The Complete Tax Guide To Charitable Donations

by Dave Horwedel | Oct 1, 2020 | Tax Blog

Is the Obamacare Tax Penalty Dead?

by Dave Horwedel | Sep 28, 2020 | Tax Blog

As a practical matter the Affordable Care Tax Penalty is dead. Legally it still exists and is the law of the land, but if the taxpayer does not wish to pay the penalty, he does not have to.

How does this work? How did it happen?

When Obamacare was launched on March 23, 2010, one of its features was it would start penalizing taxpayers for not having minimal essential health coverage. These penalties were phased in and then increased on a gradient over time.

The tool to enforce the penalty was the IRS. Taxpayers would report on their individual tax return whether they had health care coverage or not. The IRS also has been requiring that tax professionals file their clients returns electronically. So tax professionals have been using various large software companies such as Intuit to prepare tax returns and file them electronically. Now, the individual tax preparer, when filling out the tax return, was required to answer the health care question. If he did not answer the question, it would show up as an error on the tax return. And it would block electronic filing.

So the tax professional, or individual doing his own taxes with a program like TurboTax, would be forced to answer the question, and the computer software would generate the ACA Penalty Tax and it would be part of the tax return that was filed electronically with the IRS.

Then on January 20, 2017, Donald Trump issued an executive order re the Affordable Care Act which directed federal agencies to exercise authority and discretion available to them to reduce potential burden. Consistent with that, the IRS has decided to make changes that would continue to allow electronic and paper returns to be accepted for processing in instances where a taxpayer doesn’t indicate their coverage status.

Well, OK. But has anything changed. Not yet, but …

If the IRS had not earlier mandated that electronic and paper returns answered the Health Care question, then who had???

How were these health care questions being forced to be answered?

It was because the tax software companies were requiring the questions to be answered to get the tax return filed. If the ACA question was not answered, the program would flash an error message and the electronic filing of the tax return would be blocked. And so the individual taxpayer filling out his tax return on-line or the tax professional doing the same thing with his computer program were complying not to the IRS, but to a tax software program.

And now, on February 18, 2017, the true masters have spoken from the top of Mount Intuit. The following communication was sent to me by Intuit ProSeries, which is an advanced Intuit tax software program for tax professionals, sort of a TurboTax on steroids. Intuit is probably the top tax software firm. Here is what Intuit ProSeries decreed:

“The IRS has announced that it is currently reviewing the Jan. 20, 2017 executive order to determine the implications to the Affordable Care Act and the tax filing seasons.The recent executive order directed federal agencies to exercise authority and discretion available to them to reduce potential burden. Consistent with that, the IRS has decided to make changes that would continue to allow electronic and paper returns to be accepted for processing in instances where a taxpayer doesn’t indicate their coverage status.In compliance with this and to reduce taxpayer burden, in a March 2nd software update, ProSeries will begin permitting individual income tax returns to be filed electronically without indicating if the taxpayers had health care coverage last year.”

What does this mean?? Well, as near as I can figure out, it means intuit has abandoned enforcing the ACA Penalty. Donald Trump started the ball rolling with an executive order. The IRS canceled plans to mandate compulsory answering of ACA question in 2017. Intuit killed off the ACA penalty with a software modification.

If taxpayers do not answer the question and admit to no health care, how do they get penalized???

This is good news for those who would otherwise be paying the penalty, and perhaps bad news for those who would have liked to use these penalties to fund and enforce the Affordable Care Act.

If you have any questions or comments about this article or your own tax situation, feel free to contact me at Torchlight Tax using social media, email or phone.

In closing, I ask you this. Who is running this country??

What to do?

If you have any questions or need any tax assistance contact Torchlight Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.

SAVE MONEY BY DOING YOUR TAXES THE RIGHT WAY!

How to File an Amended Tax Return

by Dave Horwedel | Sep 28, 2020 | Tax Blog

What is Self-Employment Tax?

by Dave Horwedel | Sep 28, 2020 | Tax Blog

If you’re self-employed, you pay the self-employment tax on your income. This tax applies to sole proprietors, partners, or LLC members. It does not apply to Corporations.

The self-employment tax is the government’s way of collecting Social Security and Medicare taxes from your self-employment income. Tax owed is in addition to any income tax. In 2016, the Social Security tax is 12.4 percent on the first $118,500 in wages. The Medicare Tax is 2.9 percent on all your income – there is no ceiling. An additional .9 percent is charged on your income over $200,000 ($250.000 if married filing jointly).

If you’re an employee, a portion of your wages is hit with a Social Security tax. In general, half of these federal employment taxes are withheld from your paychecks while the other half gets paid by your employer. However, you pay the extra 0.9 percent Medicare tax if you are a high earner. Your employer doesn’t owe any part of this.

