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Secret Codes

There it is. In the mailbox just over there. Your hands are sweaty, and your pulse picks up. Do you open it? Do you leave it on the counter and walk away? Do you dump it in the trash and not give it a second thought? No matter your course of action, the IRS has sent you a notice and you are now looking at what seems to be a secret code. Lucky for you, I love figuring out puzzles and I have some tricks for you.

After the rush of tax season and the initial round of notices that go out for specific tax return matters such as incomplete forms, missing schedules, and additional documentation to process we reach “notice season.” This is when the IRS begins to match data from tax returns to what was reported to the Social Security Administration and dig a little bit deeper into tax returns.

If you are lucky enough to receive one of these beloved notices, the first thing that you need to do is check the Notice Number in the upper right-hand corner. Each notice number covers a different topic. For example, a CP2000 Notice will be generated when the income that was reported on your tax return does not match what was received from other reporting sources.

This is the most common type of notice that we see and generally shows up in the fall of the following year. Most of these notices show up and get people’s hearts racing with large amounts of additional tax due. The IRS will list on this form the amount of money that was not included on the tax return and refigure the return based on that information. Depending on the type of income, this maybe incomplete information and the additional tax due is substantially less than what is listed on the notice.

The most important thing to remember is you receive a CP2000 notice is that it is computer generated. There has not been a review or audit of your tax return, the information just did not give with what the computer expected to see based on other input information.

This notice contains the most detailed information regarding the issue at hand than any subsequent notice. This is the notice we want to see to help sort out the problem.

The next notice you will receive is a CP14 that just reminds you that a payment is due and after 30 days will incur additional penalty and interest.  When you get the CP504 is usually when we hear from you. This notice is a final intent to levy your bank account and assets.

When a CP504 is issued, it usually means that you have ignored previous CP14 notices and the IRS is looking to take collection action. This can happen in several different ways. First, they can place a levy on your bank account which requires the bank to withdraw and hold the balance that is due to the IRS. Then, they will typically levy your wages through your employer leaving you with a very small amount of wages to live on. Finally, you will get the opportunity to meet a local IRS Revenue Officer when they knock on your front door.

Trust me when I say the IRS does not want your house and they do not want to lock you up in jail. All they want is for you to communicate with them and get your taxes paid. That is where I come in! As an Enrolled Agent, I am authorized to work with the IRS on your behalf on these matters. Bring me your notices and let’s work together to get back on track, preferably before you get a knock on the door.

My Free Advice this Friday is to not ignore the notices! Communication is the key to successfully navigating the secret codes of the IRS.

Check back next week for tips for verifying your tax payments before you file.

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When You Don’t Know What You Don’t Know

“Huh! I didn’t know that,” is a phrase that I have used many times in my life. In a world with a constant flow of information that is so easily accessible, I sometimes think I know more about something than I do; which my young adult children take great delight in pointing out. I will be the first to admit that I know nothing about coding, auto repair, engineering, or managing a room full of students. However, I do enjoy the puzzle of the tax code and understanding how to find the answers that I may not know; I am happy to be able to share that information with you! So, without further ado, here are some filing options that you may not be aware of. Click on the links for more information about each option.

IRS.gov Free File
– Allows you to file your tax return for free through services like TurboTax, H&R Block, and Taxslayer
– Each company provides free federal and state tax prep and efiling options
– Direct deposit of your refund is available

Recommended for:
– Those who make $66,000 or less in a year
– High school and college students who have W-2 income only

Caution:
– Watch the dependency status when the kids file their own returns
– Be sure everyone knows who is a dependent and who is not

Fillable Forms Electronic Filing
– Allows you to file your federal tax return for free
– Covers filing for everything from a Sole Proprietor business to rental properties and household employees

Recommended for:
– Those over the income limit for the previously mentioned free file
– Those looking to save money and are comfortable with the basics of the income tax code

Caution:
– If you are new to being self-employed or owning rental properties, this is not recommended
– Keeping up on the tax code changes can be a full-time job
– Filing your return this way requires you to ensure your own compliance

VITA/TCE Program
– Provides volunteers who are trained by the IRS to provide free tax prep
– Includes actual in-person locations that are trained to handle basic tax prep including earned income tax credit, child tax credits, and education credits

