Bankruptcy and Your Taxes

You may have wondered what tax professionals do after the filing deadline. What? You’ve never wondered about that? Well, I’ll tell you anyway. Tax professionals use “down time” to keep up with tax law changes with continuing education. Last week, I got one of my 2019 continuing education hours by taking a free IRS webinar, all about what an individual or business taxpayer should know about taxes when filing for bankruptcy.

Hopefully, none of you (or any of my clients) will be in this situation. But, just in case, I’m sharing a few tips I learned from the IRS webinar, “Understanding Bankruptcy from an IRS Perspective”:

Notify the IRS

Anyone who has filed for bankruptcy, or who is in the process of filing for bankruptcy, should contact the IRS’ Centralized Insolvency Operations (CIO) Unit to report the filing. The bankruptcy could be related to unpaid taxes or not. The CIO will place a “hold” on any federal tax collection activities for the duration of the bankruptcy case. They also coordinate the IRS’ representation if there are any unpaid federal taxes.

Check Your Status

For individuals, the most common type of bankruptcy is a Chapter 13, although they sometimes file under Chapter 7 or Chapter 11. Chapter 13 bankruptcy is only available to wage earners, the self-employed and sole proprietors. To qualify, a taxpayer must have regular income, have filed all required tax returns for the four years prior to the bankruptcy filing and meet other requirements in the bankruptcy code.

Meet All Deadlines

During the bankruptcy case, the taxpayer must continue to file, or get an extension of time to file, all required income tax returns. All current taxes must be paid as they come due. Failure to file returns and/or to pay current taxes for the duration of the bankruptcy case may result in the case being dismissed with no discharge of tax debt.

What Else to Expect

Tax refunds can be received while in bankruptcy. However, refunds may be delayed or used to pay down tax debts. Successfully completed bankruptcy plans result in a discharge of debt, releasing the debtor from personal liability for the discharged debts. Some taxes may be discharged, depending on the facts and circumstances of the case.

You now have an idea of what to do about taxes when filing for bankruptcy. Plus, you’ve learned what tax professionals do after the filing deadline – keep up with tax law changes with continuing education.

TIME FOR YOUR MID-YEAR TAX CHECK-UP

Does it seem like you just took down the Christmas tree? Well, believe it or not, 2018 is half over! That means the tax year is half over, too. Only six months to avoid getting an expensive surprise when filing your taxes next year.

 

Doing a mid-year tax withholding checkup is even more important this year than it was before. Changes in the Tax Cuts and Jobs Act passed in December 2017 could impact your 2018 tax bill dramatically, depending on your family size and make-up, income level and location.

 

So what are the tax law changes that taxpayers should be aware of? Three areas are likely to make your 2018 tax bill look a lot different from 2017:

 

  1. Itemized Deductions – Deductions for state and local income, sales, and property taxes are limited to a total of $10,000. Home mortgage interest is limited on new mortgages to balances of $750,000. Deductions are eliminated for home equity interest unless used to purchase or improve a home. Non-disaster personal casualty losses, tax preparation and investment fees are eliminated. One bit of good news for high income taxpayers — the itemized deduction phase-out is eliminated.

 

  1. Personal Exemptions and Standard Deduction – The $4,050 per person personal exemption is eliminated. That will hit some families pretty hard. Losing personal exemptions hasn’t come up much in the news, but taxpayers will definitely notice when filing in 2019. Doubling the standard deduction has been a huge news headline. For example, married couples filing jointly will get a $24,000 standard deduction for 2018, instead of $12,700 for 2017. Millions of taxpayers will find that the standard deduction is more beneficial than itemizing.

 

  1. Tax Bracket – Six of seven individual tax brackets are reduced. Most taxpayers will benefit from the new rates, which range from 10% to 37%. Even after calculating the impact of losing some itemized deductions and all personal exemptions, lowering the rate results in a lower overall tax for many taxpayers. However, some taxpayers who were in the 33% marginal tax bracket will find themselves in the 35% marginal bracket in 2018. This unfavorable change will mainly affect singles and heads of households with taxable income between $200,000 and $400,000.

