It’s that time of year … again. That’s right: Tax Day acknowledged in the US on April 15th. This time though, you can be confident enough in your tax knowledge to avoid the common pitfalls those who fear filing season too often fall into, even failing to file on time because of it. Many people also carry strong beliefs about their right to withhold taxes for political reasons. Irwin Schiff, a well-known tax resistance advocate, even details this position in his 1976 book entitled, The Biggest Con: How the Government is Fleecing You. Regardless of your reasoning; however, withholding your taxes from the government is definitely 100 percent a bad idea for many reasons, namely imprisonment and many additional costs to you. Remember, the IRS will almost always catch up to you, and, ultimately, evading an organization with an annual budget of around 11.4 billion dollars is probably going to give you a lot more trouble than just paying them in the first place.
Simply put, unless you can afford to have some offshore trust in the Cayman Islands, your chances of successfully evading taxes are slim to none. Everyone has heard the stories propagated by self-stylized, “professional” tax evaders, but few realize that failing to file your tax returns can end up being much more costly in the long run. Aside from fines which can reach up to $250,000, you must also take into account the cost of legal fees as well as a bill for the cost of prosecuting you.
One example of someone who made this mistake is that of a public accountant (yes, an accountant) in Michigan who had to pay $140,000 in back taxes, $50,000 in penalties and interests, spend five months in prison, and five additional months under house arrest. If you think this is a harsh penalty over a matter such as taxes, consider that this person’s charge was simply withholding taxes for four years. Tax evasion is a risky business. Becoming more complicated and costly as you move toward purposely and knowingly withholding taxes, which is often not the case. This is why you need as good legal representation and council as possible when dealing with the IRS in most-case scenarios. The last thing you want is a criminal record (possibly a felony) for something that is always avoidable. Do not fall prey to the con artists who claim that they can save you a few thousand in taxes through esoteric means. More likely than not, they are luring you into the beyond-risky business of tax fraud.
The bottom line is that if you make above a certain threshold of income each year, you are legally obligated to pay tax on that income. Filing taxes is not voluntary. Clearly outlined in the first section of the Internal Revenue Code, which sets the amount for taxable income on estates, trusts, and individual persons, you are responsible for determining how much you must pay and doing so. Basically, the provisions of this section of the IRC split income earners into several categories based on things like marital status, living arrangements, etc. Section 1 determines the formula by which these entities must be charged taxes.
Failure to File and Failure to Pay are Two Different Things
The IRS treats failure to file and failure to pay taxes as two separate offenses. This means that you can end up paying 22.5% on top of the 25% of the tax owed for not paying initially. Knowing of this penalty, why not file? It’s only saving you from falling further into potential debt. Believing that not paying and not filing are the same thing is a very serious mistake and is yet another way citizens end up paying far more than necessary for simply missing their payment. If you do the calculations for your return amount and determine that you do not have the money to pay for it, you should always file anyway. The monthly penalty for not filing is 4.5% and 0.5% for not paying. The total penalty can snowball over time as compounding interest grows.
To put it simply, not filing your taxes is never a valid option.
However; let us entertain the scenario in which you do not file your taxes.
IF you fail to file, the IRS will send a notice that they have filed a substitute return for you. The IRS will not be looking to do you any favors here. A substitute return will not include any of the standard deductions that you would typically see when your accountant files for you as it only allows for one exemption. This exemption is single or married filing separate and it means that you end up with higher liability over time.
Again, the reasons abound for why you should file your tax returns even when you cannot pay them. These include but are not limited to:
- Lessening or avoiding altogether the additional failure-to-file fee.
- Not having a substitute return disallowing adjustments, deductions, and exemptions that you might otherwise retain.
- Starting the clock for the statute of limitations (usually three years) for a potential audit on your return. This means that the IRS has three years from the date you file to audit your return. However, his three-year window only begins after you file.
- Similarly, starting the IRS’s clock for collecting the tax, interest, and penalties, which after 10 years they have no legal right to do. After this time period set by the Internal Revenue Code, the IRS cannot collect.
Another important reason to file even if you do not have the means to pay is called the Notice of Tax Due and Demand for Payment. If you have ever owed the IRS money you may have received one such abrasively titled letter in the mail. But do not worry: the first thing you should be doing in this instance is preparing your documents and filing your taxes right away. The bill will include the taxes you owe them in addition to any interest or penalties. As interest and penalties continually accrue, we encourage that you pay your bull as quickly as possible by way of electronic funds transfer, check, money order, cash, or credit.
In the instance you cannot pay the full amount of your bill, the best and simplest option for you will be to pay as much as you can to reduce the interest amount and potential penalties they may want to throw your way. Next, contact your local IRS office and explain to them your circumstances, based upon which you will be given a few options or “resolutions” that you may use to pay the full amount, usually gradually.
