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Karen M. Summerhays, owner of The Summerhays Group, a Salt Lake-based tax and accounting firm, says about 125 cases brought by Utahns will be heard by the U.S. Tax Court this fall.
What are the common pitfalls for Utahns who get into tax trouble?
Three of the largest monetary penalties assessed by the IRS in 2012 were filing tax returns late, not paying individual income taxes and failure to pay employer payroll tax deposits. Failure to file taxes one year can often trigger a domino effect over consecutive years. The best way to break the cycle is to file the return by the deadline, even if it's partial. This will eliminate failure to file penalties of between 5 percent and 25 percent. The IRS offers a generous 60-month installment plan to pay back taxes. However, interest will accrue on the unpaid balance. Cash-strapped businesses often "borrow" payroll taxes to fund other operating expenses, which also leads to costly problems. Penalties assessed by the IRS can reach 25 percent of the taxes due and interest is compounded daily. Businesses can retire back taxes with a payment plan but the best way to avoid the trouble is to deposit the payroll taxes with the IRS each pay period.
What is the key to getting a tax delinquency reduced?
In most cases, working with a trained professional such as an Enrolled Agent (tax expert) increases the odds of a favorable outcome. The IRS can accept an "Offer in Compromise," which is an agreement that gives taxpayers who fit certain income and asset parameters several options for settling the tax liability for less than the amount owed. Penalties for late filing and late payment of taxes can be waived if there is "reasonable cause" and the taxpayer acted in good faith. An Enrolled Agent can leverage Chapter 7 and Chapter 13 of the Bankruptcy Code to stop the accrual of penalties and interest, reduce terms of an installment agreement and, in some cases, remove the tax debt.
What are red flags auditors look for?
One of the biggest is sizable business losses reported on Schedule C by sole proprietors, especially if those losses continue year after year. The IRS looks for a profit motive. Is the taxpayer really trying to make a profit in this business or is it really a thinly disguised hobby?
Other red flags include:
The cost of goods sold • This is direct costs of supplies, manufacturing, etc., exceeding the gross sales of the business and large travel and entertainment expenses.
Low salaries • Money paid to shareholder/employees of S corporations (which do not pay federal taxes), who also take nonpayroll distributions from the business
Personal mileage• Claimed on vehicles deducted as business usage
What does the Supreme Court's Defense of Marriage Act ruling mean to Utah's gay and lesbian taxpayers?
As yet, the IRS has not issued guidance for this landmark ruling but most experts think same-sex couples married in a state that recognizes such marriages can only file their tax returns as married filing jointly (MFJ) if they currently reside in a state that recognizes the marriage. For example, a couple married in New York who moves to Utah, could not file a MFJ tax return either federal or Utah state return. However, same-sex couples can use the unlimited estate and gift tax marital deductions to make unlimited gifts between them during their lives and to defer estate taxes until the death of the surviving spouse. It is uncertain at this time, if the couple must reside in one of the states that recognizes the marriage to take advantage of the estate and gift tax rules for married couples.
What federal benefits are impacted by the ruling?
This would include tax-free, employer-provided benefits, such as health insurance for married same-sex partners that were previously included in income under federal law are now excluded from income. A same-sex spouse can now sign for an injured or disabled spouse or for a spouse serving in a combat zone. In addition, Social Security survivor benefits will be available for surviving spouses.
Dawn House Karen M. Summerhays, tax expert