 

All of these changes means that it’s even more important to check on your tax withholding and plan ahead for next tax season. Tax projection calculators are available to help determine what your new income tax bill will look like. Of course, www.irs.gov is a great resource. The Tax Policy Center also posted a tool that appears easy to use – http://tpc-election-calculator.urban.org/.

 

Whichever tax calculator tool that you choose, don’t wait to do your mid-year tax withholding checkup. It will be time to put up the Christmas tree again sooner than you think!

 

 

Fraud and Workplace Culture

Last week’s blog was about the three types of fraud and how to prevent them. Typically, organizations lose 5 percent of revenue to fraud each year. Think about how much that means to your organization’s bottom line. Not pretty. Fraud hits smaller organizations and nonprofits even harder, which means a bigger bite out of annual revenue.

 

The Association of Certified Fraud Examiner’s 2018 Report to the Nation on Occupational Fraud and Abuse says that the median loss of fraud cases examined over the last two years was $130,000. Twenty-two percent of losses exceeded $1 million!

 

Organizations can be reluctant to report fraud to law enforcement for two related reasons – bad publicity and poor internal disciplines. Reputations and bottom lines are hurt when a fraud case is exposed in the headlines. It’s even worse when the story behind the headline reveals that financial controls and oversight were so lax, the organization essentially handed the stolen funds to the fraudster.

 

Financial controls that fail to detect or prevent fraud are the symptom of a larger issue – poor workplace culture. What is that, and why is it important? Workplace culture is the personality of an organization – the values, accepted behaviors and attitudes that make the environment and its people work together.

 

Part of a strong workplace culture is promoting ethical, honest and transparent actions, starting with senior management. A strong tone at the top goes a long way to letting everyone in the organization know that dishonest and unethical behavior is not tolerated. Fraud is less likely to occur in an organization with strong workplace culture and tone at the top.

 

So here’s the ironic part. In a recent report, The Culture Economy, 60% of smaller business leaders think that strong organizational culture is a “nice to have” thing, not a necessity. What?! Just look at the fraud statistics to see how essential workplace culture is to the financial success of an organization. Sure, not everyone working in a place with lax financial controls is going to commit fraud; but lax controls make it easy for the dishonest or financially-stressed employee to steal or engage in corrupt practices.

 

A strong workplace culture lets your employees know that fraud and other dishonest behavior will not be tolerated. Of course, strong financial controls and oversight are important. Clear messaging about expectations and appropriate actions go a long way to making sure your employees know that fraud will not be tolerated.

Phishing for your Tax Dollars

I hadn’t quite decided on this week’s blog topic when I saw an e-mail snagged in my spam folder. The sender was “IRS”. The heading was “Second Notice of Delinquent Taxes”. What a gift! A blog topic!

 

Like many taxpayers who receive a message from the “IRS” dunning them for cash, I knew that I didn’t owe the IRS anything. Thankfully, I knew better than to open or reply to it. Keep reading to know how to identify phishing, and what to do when it happens to you.

1.      What is phishing?

 

Phishing is a scam usually done through unsolicited email and/or websites that pose as legitimate senders or sites. Scammers use phishing to lure unsuspecting victims to provide personal and financial information. Bogus emails can appear to come from the IRS or your tax professional requesting information, including mother’s maiden name, passport and account information that is used to steal your identity and assets.

 

  1. How do I know if it’s phishing or really the IRS?

 

The easiest way to check for phishing is to place your cursor over the sender’s name, revealing the sender’s e-mail address. An address that doesn’t look legitimate is probably a scam. For the IRS, anything other than “irs.gov” is suspect. The IRS doesn’t initiate contact with taxpayers by email, texts or social media to request money or financial information. Most IRS communication is still through the good, old-fashioned USPS.

