When looking into the net worth of a business or individual, one of the first couple of things we look at are assets and liabilities. Assets are resources or properties owned by an individual, organization, or entity that have value. They can be used to generate future economic benefits. Real estate, vehicles, cash, inventory, intellectual property, software and licenses are assets. Deferred tax assets, on the other hand, are items that can be used to lower a tax liability. Here we will review what a deferred tax asset is and how it works.
Financial Reporting vs. Tax Reporting
Before diving into deferred tax assets, it’s important to first understand how financial reporting differs from tax reporting. Financial reporting tracks information through balance sheets, income statements, and statements of cash flows. These statements give stakeholders a good idea of a company’s financial position, performance, and cash flow. Tax reporting, on the other hand, involves calculating and reporting a business’s taxable income and tax liability to the relevant tax authorities.
Financial reporting focuses on the accrual basis of accounting. Revenues and expenses are recognized when earned or incurred, regardless of when cash is received or paid. It aims to provide a comprehensive and long-term view of the financial performance and position of a company. Tax reporting generally follows specific rules related to the timing of revenue and expense recognition for tax purposes. Depending on the tax laws, revenue and expenses may be recognized differently from financial reporting. For example, certain expenses may be deductible for tax purposes when paid, even if they are not yet recognized as expenses under financial reporting.
What is a deferred tax asset?
A deferred tax asset is an item on a balance sheet that was created by overpaying taxes or paying it off early. It usually represents a difference between the company’s internal accounting and taxes owed. If taxes are not yet recognized in an income statement, sometimes because of the accounting period used, a deferred tax asset can emerge. Another example would be how a company depreciates its assets. Changing the method or the rate of depreciation can result in overpayment of taxes.
Why do deferred tax assets exist?
Deferred tax assets allow individuals and businesses to reduce their taxable income in the future. One simple example would be a loss carryover. Since businesses are able to use a loss to reduce their taxable income in later years, the loss can essentially be viewed as an asset. Deferred tax assets never expire. That said, they can be used whenever it’s most convenient for the business. This is as long as they are not applied to past tax filings.
How are deferred tax assets calculated?
Calculating a deferred tax asset can vary depending on the type of asset. For example, let’s assume a business uses a depreciation rate of 20% for tax purposes, but 15% for their own accounting purposes. If their taxable income is $10,000, they would pay $2,000 (20% of $10,000) to the appropriate taxing authority. However, the taxes on their income statement would be $1,500 (15% of $10,000). The difference in actual tax paid and the tax reported on the income statement is a deferred tax asset on their balance sheet, or $500 ($2,000 – $1,500).
In another example, there may be some expenses that a business records on their income statement but not on their tax statement because they are not able to. This would result in more taxes actually paid and a deferred tax asset on the balance sheet.
Should I have deferred tax assets?
Deferred tax assets represent tax benefits that can be used to offset taxes owed in the future. It’s important to note that deferred tax assets are also not always guaranteed. If a company experiences financial difficulties or does not generate enough taxable income in the future, the deferred tax asset may not be used. Additionally, deferred tax assets must be periodically reviewed to ensure that they are still valid and should not be written off. It goes without saying that deferred tax assets can get very complicated. However, Optima Tax Relief has over a decade of experience helping taxpayers with the toughest tax situations.
Most people dabble in gambling at some point in life. It might look like a day at the racetrack, a quick stop at the gas station for a lottery ticket, or a weekend in Las Vegas. The IRS views all these activities as gambling, among many others. More importantly, the IRS wants everyone to know that all gambling winnings are considered taxable income. In this article, we’ll break down how gambling winnings are taxed, how to handle taxes if you gamble professionally, and how to deal with gambling losses.
Gambling Winnings are Taxable
Any winnings you receive from gambling, whether small or large, are considered taxable income and must be reported to the IRS. This is true whether the payer reports the winnings or not. If the payer does report your winnings to the IRS, they will do it through Form W-2G, Certain Gambling Winnings if:
Winnings (not reduced by the wager) are $1,200 or more from bingo or a slot machine
Winnings (reduced by the wager) are $1,500 or more from a keno game
Winnings (reduced by the buy-in) exceed $5,000 from a poker game
Winnings (except for bingo, slot machines, keno, or poker) reduced by the wager are $600 or more, or at least 300 times the wager
Winnings are subject to federal income tax withholding
It should also be noted that other gambling winnings not reported are also taxable. This includes the fair market value of any prize won, such as a car or vacation. All gambling winnings must be reported as other income on Form 1040 during tax season.