What you pay in self-employment taxes is likely to increase. As the Social Security tax ceiling increases to account for inflation, more and more of your income will be subject to the 12.4 percent Social Security tax.

Thus, we are looking at a 15.3% tax on most people’s income. It is not as obvious for the employee. For the self-employed individual, the 15.3 % tax can be VERY obvious come tax time, especially if he did not plan or set aside for it. Please note there is no “standard deduction” or “exemption” on self-employment income. The tax starts on your first dollar of net self-employment income.

Joining the ranks of the self-employed can be pretty heady stuff. Increased independence. No boss to report to. No fixed ceiling on your income. The opportunity to create a business you are proud of.

What to do?

If you have any questions or need any tax assistance contact Torchlight Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.

SAVE MONEY BY DOING YOUR TAXES THE RIGHT WAY!

What is an Enrolled Agent & Do I need one?

by Dave Horwedel | Sep 28, 2020 | Tax Blog

“An enrolled agent (or EA) is a federally authorized tax practitioner empowered by the U.S. Department of the Treasury to taxpayers before the Internal Revenue Service (IRS). Enrolled agent status is the highest credential awarded by the IRS.” Enrolled agent – Wikipedia, the free encyclopedia

“An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years.

Enrolled agents, like attorneys and certified public accountants (CPAs), have unlimited practice rights. This means they are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before.” — Internal Revenue Service

Do you need an enrolled agent?

f you were going to court and were potentially liable for tens of thousands of dollars or even jail, would you hire an attorney? Or would you represent yourself?

If you had to prepare documents that would determine if you were owed thousands of dollars, or had to pay out thousands of dollars, would you have an expert prepare them or at least review them? Or would you go it alone and hope for the best?

If someone was billing you and demanding payment, and you disagreed with the amount or payment terms, would you only ask them how to sort it out, or would you seek independent informed counsel?

The above questions are analogies as to why you may need an enrolled agent. You would not go to court with the potential of tens of of thousands of dollars loss without an attorney who knows the ropes to advise you and protect your rights. You would not represent yourself in an important court case unless you were a legal expert. You should not go before the IRS without an Enrolled Agent to advise you and protect your rights. You should not represent yourself before the IRS if the matter is serious and you are not a tax expert. But people do this all the time with the IRS. It is not a matter of the IRS being evil. It is matter of the person not being represented by someone who knows the rules.

I will give you a real-life example. One retired gentleman came to see me. He had enter into an instalment agreement to pay off an 8 year old debt with penalties and interest to the IRS. It is true that he had incurred a legitimate debt. He had sold a business and not paid the IRS their due. After a near brush with death and months of hospitalization, he invested his business sale savings into renovating his home for sale. He fully and expected to sell the house and pay off the IRS with plenty of money to spare. Disaster struck in a septic tank failure. The house became unsalable. He lost the house and all his savings. He had no money to pay the IRS what he owed them.

Eight years later, an IRS representative convinced him he had to enter into an Instalment Agreement–that he had no choice. He came to me with a problem as to how he would survive while making this payment. His only income was Social Security, and with the IRS monthly payment, he could not pay the rent for his small apartment, food, utilities, medical and life basics. Being in his late 70s, going back to work was not a realistic option. I had him sign an IRS Form 2848 Power of Attorney so I could represent him before the IRS. I knew what he did not know and the IRS had not told him. His income was below the level that the IRS, by their own regulations and the laws of this country, could collect. He had no property they could legally seize. So his debt goes into un-collectible status, and he continues to live modestly but in reasonable comfort and security. In two years, the debt disappears forever as the 10 year IRS Statute of Limitations is up. (And I feel good and sleep well, because I helped a nice old guy–who had paid plenty of taxes in his decades of work– live out his life in reasonable comfort and dignity.)

Another Real Example

Another friend, with a large tax bill unpaid from 8 years before, wanted to settle with the IRS. I told her to get me certain data. She did not call me back with the data. She called the IRS and asked for help. They recommended an Offer In Compromise. When I talked to her next, she was all set to do an offer and compromise and did not think she needed assistance. Maybe not. But the IRS had not explained to her that by the Statute of Limitations her bill was about to disappear.