Recommended for:
– Those earning under $55,000 or less, are disabled, or are over the age of 60
– Those who are not comfortable processing their own information online

Caution:
– This program does not handle complex investment income, businesses or medical insurance premium tax credits

You’re probably asking yourself: “Why would they share options that could undercut their practice?” Good question. The simple answer is: Our job is to help ensure that taxpayers are meeting their filing requirements. Sure, we could use a gimmicky marketing scheme to figure out ways to charge everyone a few extra dollars, but that is not how we choose to do business. We understand that WE are the benefits of our service. Not only our knowledge of the tax code, but our unique perspective on small businesses and the way that they function. We understand that when you stop by with a quick question, it is important that we take a few moments to meet with you if we are able. Taking the time to get to know you, your mindset, your family, and your goals is what our practice thrives on. Our job is to know what you don’t know that you don’t know.

My Free Advice: Check out the different Free File options available to you. Decide what is best for you, free filing or having a personal consultant and make the best choice for you. 

Check back next week for some guidance on what to do when an IRS notice arrives.

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The “Psychology” of Taxes

Photo by Yeshi Kangrang on Unsplash

Growing up in Michigan, the annual camping trip to “The Lake” is a rite of passage. There are other things that were annual traditions while on this camping trip in our family; things like leaving at least ½ of the tent poles at home, setting up and/or taking down camp in the rain, and playing games as a family. These games were usually accompanied by a dissertation by my Dad to distract himself from how badly he was losing. The most common dissertation was entitled “The Psychology of Rummy” and was typically met by groaning and eye rolling. As the game continued, Dad would expound upon the reasons for a terrible discard and how it really was the smartest move he could possibly have made. The commentary would continue throughout the game and become increasingly ridiculous as the evenings wore on.

Just as Dad taught me that there is a “psychology” to gin rummy, I have learned that there is also a “psychology” to taxes. As we approach another tax filing season in which we all must face our own thoughts and opinions on taxes, let’s prepare by understanding some of the different mindsets for paying taxes and tax planning. How better to prepare for taxes than getting our heads in the game?

We enjoy meeting with our clients and talking with them regarding their mindset on paying taxes. These discussions have revealed a range of ideas and positions.  We have heard everything! From “it is a good problem to have” after telling a client they owe a significant amount of money, to “there has to be a way to not pay the government anything” when presented with a small balance due. However, these are the extremes. Most taxpayers fall into a middle range; somewhere between being resigned to a necessary evil and looking at a puzzle to be solved.

No matter which category you fall into, there are things that you can do to apply your specific mindset to your tax situation.

Let’s talk about the two most common mindsets. First, there are those who approach taxes as a necessary evil. These are the clients who drop off their documents and wait for the results and “it is what it is.” For these types of taxpayers, I would challenge you to sit down with your tax preparer and talk about what you have going on in your life and what options you have not taken advantage of that might be available to you for limiting your tax exposure. Believe it or not, tax preparers are not clairvoyant. They do not know what tax savings could be left on the table until you communicate with them.

The other major group are the opposite, they LOVE to communicate with their tax preparer, and the guy at the bar, and their friend who did things a different way. I have to say, these are my favorite clients. They are creative and open to any and all options for tax savings that may be available to them. Within this category, we find that people tend to sway between being aggressive in their deductions, “how likely am I to be audited”, and a more conservative “I don’t want to get in any trouble.” If you fall into this category, keep on keeping on. Keep asking questions, keep seeking information, and understand that a tax preparer’s job is to ethically apply the tax code to each client to ensure the efficient and accurate collection of tax. So don’t shoot the messenger if we have a different suggestion that your friends.

Our “Psychology of Taxes” falls into the puzzle solving category. We strive to look at each client’s situation individually to ensure that we have all the pieces, but we can’t do that without you!

My Free Advice this Friday: Share your mindset about taxes with us! That information is a powerful tool that we can use to help manage your tax situation.

Check back next week to talk filing options.