Reporting Winnings as a Professional Gambler
If you gamble as a means of regular income, you’ll instead file a Schedule C as a self-employed individual. What makes this different from reporting your winnings on Form 1040? The main difference is that those who gamble for a living can deduct your costs of doing business using Schedule C to reduce your taxable income. This includes:
The cost of magazines, periodicals, or other data you use in relation to your gambling
Some of your internet expenses if you place bets online
Meals and travel expenses for tournaments
It does not include deducting your losses that exceed your winnings. On top of that, you will need to pay self-employment tax on your winnings. If you gamble professionally, be sure to keep good tax records for an easier filing process later.
Deducting Gambling Losses
You can deduct gambling losses as long as they do not exceed your winnings. However, in order to do this, you will need to itemize your deductions. That said, it’s not beneficial to try to deduct your losses if itemizing your deductions will yield a larger tax liability than taking the standard deduction. For example, if you won $1,000 while gambling but lost $3,000, you may only deduct $1,000 when itemizing. You will need to claim $1,000 in income on your Form 1040 and then deduct $1,000 when you itemize using Schedule A.
What if I don’t report my gambling winnings?
Failure to report gambling winnings or attempting to evade taxes can have serious consequences. Penalties for non-compliance can range from monetary fines to legal action, including criminal charges. It is crucial to maintain accurate records of gambling activities, including wins, losses, and related expenses, to ensure compliance with tax laws. Remember, staying informed and fulfilling tax obligations will help you enjoy your gambling pursuits while avoiding any potential legal or financial repercussions. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses levies and garnishments, including which assets the IRS can seize and how the IRS can garnish your wages.
A levy is a legal seizure against your assets that results from owing back taxes. In truth, the IRS can seize just about anything you own. This includes property, bank accounts, retirement accounts, some life insurance policies, and even wages. How much of your wages the IRS levies to begin with depends on a few factors. Your filing status, dependents, and how often you receive a paycheck can affect their decision.
How Much Can the IRS Garnish?
Unfortunately, the IRS has full discretion on how much of your paycheck they will garnish. However, the IRS can typically only garnish your disposable income each month that is over the exempt amount according to your standard deduction. For example, single filers have a standard deduction of $13,850 in 2023. Let’s say a single filer with no dependents gets paid weekly. Their take home pay after the wage garnishment would be about $266 ($13,850 divided by 52 weeks). However, if you have dependents, or use a higher standard deduction, this amount will increase.
How to Remove Levies and Garnishments
Most taxpayers who have levies and garnishments just want to know how to get them removed. The simplest and most obvious answer is to pay the tax liability in full. However, sometimes this isn’t an option. If not, you can set up an installment agreement with the IRS or try to claim economic hardship. In any case, taking swift action is crucial. Additionally, having a team of tax professionals in your corner can help ease the process.
Don’t miss next week’s episode where Phil will discuss tax scams. See you next Friday!
If You Need Help Getting a Levy Released or Garnishment Removed, Contact Us Today for a Free Consultation
Tax time can be a stressful period for individuals and businesses alike. However, maintaining accurate and organized tax records throughout the year can make the process much smoother and alleviate unnecessary headaches. Whether you’re a freelancer, small business owner, or an individual taxpayer, this guide will provide you with valuable tips on how to keep good tax records, ensuring compliance, minimizing errors, and maximizing deductions.
Organize Your Documents
The best way to get started with keeping good tax records is to create a system to help you stay organized. To some, this may look like a filing system, either physical or digital. However, if you do go with a physical cabinet, you should still keep digital backup files. You can start organizing by labeling all documents by category, from income to expenses to deductions and credits. Then you may want to take it a step further and include subdivisions of each category. For example, you can break these down by month, expense type, or project.
Utilize Technology
Some of us are old school and that’s okay. However, working technology into your system can make things much more efficient. For example, if you’re looking for a specific file, doing a quick search on your computer will be a whole lot easier than digging through paper files. You may also want to consider using accounting software to track expenses and income. These tools can streamline the record-keeping process significantly, especially if you are running a business.
Separate Business and Personal Records
Speaking of business, always remember to keep your personal and business income and expenses completely separate from each other. This includes documentation and receipts.
Keep Records of All Relevant Information
It’s better to keep more records than you need just to be on the safe side. At the very least, you should keep the following for a minimum of three years:
Income records, including bank statements, W-2s, 1099s, receipts from rental income, etc. If you file jointly with your spouse, you’ll also need their records.
Expense documents, like receipts, invoices, checks, etc. Be sure these are categorized so it’s easier to claim certain deductions at tax time.