Let me expand on this analogy. You are driving on a dark night going downhill, sober, not speeding and your brakes fail and you crash into another car at an intersection, and the drunken felon who was speeding in that car is killed. You feel bad. You should have maintained your brakes better. You realize you should have done something more effective than honk your horn as you approached the intersection with no brakes. Now, if the other driver had not been drunk and speeding himself, he might have been able to avoid the accident. But you still know you did wrong. The DA comes to you and tells you you are being charged with murder in the first degree. You think of your two kids and your wife and and wonder how they are going to get along. You say to the DA “But he was drunk and speeding and a recently-fired 45 caliber gun was found in the car which was linked to a drive-by shooting two miles away two minutes before” The DA says “Those allegations may or may not be true, but are not relevant. You did not stop at a stop sign and he is dead. You are guilty of murder.” You say, “This is terrible. My wife. My kids. You have got to help me. What can I do?” The DA says “Gosh, I feel sorry about your kids. Tell you what, you sign this confession right here and right now, don’t bother with engaging a lawyer as we are giving such a good deal, and I will let you cop a plea for 3rd degree murder. You can be out in ten years, catch your kid’s college graduation.” Since the DA is being so helpful, you thank him for letting you live and do not spoil the deal by engaging a lawyer of your own, as there is no need.

Maybe I am being a bit melodramatic. But if you are having a problem with the IRS about taxes, don’t you think it would be prudent to ask for help from someone who is not part of the IRS and whom you can hire to protect your rights? The IRS says “Per law 4857 and legal precedent of Wacko vs Fruitcake, your statement that the printing press you bought was tax deductible is false and you owe us ___”. You do not know what the IRS is talking about. You don’t speak tax. But you had prudently engaged an EA. Your EA says “Look here. Law 4857 only applies to foreign held corporations and this is a domestic LLC, and Wacko vs Fruitcake was about a KKK member who deducted the wood used for burning crosses on negros’ lawns. This does not apply here …. Let me show you the actual rulings that apply. I have them right here….”

The Price of Not Knowing

One last example. You would not draw up a legal agreement committing yourself to tens of thousands of dollars of payment without knowing fully what you are agreeing to or whether the document was legally correct. Well, what about the guy who files his taxes with Turbo Tax because it is easy to do and he can slip in some nice deductions, but he does not know what all the words mean on the tax form and he does not know exactly where to enter . . .. Besides, his tax bill is only $40,000 and that was already withheld from his wages, so he will even get a refund. “Yeah,” he thinks, “I can do this. No need to hire a pro.”

And then he gets a notice and finds himself under an IRS audit by mail because he entered a forgiven loan correctly as income but in the wrong place. Luckily, he had the good sense to call me, an enrolled agent. When I review his taxes I discover he filed and paid over $10,000 in State Income taxes to a state he no longer worked in. He does not owe that state income tax! Now, this is a real example, It happened. I was able to correct his initial error, put his income in the right place under the right heading, and file an amended return with the IRS and the state and request a $10,000 refund. (By the way, there is nothing wrong with Turbo Tax. But the person using it has to know what he is doing.) Filing his own tax got him an IRS audit by mail and if left uncorrected would have cost him 10 Gs.

One last tip. There are many tax preparers out there with no formal training in tax. And there are many very high-quality computer programs that print out very professional looking completed forms and tax analyses, but are really only as good as the data was input correctly by someone who understands tax. The untrained preparer may have a nice office and friendly manner. An untrained person who is unethical can even get you large refunds. Inflated expenses and spurious deductions and credits are not hard to put into a tax return. If your refund is too good to be true, it may be. Of course, if the IRS audits you, you wind up with penalties and interest and a vastly increased bill. Indeed, if you did not carefully read what you sign, the preparer who made up a fraudulent return may say, “but he told me his start-up company lost 50,000 dollars and these expenses were what he told me. He was lucky he had not quit his day job. Look. He even signed the return.” It is not hard for anyone to call himself a tax specialist. There is no mandatory training or exam they have to pass to say “expert” or “pro” or “specialist”. Lawyers, CPAs and Enrolled Agents DO have to pass rigorous exams and do lots of continuing professional education every year to maintain their license.

And you have to be one to call yourself one, or it is a crime. The EA has the advantage of ONLY doing taxes and so all his exams and continuing education is on taxes. I would personally recommend only using a licensed professional. I am sure some un-licensed tax preparers do a good job even if they are not an EA, CPA or Lawyer. But if they really know taxes, they should be able to take and pass the EA exams.

Lawyers, CPAs and EA also are part of professional organizations and hold a valuable license that they keep by maintaining an ethical standard and quality of product. A competent tax pro knows his long term prosperity is only guaranteed by good ethical work. If you like your un-licensed tax preparer, encourage him to take the exams to become an enrolled agent. He simply has to demonstrate he knows his business on taxes to pass the exams.

Can You Afford Not to Have the Right Representation?