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What I Did On My Summer Vacation

The Obligatory Time Square Selfie

I spent the summer enjoying my family and crossing something off of my bucket list. My daughter and I were able to visit New York City and see The Prom on Broadway before it closed in August. We had a great time and are already planning our return trip. At home we are finishing up building a new shed; our first big home improvement project at the new house.

Meanwhile, the IRS has been hard at work. They put out 68 news bulletins over the course of the summer! These bulletins range in topic from registration information for the annual National Tax Forums to relief for those who have been affected by hurricane Dorian. Mixed in with guidance for tax preparers on handling certain aspects of the new tax code, there are 8 different notices regarding safe guarding your information and current tax scams that have been reported to the IRS.

While most of these notices are geared toward tax professionals, there is one that lists some tax tips to consider while going about your summer plans. Some of these tips include changing your name and address after the wedding, what summer camps qualify for child care credits, and a reminder to report those gambling winnings from that day you were escaping the heat on vacation. The final tip listed is to check your withholding.

I know I sound like a broken record, but I really do hate having to sit across from a client and surprise them with a tax return result. At least I have company in the broken record department, the IRS Newsroom has a total of 11 different notices with a headline encouraging all to check their withholding.

On August 6th, the IRS launched a new Tax Withholding Estimator that was redesigned to simplify the process of estimating your 2019 tax liability and what your withholding should be. This redesign requires you to have your most recent paycheck stub, the amount of any and all tax credits you will be eligible to take, a list of adjustments to income, and finally a crystal ball.

Your crystal ball will come in handy when you are answering questions like, do you expect to keep this job for the rest of the year? Do you have any other types of income? How much do you expect to make in total by the end of the year? While all of these questions do factor into your tax picture, it can be daunting to try to consider every possibility all at once. This is one of the reasons that I recommend checking your withholding at least once per year, and if you are unsure or something changes in your situation, check again before the end of the year.

On January 1st, there is nothing that can be done to correct under-withholding.  

My Free Advice this Friday: Check your withholding! If the Tax Withholding Estimator is too cumbersome, please call me and we can work through the numbers to ensure there are no tax season surprises.

Check back next week for tips on how to get ready for tax season, even if it seems a bit too early.                                              

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Wrestling with Results

It has been a very interesting three weeks since the IRS opened the e-filing season. We are seeing varied results compared to last year and generally those results are less money coming back to clients as refunds. This causes a state of bewilderment and frustration to those who traditionally count on their refund for certain expenses. We understand that the news is surprising to those who have filed and worrisome to those who are still not ready to file. Although we cannot change the 2018 results, there is good news for 2019.

In researching the withholding tables for 2017 to 2018 and 2018 to 2019, I have found that the adjustment has been made. This means that there should not be a dramatic change in withholding for 2019 compared to 2018, unlike the adjustment that we are currently seeing from 2017 to 2018. While this may not be good news, we do have a couple of options for 2019.

Option #1: Keep everything the same and expect a smaller refund when filing for 2019.

Option #2: Review the withholding on your paycheck and make changes. Remember the smaller the number the higher the amount withheld! If you are already claiming Single with 0 dependents, you are able to request an additional dollar amount to be withheld. You can follow this link to complete a new 2019 Federal W-4 to change that withholding.

My free advice this Friday: Ask questions and be proactive. 2018 tax returns have been a surprise, but 2019 returns don’t need to be.

~Amy

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Pardon the interruption…

My free advice from last Friday: do not think that you can clean, sort, organize, and move an entire household in three days while prepping for the first 16 day stretch of your tax season work-cation. It does not work well. This Friday finds me in one location and enjoying meeting with our amazing clients while doing the work that I love.

The IRS filing season has officially been open for 12 days. In those 288 hours Ralph and I have prepared over 70 tax returns. With most of those returns, we are seeing lower refunds due to lower withholding (see my previous post regarding withholding) on federal returns. Generally, state and local returns are not seeing dramatic changes due to the simple flat tax that each imposes.

