise is one way that you can resolve your overdue taxes with the IRS and get a fresh start. 

What is an Offer in Compromise?

An Officer in Compromise is a tax relief program of the Internal Revenue Service that resolves an outstanding tax liability for less than the entire amount due. The IRS allows qualifying taxpayers to make an offer to settle their entire tax debt for a fraction of the total debt. The goal of the Offer in Compromise program is to collect at least some of the outstanding tax debts while giving the taxpayer the opportunity to become current on their obligations to the United States government. 

How does an Offer in Compromise work?

An Officer in Compromise occurs when a tax debtor makes an offer to the IRS to pay a portion of their outstanding tax debt. IRS representatives decide whether to accept the offer or reject it. There are requirements for all offers and guidelines for whether the IRS can accept the offer. If the IRS accepts the offer, the debtor pays the taxes according to the settlement agreement. The remaining debts are discharged and the debtor once again returns to paying taxes according to U.S. tax law. 

Is an Offer in Compromise right for me?

Whether an Offer in Compromise is right for you depends on your tax liabilities, the likelihood of the IRS accepting your offer and your ability to pay according to the terms of the offer. The IRS accepts about 40 percent of the offers they receive. Because there’s a downpayment that goes along with making an offer, it’s critical to make an offer that the IRS is likely to accept. An Offer in Compromise may be right for you if you’re unable to pay your tax liability and you can make a reasonable offer according to IRS guidelines. 

Why would the IRS accept an Offer in Compromise?

It may seem like the Offer in Compromise program isn’t a good deal for the government. If the taxpayer owes the entire tax debt, it may seem more logical for IRS agents to continue to try and collect the debt. There are several reasons why the IRS participates in the OIC program. 

It’s more advantageous for the IRS to collect the debt quickly. Even if they collect a lower amount, it may be worth it to the IRS to have the money now instead of later. The longer the debt drags on, the less likely the government is to collect anything at all. In some circumstances, IRS agents believe that it’s better to get less now than risk collecting nothing at all. 

Why should I make an Offer in Compromise?

An Offer in Compromise can help you in multiple ways. If you’re unable to pay your tax debt, an OIC can help you resolve the issue with the IRS for an affordable amount. Also, while an OIC is under consideration with the IRS, the IRS stops garnishments and temporarily ceases asset seizure proceedings. It may be advantageous to you as a debtor to stop garnishments and make payments under the terms of the OIC. An experienced tax attorney can help you determine if it’s in your best interests to make an offer. 

How do I make an Offer in Compromise?

There are two ways to make an Offer in Compromise. The first way is to make a lump sum payment. With a lump sum payment, you pay 100 percent of the offered amount within five months. You must also make a 20 percent down payment when you make the offer. 

The other type of OIC is an offer for periodic payments. If you offer to make periodic payments, you must pay within 24 months of the IRS accepting the offer. You must make the first payment with the application. 

To determine what amount you have to pay, the IRS looks at how much they’re likely to collect if they continue to try and collect the entire tax liability. If the IRS finds that you can pay your debt in full, they’re unlikely to agree to a settlement. The amount that the IRS believes you can pay depends on your assets and your disposable income. 

The IRS calculates the value of your assets based on what they’re worth if they’re sold quickly. They also factor in your disposable income to determine what’s called your net realizable value. If you make an offer that’s at least as much as your net realizable value, there’s a good chance that the IRS is going to approve the offer. 

Am I eligible to make an Offer in Compromise?

You’re eligible to make an offer in compromise if several conditions are true: 

  • There’s an outstanding tax bill
  • It’s an economic hardship to require you to pay the full amount or there’s a doubt about the validity of the full amount
  • You file all of the required tax returns
  • Estimated tax payments are up to date if you’re self-employed or own a business
  • If you’re a business owner, payments are up to date for employees
  • There’s not a pending bankruptcy proceeding

How can I make an Offer in Compromise successful?

If you’re considering making an Offer in Compromise, it’s critical to make a payment that’s realistic based on IRS guidelines. You want your offer to be the lowest amount that the IRS is going to accept. An experienced estate planning attorney can help you determine if an Officer in Compromise is in your best interests. They can also help you understand how it can benefit you and what steps you need to take to make your offer successful.