So, do you need an EA? Maybe not. You are single making $10 an hour in wages, have no dependants, no house, are not going to college. Heck, file direct with the IRS or use Turbo Tax. You probably do not need an EA. If you have a CPA who specializes in taxes (not just one who does Corporate Audits), and he always does a good job and he is always helpful, knowledgeable and ethical then fine. If you have a lawyer representing you before the IRS and just won your case, fine. You may not need an enrolled agent (EA).

However, if you are in any of the following categories, you probably DO need an EA, and should call us to schedule a free consultation. We will review your situation and advise you on your options.

• You think your taxes are too high
• You think your taxes may have been done wrong
• You are spending too much time on your taxes
• You have a large tax debt
• You have defaulted on an offer in compromise or instalment agreement
• You want to be represented before the IRS
• You are self-employed and pay a lot of self-employment tax
• You are under audit
• You want someone to stand in your shoes before the IRS
• You have not filed your taxes for some years
• You think some returns need to be amended
• You have received a letter or notice from the IRS
• Your tax preparer has disappeared
• You are confused about your taxes
• You are worried about your taxes
• Your books are a mess and you do not know what to do to file
• The IRS seems to have different records than you have
• You wake up at 3:00 am sweating because of tax nightmares

What to do?

If you have any questions or need any tax assistance contact Torchlight Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.

SAVE MONEY BY DOING YOUR TAXES THE RIGHT WAY!

The Hidden Costs of Payroll and Bookkeeping

by Dave Horwedel | Sep 28, 2020 | Tax Blog

The visible costs of Payroll and Bookkeeping can be truly daunting. These two areas have been the bane of many small business owner. The visible costs include not just the cost of the service, but also the cost of not doing it right. All too often, the small business owner gets into tax trouble because of their books. They cannot file a timely return, or files an inaccurate one, and winds up with heavy tax penalties. Or perhaps he has tens of thousands of dollars of perfectly legitimate expenses disallowed because his bookkeeping did not support them.

Payroll can be even worse. The penalties for not forwarding payroll taxes are brutal. Every small businessman has heard these horror stories. The vigor of the IRS in pursuing unpaid Payroll Tax and the penalties exacted make routine IRS collection activities seem tame.

With visible costs like this, it is no wonder that Small Business owner turns to QuickBooks. It seems that you cannot even watch a sporting event on TV, without seeing a QuickBooks ad. How can he be safe and run his business without adequate bookkeeping and payroll? Well he can’t. For many small business owner, QuickBooks seems the answer. Their business is small, and they are or become adept at bookkeeping and payroll using Quikbooks or similar software. They can monitor their income and expenses, file their taxes, and carry on their business.

But what then are the hidden costs?

I will illustrate this by example, one businessman had built a small business grossing about $1.5 million dollars a year. He brought all his QuickBooks and bank and tax data in to our firm to do his taxes, and it was a mess. His tax return could not be filed without extensive bookkeeping, which he paid for. This cost is visible. Where then is the hidden cost?

He had spent 2-3 hours a day all year working on his books. He was the creator and production manager of his business, and had plenty of work to do. But he spent this daily time on his books, and he knew it was important. What did this cost his business? Probably $300,000 in lost income. When he was handling the production and sales of his firm, income flowed in.

What did he get for all this book work? Bad Books.

He even had a secretary who could have been trained up to handle the books.

The hidden cost of bookkeeping and payroll is two-fold:

1. The income not generated because the owner or key manager is doing books or payroll when he could be running the business to make income.
2. The profit lost because the bookkeeping is inadequate and the manager does not see exactly what is making money, and what is losing money, and thus cannot take appropriate informed actions to increase profits.

The visible costs can be high enough. Paying the bookkeeper or paying the IRS because of bad bookkeeping or payroll is easily, if painfully, visible. For some, the hidden costs may be small. Maybe you enjoy doing bookkeeping and payroll, and keep your records spiffy and up-to-date in just a few minutes per day (you know, like the guys and gals in the QuickBooks TV Ads). Maybe this does not affect your firm’s income at all.

However, if you make the business run and the income flow in, and are not a great bookkeeper, this hidden cost may be killing you. Your time might be better spent in making more money for the firm, or hanging out with the family.

What to do?

If you have any questions or need any bookkeeping or tax assistance contact Torchlight Tax for a free consultation. We are a tax firm, but we cannot do taxes when when poor bookkeeping obscures the income and expenses of a person or company. So we must be bookkeeping experts as well. No matter how bad your records are something can be done about it. It is far less expensive to pay the bookkeeper to get your books in order than to pay the IRS with bad books.

As the tax deadline approaches, contact us ASAP. We can still file for a tax extension for your C-Corp or sole proprietorship while we get your books in order so we can do your taxes.

One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.

SAVE MONEY BY DOING YOUR TAXES THE RIGHT WAY!