Investment records, such as purchase and sale details, dividend payments, capital gains and losses, etc.
Real estate records, including purchase agreements, mortgage interest statements, property tax records and more.
Track Your Deductions and Credits
During tax time, you’ll want to maximize your refund and savings by taking advantage of tax deductions and credits. Be sure to only claim the credits and deductions you qualify for and can substantiate with proof. For example, if you plan to deduct contributions made to charity, you should keep receipts and acknowledgements for donations you make. These will allow you to calculate your deductions. If you have education-related expenses, records of tuition payments, student loan interest, or materials can help prove your eligibility for education tax credits.
Get Tax Help
Keeping good tax records is essential for legal compliance, minimizing errors, maximizing deductions, making the audit process smoother, and gaining valuable financial insights. By investing time and effort in maintaining accurate and organized records, you can navigate tax season with confidence, minimize tax liabilities, and ensure smooth interactions with the IRS. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Tax evasion and tax fraud are federal crimes. Both involve the willful attempt to either evade the assessment or the payment of taxes. But at what point does the IRS pursue criminal charges for these actions? What consequences are included in the criminal charges? How does one prevent these charges from being brought upon them? Here’s what you need to know about how and when the IRS pursues criminal charges against a taxpayer.
What causes the IRS to consider pursuing criminal charges?
The IRS typically does not pursue criminal charges unless you exhibit a pattern of intentionally breaking tax laws. This can include non-filing, filing fraudulent returns, falsifying information on your return, not paying taxes, and more. The IRS statute of limitations could trigger charges to be filed. Currently, the IRS has six years from the return filing date to pursue criminal charges that relate to failing to file and underreporting income. Finally, if you are ever audited, do not attempt to falsify records or omit information. This is a sure way to be implicated in a tax crime.
If the IRS opens a case against you, they will refer it to the Department of Justice for prosecution. In order for the IRS to be successful in convicting someone for tax evasion, they must prove without reasonable doubt that the accused taxpayer (or nonpayer) acted in a deliberate and willful manner to avoid paying their taxes.
What consequences are included in the criminal charges?
While these charges are not as common as others, the penalties are very harshand can have life-altering consequences. Being guilty of tax fraud can result in heavy fines, interest, penalties, and even jail time. The average jail sentence for tax evasion varies between three to five years. The sentence will depend on the severity of the case. In addition, you can be fined up to $100,000, or up to $500,000 for corporations. If you are found guilty of filing false tax returns, you can be fined up to $100,000 and up to three years in prison. Even misdemeanors, like failing to file, have harsh consequences. For example, you could owe up to $25,000 for each year of non-filing, and up to one year in jail.
On the more extreme side, willfully hiding offshore bank accounts can result in up to $500,000 in fees and up to ten years in jail. Even if the action was not willful it will result in penalties.
How do I prevent IRS criminal charges?
The answer is simple: always remain tax compliant. Avoid committing tax evasion or tax fraud, and always file and pay your taxes. If you’re unable to pay, contact the IRS immediately to see what options you have. If you find yourself stuck in a tax dispute with the IRS, consider hiring an attorney to fix the issue while it’s at the civil level to avoid the charge becoming criminal.
Remember, you are guilty even if you are only helping someone else evade their taxes, according to Section 7201 of the U.S. Internal Revenue Code. In any case, working with the IRS can help avoid criminal charges being filed against you. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
A passport is an essential travel document that allows individuals to explore new horizons, visit foreign lands, and experience diverse cultures. However, the privilege of holding a passport comes with certain responsibilities, one of which is fulfilling your financial obligations to the government. In this blog article, we will explore the question of whether you can obtain or renew a passport if you owe back taxes.
Understanding Passports and Tax Obligations Most people are quite shocked to learn that back taxes can affect your ability to obtain or renew a passport. The IRS’s control over this privilege is just another method they use to encourage taxpayers to remain compliant. If the IRS deems your tax debt “seriously delinquent,” they have the authority to notify the State Department, who can then revoke your passport, or deny your passport application or renewal. This action will not come as a surprise. If the IRS plans to contact the State Department about your back taxes, they will let you know with IRS Notice CP508C. The Department of State will also notify you in writing of their plans to revoke your passport or deny your passport application.
“Seriously Delinquent”
According to the IRS, any tax debt that totals more than $55,000, including interest and penalties, is considered seriously delinquent. By this point, an individual likely has been levied and a notice of federal tax lien has been filed.
How can I get this action reversed?