8 Ways To Avoid Tax Surprises In 2019

By

2018 tax changes

The U.S. government quietly overhauled the tax code with the Tax Cuts and Job Act. They passed the law in 2017, and big changes apply to taxes for the 2018 tax year, the 2019 tax year and beyond. The tax changes are big, and most taxpayers are going to notice when they begin to prepare their 2018 taxes.

What are the U.S. tax changes in 2018?

The 2018 U.S. tax changes increase the standard deduction. At the same time, the changes reduce the things that people can claim as itemized deductions. The net effect is going to be that fewer people itemize their deductions and just take the standardized deduction instead. There are changes to withholdings and changes to the percentage rates of certain tax brackets.

How do I prepare for the 2018 tax changes?

With a little bit of advance planning, you can be ready for the 2018 tax changes. You may not realize how big the tax changes are until you begin to work on your 2018 taxes. If you don’t make adjustments, you might be in for a good – or bad – surprise come tax time. Of course, with some planning, you can avoid tax surprises in 2019. Here are 8 ways to avoid tax surprises in 2019:

1. Review your withholdings for 2018

The best way to avoid a surprise tax bill in 2018 is to review your withholdings. Your withholdings are the amount that your employer keeps from your pay and sends directly to the IRS. If your taxes are going up with the proposed changes, you want to make sure that you adjust your tax withholdings so that you’re taking out enough from each paycheck.

Of course, whether you need to increase your withholdings or you can rest easy depends on an estimate of your overall tax liability. Even with changes that drastically reduce things that you can deduct, many people are going to pay less in taxes overall than they did before. On the other hand, if you’re on the losing end of the changes, you might have to write Uncle Sam a check. A mid-year review of your withholdings can prevent you from having April 15, 2019 come with financial setbacks.

2. Stay on top of standardized deductions

The old tax code had both standardized deductions and personalized exemptions. Standardized deductions are the amount that taxpayers can deduct from their income. Exemptions are an amount of income for each person that’s exempt from taxes.

Under the new tax code, standardized deductions are up, and personal exemptions are out. The new tax code increases the standardized deduction to $12,000 for one person and $24,000 for a couple filing jointly. That’s a big increase over the prior standardized deductions. At the same time, personal exemptions are completely eliminated for everyone.

Fewer people qualify to itemize their deductions under the new tax code. If you’re going to make the jump from itemized deductions to standardized deductions, it’s helpful to know ahead of time so that you can go about your business accordingly. It’s also important to know what expenses are no longer deductible from income.

3. Cap on state and local taxes

If you don’t look twice, you may get a big surprise when you find out that the new tax code caps state and local taxes at $10,000. For families who pay property taxes, they may quickly reach the ceiling. Before, property taxes may have just been seen as par for the course, but now, there’s even more incentive to fight your property tax assessment and lower that local tax bill.

4. Elimination of unreimbursed employee expenses

Most people put at least some of their own money into their work even if they’re an employee. If you’re a teacher, you buy supplies. If you’re an office manager, you might pick up a ream of paper in an emergency. Under the old tax code, employees could deduct unreimbursed business expenses. In the new code, that’s no longer the case. If you pay significant amounts of your own income towards your job, now is the time to renegotiate reimbursements or a pay raise to cover the cost.

You may have a rough time paying the tax bill when you find that the new code doesn’t allow for employee expenses. Teachers may still deduct a limited amount for classroom expenses. In addition, business expenses are still deductible.

5. Make charitable changes

Americans are among the most generous people on earth. With the new tax changes, you may get more bang for your charitable buck by grouping your charitable donations into the same year. For example, you can make twice the deductions in 2019 and then give nothing in 2020. That way, you can take itemized deductions in one year instead of falling into the standardized deduction category two years in a row. The amount of income that you can deduct for charitable contributions increases under the new tax code.

6. Make charity pay with IRA giving

One way to avoid the sting of the new tax code is to give to charity from your IRA. Giving contributions directly from the IRA to the charity lets you avoid counting the IRA withdrawal as income only to take a standardized deduction that doesn’t account for your charitable gift.