 

  1. What should I do with a phishing e-mail claiming to be from the IRS?

 

If you receive an email claiming to be from the IRS that contains a request for delinquent tax balances or financial information, immediately do the following:

 

  1. Don’t reply.
  2. Don’t open any attachments. They can contain malicious code that may infect your computer or mobile phone.
  3. Don’t click on any links. Visit the IRS’ identity protection page if you clicked on links in a suspicious email or website and entered confidential information.
  4. Forward the email as-is to the IRS at [email protected].
  5. Delete the original email.

 

Don’t get phished! When you get an e-mail that looks suspicious or is from an unfamiliar sender, stop and check it out before deciding to open it. If it’s phishing for your tax dollars, don’t even think about opening it! Just forward to [email protected] and delete!

 

Make your Tax Withholdings “Just Right”

We all want to be like Goldilocks when we pay our income taxes – we want to get it “Just Right”. Not too hot (paying too much) or too cold (paying too little). How do you get it “Just Right” the Bear Family – eh — the IRS? Interest on underpaid taxes can be almost as scary as an angry Papa Bear!

 

Figuring out if your tax withholding is too high or too low is easier than you think. The IRS published a Withholding Calculator for employers in January 2018, found here. It reflects the new tax law passed in December 2017. Using this tool and making any indicated adjustments can help to avoid a serious too-hot or too-cold situation when you file your taxes next year.

 

The Withholding Calculator says to gather your pay information and last year’s tax return to get started. Actually, there’s more you need to know to get the most accurate and helpful results. Follow these three tips to get your Tax Withholdings “Just Right”:

 

1.      Understand Terms — Get clarification for any unfamiliar terms used in the Withholding Calculator so you answer the questions accurately. Terms like “pre-tax retirement plan,” “qualifying person,” and “taxable earned income” could mean something different than what you think. The IRS defines its terminology, but it’s not always super clear to everyone. Good news – a quick Internet search will provide links to sites where terms are explained in plain and simple language.

 

2.      Identify Changes — Compare your life and work situation from last year to your circumstances now. If you’ve changed your marital status, purchased or sold a home, or added an employer-provided benefit, your answers for this year will be different than they were for last year. Be sure you know how to answer each question based on your life and work circumstances now. If anything else changes, you will want to go through the Withholding Calculator again later in the year.

 

3.      Know Your Pay Frequency – Entering the wrong pay frequency, i.e., how often you get paid, really throws off the Withholding Calculator. One small difference, such as being paid bi-weekly (every other week, or 26 times a year) instead of semi-monthly (twice a month, or 24 times a year) could mean owing more money when you file your return next year. Miscalculating by two pay periods could make a significant difference.

 

Make sure your tax withholding is “just right” with the IRS Withholding Calculator and avoid a too-hot or too-cold situation when you file your taxes next year. Otherwise, you could be staring an angry Papa Bear in the eye next April 15!

Need 2018 Estimated Tax Payments?

Phew! Tax season 2018 is over! So how did it turn out? Did you have to pay when you filed your 2017 returns? Do you know if you are withholding or paying enough for 2018?

 

April is a good time to check on what you are projected to owe for your 2018 taxes and see if it’s enough, or too much. That’s especially true this year because of the new tax law and changes to employer withholding tables. Word on the street is that the IRS was really aggressive in decreasing employer withholdings in order to increase paychecks. That can make employees feel rich now, but it could bite them hard when their 2018 tax returns are due.

 

If all your income comes from wages, chances are that your tax withholdings will cover your income tax liability. But if you are self-employed or receive other income, such as interest, dividends, capital gains, or rent, you might need to make estimated income tax payments. On top of that, if you don’t pay enough of your taxes on time, you could get hit with interest and penalties.

 

What the Required Payments?

If you owed additional tax for 2017, you may have to pay estimated tax for 2018. Estimated payments should be made if:

 

  • You expect to owe at least $1,000 in tax for 2018, after subtracting your withholding and refundable credits.

AND

 

  • You expect your total withholding and refundable credits to be less than the smaller of 90% of your 2018 tax liability or 100% of your 2017 tax liability.

 

What Are the Penalties?