Refunds are being received, but remember that in order to help safe-guard against identity theft, those tax returns claiming the Earned Income Tax Credit and/or the Additional Child Tax Credit will not be released until the 15th of February. However, the actual receipt of the refund could be a bit longer depending on IRS and financial institution processing time. You can keep an eye on your refund via our website www.sayeandassociates.com; click on “Check your federal refund” on our Links page. For all other returns, and all returns filed after February 15th, the general rule is that you should have your refund 21 days from the acceptance date. Please remember that once we have sent the return and received an e-file confirmation, what happens next is completely out of our hands.

What to expect in the next 1,560 hours: I anticipate that we will consume well over 15,000 mg of caffeine, go through over 20 cases of paper, spend over 1,000 more hours at our desks, and prepare an estimated 200,000 different tax forms! In 1,561 hours we will be sleeping where we fall.

My Free Advice for this Friday is bookmark our website so you can keep an eye on your refunds.

Check back next week for an update on how our office staff survives the season. It may or may not involve Nerf guns.

~Amy

Pay-As-You-Go

I was in a Political Science course recently and was surprised to realize that there are some who do not understand the correlation between the tax dollars we pay and the money that the government has to spend. In other words, our taxes are what the government has available to them to spend.

Consider the following: what if your weekly paycheck began coming to you on an irregular basis and in varying amounts? Besides the obvious frustration with our employer, think about how you would be able to pay your bills, buy groceries, or even have the gas to get to work. Would this change the way that you approached your spending? How about your stress level? Now, on top of this new varied pay schedule, imagine that your employer comes to you once a year and asks you to refund them a substantial over-payment of wages. Are you freaking out yet?!

Let’s add another layer to this. Not only is your income coming in sporadically and you have to pay some back, now your employer tells you that you have to apply for your pay and will get paid when they get paid from their customers. You have a great week and you work a lot of hours and go through the process of requesting your pay, but you have been waiting a month or even a year to get that payment. Even worse, it never comes in. During a busy time you forgot to put in your request for payment and by the time you remember it is past the deadline for collecting that money from your employer.

This is what the Treasury Department of the United States goes through each year. I have no interest in getting political and want to just talk numbers and cash-flow. The current year budget is based on an estimated $3.643 trillion. According to The Office of Management and Budget, reported by http://www.thebalance.com, “the federal government’s revenue comes from Individual Income taxes that contribute $1.822 trillion, over half of the total. Another third, $1.295 trillion, comes from your payroll taxes. This includes $949 billion for Social Security, $289 billion for Medicare, and $46 billion for unemployment insurance.” (https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762)

IRS Commissioner Charles Rettig reported on 4/10/19 that as of March 22nd, the IRS had issued $191 billion in tax refunds. That is 5.25% of the total federal budget. You may be thinking that is a rather small percentage and manageable, so let’s throw in your household income and see what happens. Assuming you bring home $1,000 per week for a total of $52,000 per year, you would be asked to refund your employer $2,730 every year. That is an average of $52 per week that you receive.

That $52 per week may be manageable, but there is more. The IRS estimates that the average Tax Gap (the amount of uncollected tax) for the each year during 2008 – 2010 was $458 Billion per year. That is 13.23% of the total budget! On top of that, the IRS was holding on to approximately $1.4 Billion in refunds that were nearing the three year deadline for payment. That accounts for another 3.85% of the budget. Lucky for the government, anything that is not claimed is sent back into the coffers to offset the refund paid out and the Tax Gap.

Now, instead of just the $52 per week that you have to hold back, your employer is going to keep about $6,900 of your total salary. We are up to $185 per week that you may or may not receive over the course of the year. Just for fun, your employer remembers that they didn’t ask you to pay back enough a couple of years ago so they request an additional $2,000 to be paid back to them, another $38 per week! That brings our grand total to $223 of each pay check that we may or may not receive or be able to keep. That equals 22.3% of your $52,000 annual salary. That is a significant number!

Looking at the government budget of $3.643 trillion, that is $8.124 billion in money that may or may not come in and if it does, it has to go back out again.

With the release of the new W-4 form and the adjustment to the withholding tax tables, the guiding principal was to close the gap between what is coming in and what has to be refunded. The tax code is setup as a “pay as you go” system to help encourage a steady cash-flow. For most of us our taxes are taken out of our paychecks and we do not even think about it. However, how many of us have a side hustle or a second job or are out there on our own running a small business? With the raise of the gig economy (Uber, Lyft, Shipt, Instacart, etc.) there is a need to be aware of tax implications of this type of income.