7. Your home is no longer an office

People work at home these days more than ever before. Unfortunately, if you’re an employee, you can no longer claim a deduction for your home office. If you’re self-employed, the home office is still a deduction. For everyone else, home is only home from now on.

8. Child tax credits are going to increase

The child tax credits are better for everyone under the new plan. The credits are higher, the maximum income to qualify is higher and even the definition of who is a qualifying child has expanded. The good thing about the child tax credit is that it’s a direct deduction from your tax liability and not a deduction from your taxable income. It’s a straight credit of the dollars you owe in taxes. Under the new tax code, $1,400 of the child tax credit is refundable, so it can even put dollars in your pocket.

Planning to avoid tax surprises in 2018

Paying taxes is never fun. There are a lot of changes in 2018 and again in 2019. The right planning can help you avoid surprises and use the new tax code to your advantage. The professionals at Wilson Ratledge can help examine your case in order to structure your personal and business taxes in the best way possible.

What Business Owners Need To Know About The 2018 Tax Law Changes

By

2018 will see the first significant tax reform since 1986. This reform affects everything in the economy as well as everyone in the country. The ways it will affect individuals, couples, corporations and small business owners will vary, but everyone will see changes in 2018.

The Tax Cuts and Jobs Act is a tax reform bill that will provide tax cuts for both corporations and small business owners and will restore some tax benefits to individuals. This tax reform will not affect 2017 taxes, and some provisions in the final tax bill will remain until 2025.

70 percent of Americans claim a standard deduction when filing taxes and they will see slight increases in income with the 2018 tax reform bill, which is still being fleshed out as of January. Many people are unaware how their taxes are calculated and what deductions mean for them. Businesses have a different set of tax codes and many businesses employ the expertise of an experienced tax attorney to ensure their business taxes are properly calculated and paid.

What The Tax Cuts and Jobs Act means for business owners is substantial. The new tax reform changes both tax brackets and income ranges. The IRS has published an announcement which lists many new provisions, some of which are unrelated to the new reform bill. Individuals, as well as business owners, will see these changes in the 2018 tax year.

Some of the reform’s changes which will affect business owners in 2018 include:

  • Lowers the tax burden on pass-through businesses (owners of a business who pay taxes on income derived from that business on their personal income tax returns)
    Small business owners can start deducting 20 percent of their qualified business income in 2018 whether that is a sole proprietorship, partnership or S corporation which already sees lower taxes. There are some limits such as a limit of $157,500 individually claimed and a $315,000 limit of jointly claimed income.
  • The tax reform includes a rule to prevent abuse of the pass-through tax break
    If a partner in a pass-through also earns a salary from the jointly-owned business, their income would be subject to regular income tax rates. To prevent people from claiming their salary income as a business profit in order to take advantage of the pass-through deduction, the bill places limits on how much income qualifies for the deduction.
  • Territorial tax system
    U.S. corporations are required to pay U.S. taxes on profits they have earned abroad, The new system will end the double taxation and they will pay one tax.
  • Repatriation of foreign assets
    Many corporations and businesses hold assets abroad. U.S. Corporations have approximately $2.5 trillion in foreign profits. The new tax reform bill provides an incentive to bring these assets back to the U.S., assessing a one-time repatriation rate of 15.5 percent on cash and equivalent assets and 8 percent on liquid assets over a period of 8 years.
  • Dividend Reduction and Net Losses
    The reform bill reduces 80 percent deductions on dividends received to 65 percent deductions, and 70 percent deductions on dividends received to 50 percent deductions. The reform also limits the deduction for net operating loss carryovers up to 80 percent of the business’s taxable income.

If you are a small business owner, you may want to consult one of our experienced tax attorneys regarding these new changes for what they may mean for you both individually and as a business owner. We can help interpret the tax law as it applies to your situation, and help you navigate your way through the changes.

Gifting, Taxes, and Long Term Care

By

One of the more common concepts that clients get confused about is taxes on gifts to children or grandchildren, and how it all works together when you’re thinking about planning for Medicaid or long-term care.  This normally happens with our older clients who are getting to a point where paying for care is a concern.  The conversation normally goes something like this:

Client: “I want to give my kids $50,000.00 each.  I know I can give some amount away each year to my kids and the government won’t count it, right?”