Penalties are assessed if the required payments described above aren’t made as income is received, at least quarterly. Interest penalties are assessed on the underpaid amount, accrued daily from the date it was due and until it is paid. Interest rates are adjusted periodically and daily accruals really add up.

 

What Should You Do?

Clearly, the IRS and other taxing agencies are serious about wanting their money on time. You can figure out your 2018 federal income tax bill by using the IRS Withholding Calculator, updated for the new tax law – . People who are self-employed or have investment income should check out the IRS web page about tax estimates.

 

When in doubt, or if you are not comfortable with DIY tax estimates, be sure to consult with a qualified tax professional. She or he will help you identify all the information needed to project your 2018 tax liabilities, pay enough taxes on time, and avoid interest penalties.

Getting a Tax Filing Extension

Your life is busy and deadlines can be hard to meet. April 15th is on a Sunday this year and Monday is a holiday, so the tax deadline is pushed back to April 17th. Whether you just can’t get organized or all your tax information hasn’t come in, you might just need more time to get those tax returns filed by the deadline, even with those extra two days.

 

Not ready? Not a problem! You can get an automatic six-month extension to file your taxes.

 

Two things to know if you’re not ready to file your taxes by April 17th:

 

  1. Requesting an Extension

 

Individual taxpayers use IRS Form 4868 to request an automatic extension to file their federal income tax return. An extension can be filed on the IRS website, e-filed using approved tax software, or in paper form. Paper forms must be postmarked or date-stamped before midnight of the due date.

 

Requesting an extension to file your state taxes varies based on where you live. Check your state’s tax website for instructions and details.

 

  1. What to Do if You Owe

 

You have to estimate your tax liability and figure out your tax withheld and/or paid quarterly to prepare your extension request. If you will owe more tax than you’ve already paid in, the balance due must be paid with your extension request. Failure to pay will result in an underpayment penalty and interest on the unpaid amount, accrued daily until it’s paid. That really adds up.

 

If you are getting a refund, your extension is automatically approved. But you still have to wait until your return is filed to get your tax refund.

 

Need more details about estimating your 2017 tax liability and getting a tax filing extension? Go to the IRS website and your state tax website. Need more guidance? Consult a qualified tax professional.

New Tax Withholdings

The IRS issued new tax withholding tables for employers in January 2018, designed to reflect the new tax law passed in December 2017. By now, you’ve probably seen the results in a higher net paycheck. Seems like a pretty nice deal. But will you feel the same way next tax season?

 

The new tax withholding tables may not account for all of your income and deductions, which could result in under- or over-withholding income taxes compared to your tax liability. You could end up giving the government an interest-free loan — your refund. Or, you could end up having to pay a chunk of money when you file. You could even owe interest and penalties!

 

How can you avoid all of that? Compare your withholdings and any estimated tax payments to your projected tax liability. More easily said than done.

 

You have two options for verifying that your taxes are covered for next tax season:

 

  1. Do It Yourself (DIY)

Most people have all the information needed to figure out if their tax withholdings are enough to cover their tax liability. Pay stubs or online pay information reflect how much you earn and have withheld each pay period and year-to-date. Apply a little arithmetic to the pay information, and you can figure out your income and withholdings for the year. Have a completed copy of your most recent tax return handy. Information on that return can help you estimate income and other items for 2018.

 

It’s really important to know about the new tax law changes to estimate your 2018 income and deductions. To help with that, the IRS published a Withholding Calculator at https://www.irs.gov/payments/tax-withholding so taxpayers can make sure they have the right amount of withholding.

 

  1. Get Professional Help

No, not that kind of professional help. I mean help from a tax professional. The IRS Tax Calculator may be a great tool for taxpayers with simple situations. People with more complicated financial situations might need to meet with a tax preparer to get insight on how 2018 will differ from 2017 because of the new tax law. Sure, you’ll pay a fee for that service, but peace of mind is extremely valuable.

 

Avoid expensive surprises next tax season by figuring out now whether your tax withholdings will cover your 2018 income tax liability. Whether you Do It Yourself or get help from a tax professional, you’ll have peace of mind that your taxes are covered.