Like many other consequences of not paying your taxes, the fastest and easiest way to reverse this action is to pay your tax debt. However, even paying your debt down so it falls below the “seriously delinquent” threshold can help resolve the issue. For those who cannot afford to pay, there are other options available to them including:
Getting approved for an installment agreement with the IRS
Getting approved for an offer in compromise
Request innocent spouse relief
Request a collection due process hearing
Settle the debt with the U.S. Department of Justice
On the other hand, there are some scenarios in which the seriously delinquent status can be removed. These include:
Being impacted by a federally declared disaster area
Requesting an installment agreement
Submitting an offer in compromise
Having an IRS-accepted adjustment that can pay off the full debt
If you manage to fall into one of the above scenarios, it typically takes the IRS 30 days to reverse their action and notify the Department of State. In any case, it is crucial to take proactive steps to resolve the matter. Seek assistance from tax professionals, explore repayment options, and communicate with the relevant government agencies to find a suitable solution. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
When taxpayers are unable to pay their tax liabilities, the IRS offers Currently Not Collectible (CNC) status. This temporarily suspends debt collection efforts by the IRS. It provides individuals with breathing room to get their finances under control. In this article, we will explore what CNC status entails, who may qualify for it, and how it can provide much-needed financial relief.
What is Currently Not Collectible (CNC) status?
Currently Not Collectible (CNC) status is a designation provided by the IRS to taxpayers who demonstrate that they are unable to pay their tax debt due to severe financial hardship. When a taxpayer’s account is classified as CNC, the IRS temporarily halts its collection activities. In other words, it pauses liens, levies, and wage garnishments. However, the IRS will continue to assess interest and penalties during this time. They will also seize any tax refunds you receive and apply them to your tax balance. While collections typically stop, the IRS will still continue to send you tax bills as they are legally required to.
Who qualifies for CNC status?
As mentioned, CNC status is for taxpayers who cannot afford to pay their taxes. In general, taxpayers will need to meet general qualifications to be considered for CNC status. These include:
Income under certain threshold
Unemployed with no other income
Little or no disposable income after basic expenses
Living expenses meet IRS guidelines
All income comes from Social Security, government welfare, or unemployment
How do I apply for CNC status with the IRS?
Taxpayers who can show proof of financial hardship may qualify for CNC status. To be considered, the IRS may require you to be current on any tax returns. You will need to submit IRS Form 433-F, Collection Information Statement, IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or IRS Form 433-B, Collection Information Statement for Businesses. These forms collect information about your current financial situation, including your account balances, real estate values, credit card debt, employment information, living expenses, and more.
The IRS will use the information provided to confirm your inability to fulfill your tax obligations. They may request additional information and documentation to support your claims. You should keep in mind that you need to continue to file your taxes each year that you are under CNC status, even if you cannot afford to pay your taxes. You should also continue to make estimated tax payments and federal tax deposits if you are required to.
What happens after the IRS reviews my case?
If the IRS determines that you are unable to pay your taxes, you will be granted CNC status. This means that the IRS will temporarily pause all collections. It’s important to understand that CNC status is not a permanent get out jail free card, nor will it stop penalties and interest or federal tax liens. It is meant to relieve financial pressure until your financial situation improves. That said, the IRS will review your financials every year to see if you can afford to pay your tax bill. If your financial situation improves, they will likely remove your account from CNC status and begin to collect again.
Should I apply for CNC status?
CNC status allows individuals to stabilize their finances, meet essential living expenses, and work towards resolving their tax debt. It is important to consult with a tax professional or seek guidance from the IRS to understand the eligibility criteria and application process for CNC status. Remember, while CNC status offers temporary relief, it does not eliminate your tax debt entirely, and individuals should actively seek long-term solutions to their financial challenges. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses IRS enforcement, including the statute of limitations and how it might affect your credit report.
Did you know the IRS has a certain amount of time to collect your tax debt before it expires? How long? Well, the simple answer is 10 years, but several factors can pause this timeline. For example, filing for bankruptcy, living abroad, applying for an installment agreement, submitting an offer in compromise, applying for innocent spouse relief, applying for a taxpayer assistance order, requesting a collection due process hearing, serving in the military, or being sued by the IRS can all pause the 10-year collections period.
Many also wonder if IRS enforcement can affect your credit. The IRS can file a Notice of Federal Tax Lien, or a priority claim over all of your assets. While this notice does not show up on your credit report directly, it does become public information that creditors can access through supplemental reports. This can affect your access to credit, business opportunities, and even employment.
Join us next Friday as Phil will answer your questions about levies and wage garnishments!