My Free Advice this Friday: Check your withholding! Make those estimated tax payments! Being proactive helps the cash-flow for both you and the Treasury Department.

Check back next week for a look at the taxing changes for your side hustle.

~Amy

The Plot Thickens

Hi, everyone! I think I am finally recovered from tax season.

Today the IRS released a new W-4 form to more accurately reflect the amount of tax liability that you will have during 2019. You can view the new form here. Although the first page does not look very different, the worksheets that accompany the form are a bit more complicated.

To begin processing the worksheets, you will need to review two separate IRS Publications, process several different If/Then situations, and figure out how many children will qualify for the child tax credit. Once you have that info you will multiply the number of kids that qualify by either 2 or 4, depending on your total income for the year. If you want to tackle itemized deductions, adjustments or additional income you get to subtract, add, subtract, divide, and add again. Then, if you and your spouse both work you need to interpret two separate tables. But first you must figure out the total highest paying job and the lowest paying job and then look at the qualifier to be sure you don’t enter more than “3” no matter what the table says. And then you will need to find some other numbers on the worksheet, subtract, find the amount on another table, and multiply that amount by a different line and then divide by the number of pay periods remaining for 2019.

Or they have an app on their website www.irs.gov/W4App that will calculate your withholding status for you.

For the app, you will need to have your paycheck stubs handy so you can list your earnings, retirement contributions, and health insurance deductions. You will also need to decide which credits you are eligible for and the amounts of any student loan interest or other adjustments that you will claim on your tax return at the end of the year. Then once you have entered all that information for all the jobs that you and your spouse have during the year, you will need to estimate your itemized deductions. The website will calculate which is better, standard or itemized, and generate a results page. After running a married filing joint scenario with no dependents and an annual income of $50,000 I was astonished to see that the W-4 should be completed with Married 6 as the withholding status.

All I can say is, wow!! The idea of just being able to mark Married 3 if you are married with 3 kids has gone out the window. If this makes your head spin, I understand. It took the IRS 18 months to come up with the new form and worksheets. I figure it will take us all that long to fill them out.

This should help you see the incredible changes that were brought into the tax code with the Tax Cuts & Jobs Act. While we are all still recovering from some shocking results during the 2018 tax season, we can now begin to plan for 2019.

My Free Advice this Friday: Check out the new form or the App. You may be surprised by the results! If any questions arise, you know where to find me!

Check back next week for a look at our Pay-As-You-Go Tax System.

~Amy

Let’s talk about 2019

There are only 3 weeks left until the April 15th filing deadline. It has been a busy season with mixed results for some clients. I think that it is safe to say that the 2017 Tax Cuts and Jobs Act has proven to be as far reaching as it was promised. While the results are not always expected, they are starting very important conversations regarding tax planning. Most people think that tax planning is only for the wealthy who are trying to get out of paying taxes, but that is not true. Most taxpayers have options available to them that would help to manage the amount of tax that they pay. The options range from utilizing a Health Savings Account (if eligible) to pay medical expenses with money that is not taxed, to simply adjusting the amount of withholding that is coming out of your paycheck each pay period.

One question that I like to ask a client is, “what is your tax goal? Do you want to breakeven or get a large refund?” Then I explain how to go about each option and provide answers as varied as my clients. So I am asking you, “What is your tax goal?” and more importantly, “how are you going to get there?”

If you owed more money than you expected, here are the three options available to you:

  • 1 – Leave everything the same and plan on owing again for 2019
  • 2 – Change your withholding; have more money taken out before you see it
  • 3 – Make quarterly estimated payments to the IRS

If you received a large refund here a couple of things to consider:

  • 1 – You just gave the government more money than necessary during the year, interest free.
  • 2 – The IRS would prefer that taxpayers fall into a $2,000 range of owing or getting a refund. Although there is no penalty assessed for a refund over $1,000 there is a penalty assessed if you owe more than $1,000 for more than one year in a row.

My free advice this Friday: Let’s talk! Tax planning is not just for the wealthy.