The Installment Plan
One common resolution offered by the IRS to those who cannot pay is an installment agreement in which total payments are broken into monthly, smaller payments which make them more manageable. These are often based on income and are thus somewhat flexible.
The IRS may also offer to temporarily delay the collection of what you owe them. While getting an extension to pay your bill may seem like an attractive option depending on your financial situation, keep in mind that they may also file a Notice of Federal Tax Lien on your account as they assess your ability to pay. This public notice essentially alerts creditors, letting them know that the IRS is declaring a secured claim against your assets. This will show up on your credit report and will not be lifted until you pay the full amount or is otherwise resolved.
Offers in Compromise
An offer in compromise is somewhat of a last resort when dealing with unpaid taxes due to the IRS. Once all other alternatives have been exhausted, taxpayers may be eligible to apply for an Offer in Compromise (Form 656) or simply OIC. If your application is accepted, you will be able to settle your unpaid accounts for less than the total amounts. Keep in mind that the application fee for this potential option is $150, so it may not even make sense if the amount you owe is relatively low.
I Have Received a Bill that I Believe to be a Mistake
In general, if you receive a bill for anything which is unfamiliar to you, it is best practice to immediately contact the purported entity from whom sent you the bill. In the case of federal taxes, you should call your local IRS service center or visit them. Bring the bill with you along with any records, old returns, checks, etc. This will help prove your case in the event the IRS has made a mistake in sending you a bill.
In conclusion, as a citizen and subsequently a taxpayer of the United States, you are obligated by law to file all returns as they are due, irrespective of your ability to pay them. Those who consistently fail to file and/or respond to IRS inquiries are liable to face many different kinds of penalties whether they be fiscal or criminal. You will also continually accrue interest which will make the aforementioned penalties gradually harsher. If you are like most people and do not want a long and arduous relationship with tax enforcement agencies, it is best that you act swiftly and accordingly. Visit www.irs.gov for more information.
Knowing how and when to file your taxes can be a daunting process for a business owner with or without adequate experience in these matters. What complicates things is that there are so many ways one can be guilty of tax evasion. These pitfalls can come in the form of paying workers under the table, ignoring overseas income, using cryptocurrencies as a “loophole” for paying taxes, or not reporting businesses that are cash-only.
Paying Your Employees Under the Table
Greg Freyman, a Certified Public Accountant in St. Johns, Florida says “Income is income,” there are no loopholes in the tax code which prevent the IRS from expecting payment for cash salaries. You must report all wages that you are paying on Schedule H and supply your worker with a new W-2 every year, he continues to say. There are specified ways of determining whether or not your helper who you pay would constitute an employee. You can refer to IRS Publication 926 for help with this determination.
Receiving Income from Overseas
Many people who own rental properties overseas run into the problem of not knowing how to report this income or believing that they don’t need to report it to the U.S government. Do not make this mistake as it can cost you thousands of dollars in return interests.
Some people believe that cryptocurrencies are truly untraceable and thus using them to sell and purchase assets is a nontaxable act. This notion; however, is dubious at best. While it is true that cryptocurrencies are designed to be secure ways of transferring funds from one account to another, governments around the world are becoming increasingly adept in tracing these funds to their sources. Furthermore, as a condition of signing up for most currency exchanges, you must provide your social security number as well as other various forms of identification. These can be used by the IRS to determine that you have unpaid taxes.
All-cash or Illegal Business Endeavours
Many problems people face with the IRS stem simply from poor business practices, such as frequently pocketing cash from their place of business. Small actions such as this can cost you in the long term when you fail to report them to the IRS. This is why payments to yourself should take place on a moderately infrequent basis and by some other means besides cash-to-hand. There are many ways of doing this and, again, it relates back to proper business and financial habits.
Own an illegal prostitution or narcotics business on the side? Believe it or not, the IRS actually requires that you state your earnings when you file a Form 1040, Schedule C, or Schedule C-EZ as “self-employment activity.” However, if in fact you are involved in such endeavors, we’ll leave that choice up to you.
For more personalized legal advice for your business’ taxation issues, LLC Formations can help. We offer reasonable prices for company formation service access which means that you will be in close contact with people who know their way around entrepreneurship and starting a business. Here, we understand that you may not have the capital to invest in attorney fees, etc just starting out. Furthermore, an individualized action plan will set your company up for future success, laying the foundation for your tax agendas. Whether you are in need of help starting your LLC, S-corporation, C-corporation, or Nonprofit entity, we have you covered with experienced, knowledgeable, and friendly experts on hand. They can even help you draft a continuity plan to keep everything where it should be. When starting out in any business endeavor, bad things are bound to happen. Don’t allow yourself to lose track of all the moving parts, let us make running your company a more rewarding process.