If You Are Being Hit with IRS Enforcement, Contact Us Today for a Free Consultation
Bankruptcy is an exhausting process that individuals and corporations may have to go through when they are overburdened by financial obligations. While it provides the opportunity for a fresh start, it is critical to be mindful of the tax implications. In this blog article, we will discuss the tax implications of bankruptcy, assisting you in understanding the potential penalties and providing guidance to help you navigate this complex scenario.
The Inflation Reduction Act of 2022 has equipped the IRS with more than $80 billion in funding. That means more audits and more enforcement. CEO David King and Lead Tax Attorney Philip Hwang provide helpful tips on what you can expect from the IRS moving forward and how you can resolve your tax burden.
While medical bills can be a significant hardship for many individuals and families, it is critical to understand that certain medical expenses are tax deductible. Understanding the eligibility criteria and documentation requirements will help you in optimizing your deductions and possibly lowering your tax payment. In this post, we will look at medical expenses that are tax deductible.
Withholding too little tax from your paychecks can result in a tax bill during tax time, while withholding too much tax can result in smaller paychecks than necessary. That being said, understanding tax withholding is crucial because it directly affects your income, tax liability, and financial planning. Here is a breakdown of tax withholding.
Buying a house is an exciting milestone in life, representing stability, investment, and the fulfillment of a dream. However, for individuals who owe back taxes, the path to homeownership can seem uncertain. It’s essential to understand the implications and challenges associated with buying a house while having outstanding tax debt. In this article, we will explore the factors to consider and strategies to help you navigate this unique situation.
Understanding Back Taxes
Before diving into the home buying process, it’s crucial to understand what back taxes are. Back taxes are unpaid taxes from previous years, either due to underpayment or non-payment. The IRS may assess penalties, interest, and other charges on the outstanding amount, which can accumulate over time. While it’s not impossible to buy a house while having a tax balance, owing back taxes can potentially hurt your ability to qualify for a mortgage.
Addressing Back Taxes
Addressing your back taxes is crucial before attempting to buy a house, especially since most lenders will not want to approve you for a mortgage if you haven’t made any attempt to resolve your tax debt. This is because if you owe back taxes and own a home, the IRS can place a tax lien on your property, which gives them first dibs at the home if you do not pay your back taxes. In other words, your lender would incur a major financial loss. Here are a few steps to help you address your tax debt:
Evaluate your options: The IRS may offer options for resolving back taxes, such as installment agreements, offers in compromise, or currently not collectible status. Consult a tax professional to determine the best course of action for your situation.
Establish a payment plan: If you can’t pay the entire amount upfront, consider setting up a payment plan with the IRS. This allows you to make monthly payments towards your tax debt over an extended period. Demonstrating a consistent repayment history will show lenders your commitment to resolving your financial obligations.
Consider professional help: If your tax debt is complex or substantial, seek the assistance of a tax professional. These professionals can negotiate with the IRS on your behalf and help you explore potential resolution options.
Prioritize tax debt repayment: Make it a priority to pay down your tax debt as much as possible. Dedicate a portion of your budget to regular payments, aiming to reduce your overall tax liability over time.
Qualifying for a Mortgage While Owing Back Taxes
Once you’ve made significant progress in addressing your back taxes, you can focus on qualifying for a mortgage. Here are a few considerations:
Credit score and history: Your credit score plays a crucial role in the mortgage application process. Maintaining a good credit score and demonstrating responsible financial behavior will enhance your chances of securing a mortgage.
Debt-to-income ratio: Lenders assess your debt-to-income ratio (DTI) to evaluate your ability to manage mortgage payments. Paying down your tax debt and minimizing other outstanding debts can improve your DTI ratio and increase your chances of mortgage approval.
Documentation: Prepare thorough documentation of your financial situation, including proof of income, tax returns, and documentation related to your tax debt repayment. This documentation will help demonstrate your financial stability and responsible approach to resolving your tax obligations.
Qualifying for a mortgage while owing back taxes can depend on the type of loan you are seeking. For example, FHA loans are more desired for buyers because they allow you to buy a home with looser financial requirements. If you are seeking an FHA loan but owe back taxes, you must have made at least three payments to an IRS installment agreement, and meet other conditions, to be approved.
Getting Approved for a Mortgage While Owing Back Taxes
If you do manage to get a lender to approve you for a mortgage while owing back taxes, you should expect your tax bill to have an effect on your monthly payments. Because you will be considered a high-risk borrower, your interest rate will likely be higher than that of a low-risk borrower. You may also be required to put down a much larger down payment if the lender feels this might mitigate the risk that you come with. It goes without saying that these terms are not favorable for buyers, and seeking tax help from a professional can help lower the cost and stress associated with buying a home. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
