IRS Major Announcement

Today the IRS made a major announcement to help more middle class Americans.  They are going to expand their federal tax forgiveness program.  Traditionally, if one owes back taxes to the federal government, you either pay the full amount all at once, through a payment plan or by negotiating a reduction of the debt through what is commonly called an “offer in compromise”.

To qualify for an offer in compromise, you need to show doubt towards the collectability of the debt, whether because you lack the funds or more importantly that there is some dispute about the legitimacy of the debt.

It is said that through today’s announcement, the IRS is going to relax some of their criteria for the qualification of the Offer In Compromise procedures.  We are going to have to wait to see if this truly helps people or not.  If this is true then some people will be able to pay off their back taxes and pay off their local state taxes as well.

Classification Settlement Program

If you are a small business owner and you misclassified your workers an independent contractors instead of regular employees and you got caught by the IRS, you got some options.  Under the Classification Settlement Program (“CSP”), the IRS will allow you to come clean with your mistake and work out a deal to save back taxes and penalties.

To qualify for CSP, you must satisfy the following requirements:

  1. You must be a business owner
  2. Have a open case with the IRS either in an audit or appeal
  3. You made a request for a CSP deal
  4. You are in compliance with Section 530 of the Revenue Act.

Revenue Act Section 530 states that the employer must file all tax returns including 1099 forms showing independent contractor payments, treated all similarly situated workers as independent contractors and had a reasonable basis for the misclassification (like relied on written IRS advice, court decision, past audit and etc).

Those small business that qualify will be offered one of three types of settlement: (1) no tax assessment; (2) pay the most recent year of taxes for the missed classified workers and ignore prior years; or (3) pay 25% of the latest audit year deficiency.

Which settlement offered will depend on the facts of your case.  If you didn’t classify all similar situated workers the same way then don’t try to qualified.  You can’t really argue that you accidentally missed classified if you have two workers in the same situation and you classified one as a general worker and the other as an independent contractor.

Payroll Tax Indemnification Agreement

Many people are involved in a partnership or are shareholders of a corporation and their roles and duties in the company have nothing to do with the financial aspects of the business.  These people carry on their duties and let the other partners deal with the financial duties.

If this fits your duties in a business and your company has employees and your business is required to collect taxes and remit them to the government then you might want to consider entering into an agreement with your partners or the other owners of the business a payroll tax indemnification agreement.  The agreement will protect you and require the other partners to reimburse any payroll tax penalty that you might suffer personally if the IRS determines that company failed to fulfill its payroll tax remittance requirements.

Just so that you are clear, this agreement would only obligation them to pay you back what the IRS takes from you because you will still be personally liable for none remitted payroll tax.

The agreement can be as simple as stating that all the co-owners or shareholders agree to indemnify any of the other owners or shareholders that may be held liable for any unpaid payroll tax liabilities of the business that are proposed or assessed against them personally, plus legal cost in contesting the taxes.

Writing off business expenses

As a business owner, you are constantly having to entertain people to draw up new business.  Sometimes your entertainment expenses are to maintain current business relationship.  When tax time comes around, you need to figure out which expenses are deductible to minimize your tax liability.

As a general rule, you can deduct entertainment expenses if the expense was use to entertain a client, customer, or employee if the expenses are directly related or associated to your trade or business.

If the entertainment took place in a business setting or the main purpose of the entertainment was to conduct business and you actually did some business and you had more than a general expectation of getting income or some business benefit from the activity then it is deductible.

Or if the entertainment is associated with your trade or business and the entertainment directly preceded or follows a substantial business discussion.

So how can you deduct?

You can deduct 50% of your business entertainment expenses.  The transportation cost to the entertainment location is fully 100% deductible.

Constructive Income

“Constructive Income” is a form of income that should be declared on your tax income.  The IRS consider income to include constructive income.  Constructive income is define as income, for tax purposes, money or property that is available to you or is credited to your account.  The income is taxable as soon as it becomes available to you.

For example, say you were working hard and during work for a client for the entire year.  They finally pay you $20,000.00 for all the work that you did on December 15, 2012.  You had a particularly good year and if you deposit that check, your overall earned income will put you into a higher tax bracket.  This will cost you thousands of dollars in additional taxes.

So to avoid the additional taxes, you decide to deposit the check on January 5, 2013 so that the $20,000 can be reported on your 2013 taxes instead.  Under the tax code, the $20,000.00 was available to you on December 15, 2012, and should be listed as income in the 2012 tax year.