Me: “You’re allowed to give $14,000 to an individual without incurring any gift tax liability.”

Client: “So they can’t come back and get it if I need to go into the nursing home?”

And this is where the confusion begins.  Many clients confuse the rules related to taxes on gifts with the rules related to gifts related to the Medicaid lookback, or they assume that one rule covers everything.  Unfortunately, this isn’t the case.

The website “The Motley Fool” has a good, succinct article about when a person should consider making gifts to heirs.  The article, which can be found here, has as straightforward an explanation of gifts and taxes as I’ve seen.  It also raises a good point, namely, have you considered how you are going to pay for long-term care after you’ve made these gifts?

The important points to remember are:

  1. Gifts made for tax purposes are not always protected from the Medicaid lookback rules, if such gifts are made within five years of applying for Medicaid assistance.  This five year period is also called the “lookback” period, and it is what it says.  Social Services is looking back through your financial history to determine whether you have made gifts of assets that should have instead been used to pay for your long-term care.  There are certain situations in which you may be able to overcome this presumption, but the safe rule of thumb is that Social Services will count those gifts against you.
  2. If you have your cost of care covered, either with long-term care insurance, or with other assets, remember to take into consideration the assets you are gifting.  Gifts of stocks or real property can result in adverse tax consequences down the road for the recipient.  Why?  Because generally speaking, gifts during the life of the donor (donor is the person making the gift) retain the basis of the donor in the hands of the donee (the person receiving the gift).  In English?  OK, OK.  Let’s say I bought 5,000 shares of stock in ABC Corporation for $1.00 each 20 years ago.  My basis in these shares is $5,000.00.  If today they are worth $10.00 per share, and I sold them, I would have a taxable gain of $45,000.00.

If I give the shares away to my sister when they are worth $10.00 per share, my sister’s basis would not be $50,000.00, it would be what I paid for them: $5,000.00, meaning that if my sister were to sell the shares, she would be taxed on the $45,000.00.

If I retained my shares, and gave them to my sister via my Will when I died, she would receive the shares with the basis “stepped up” to the value of the shares the day I died.  So if when I died, the shares were worth $100 per share, my sister’s basis would be $100 per share.  If she sold the stock that same day, she would owe no taxes on the money received from the sale.

So what does this mean?  If you’re going to make gifts, think about the type of asset you’re giving.  If it’s something you didn’t pay much for but is worth an awful lot now, consider holding onto that asset and passing it at death, or consulting with us regarding better ways to plan for tax consequences.

Where does this tie in with the Medicaid lookback rules?  If you’re worried about protecting assets for long-term care and/or Medicaid eligibility, but want to make sure that your beneficiaries retain the advantages of a stepped-up basis in the asset, consider estate planning that will do both.  There are several different ways to ensure that assets will not be subject to estate recovery should you need Medicaid assistance, while retaining the step-up in basis provided by an on-death transfer.  Irrevocable trusts and gift deeds reserving life estate are one common way of doing this, but it needs to be done properly, and it needs to be part of an overall plan that will leave you with the assets you need and access you need to be able to live comfortably during retirement.

If you have questions about these issues, or need advice about planning for long-term care, talk to an attorney who deals specifically with these matters.

IRS Raises Tangible Property Expensing Threshold to $2,500 For Small Businesses

By

The Internal Revenue Service today simplified the paperwork and recordkeeping requirements for small businesses by raising the safe harbor threshold from $500 to $2,500 for deducting certain capital items.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.

“We received many thoughtful comments from taxpayers, their representatives and the professional tax community”, said IRS Commissioner John Koskinen. “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.”

Responding to a February comment request, the IRS received more than 150 letters from businesses and their representatives suggesting an increase in the threshold. Commenters noted that the existing $500 threshold was too low to effectively reduce administrative burden on small business. Moreover, the cost of many commonly expensed items such as tablet-style personal computers, smart phones, and machinery and equipment parts typically surpass the $500 threshold.

As before, businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold.

The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.

For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000. Further details on this change can be found in Notice 2015-82, posted today on IRS.gov.

For any questions about your specific tax situation, call one of our tax planning experts at 919-787-7711 or contact us online to schedule a consultation.