Tag Archive for: Back Taxes

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REMEDY FOR FAILING TO FILE 1099s

If you’re thinking back on the previous year and realizing there are 1099 forms you did not submit, here are the steps you can take to remedy the situation and possibly avoid having to pay fines on your errors.

  1. Reach out to your tax attorney and share the information of which contractors you failed to file 1099s for.
  2. Gather any necessary information (EIN, Tax ID # or SS#) for those parties.
  3. Have your tax attorney reach out to IRS and submit the correct forms with a letter of explanation for why the forms are late. The reason for late filing has to be more substantial than, “I forgot” but with supporting evidence and documentation, fines can be waived.

Think the IRS isn’t after small fry like you? Think again. In the case of Chelsea Piers in NYC, criminal tax proceedings were brought against referees who, in collusion with Chelsea Piers, cashed multiple $40 checks for referee work under false names over, and over and over again to save money come tax time.
They played tax dodge-ball and got hit in the face with a criminal indictment for fraud… Yet another reason not to like dodge-ball.

Small businesses often pay contractors for projects, services and even rent (paid to non incorporated companies). Form 1099 is the form business owners send to those contractors and submit to IRS to share the information with IRS of how much was paid to those contractors. If the amount paid was over $600 in a fiscal year, it is mandatory to file form 1099. Take note: The deadlines for filing 1099s are different from the regular April 15th deadline, so read on…

Form 1099 comes in many varieties, including 1099-INT for interest, 1099-DIV for dividends, 1099-G for tax refunds, 1099-R for pensions and 1099-MISC for miscellaneous income. All 1099 forms are informational tax filings, not tax return documents and as such the information that your business submits to IRS has to be correct. If you failed to file 1099s for 2018 you may find it challenging to gather all the required information for your payees. Take this as a lesson for next year… gather contractor Tax ID# or SS#, address, legal name and even phone number so you can submit your 1099s on time to IRS for 2019. Late or non filed 1099 forms risk fines starting at $50 and escalating quickly from there.
If you realize you have made a mistake or have forgotten to file certain 1099s, act as soon as possible, the longer you wait, the more you may have to pay in penalties.

Deadlines:
File Form 1099-MISC on or before Jan. 31 if you are reporting non-employee compensation (also known as NEC) payments (in Box 7) using either paper or electronic filing. For all other reported payments, file Form 1099-MISC by Feb. 28, if you file on paper, or April 1, if you file electronically.

Guidelines for non-incorporated contractors you must file 1099s for:

  • Independent contractors who worked for your business
  • Recipients of prizes and awards from your business
  • Rent (even between related parties, if not incorporated) for your business
  • Physicians, physicians’ corporation or other supplier of health or medical services (corporations need a 1099-MISC for medical services) for your business (not personal)
  • Gross proceeds of $600 or more paid to an attorney for your company
  • Interest on a business debt to someone (excluding interest on an obligation issued by an individual)
  • Dividends, even to a company shareholder

Remember, you are only required to issue a 1099-MISC for “Non-employee services” when personal services are provided.

Resources:
Visit IRS.gov:
Form 1099-MISC
Instructions for Form 1099-MISC
Information Return Reporting

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Back taxes occur when business or personal taxes are not filed and paid in full by their due date each year. They continue to accrue interest for as long as they remain unpaid, and many can incur a number of additional penalties as well.

Here are some of the serious and often severe consequences your business may encounter if you fail to remedy back taxes owed to the IRS.

Failure-to-File Penalty

Regardless of whether or not you can pay immediately, you should at least file your taxes. The failure-to-file penalty can be as much as ten times greater than the penalty for simply not paying. Often, this penalty is 5 percent of the unpaid taxes for each month that your tax return is late (not to exceed 25% of your unpaid taxes). The penalty can add up quickly, which is why tax professionals strongly recommend filing on time, no matter whether you can afford to pay the actual taxes you owe.

The IRS uses their Information Returns Processing (IRP) system, which automatically flags those who do not file for follow up. The IRP also provides an assessment of what you owe. It likely will not take into account any deductions or other measures you might use to reduce your tax exposure, meaning that the IRS tax bill it generates is likely going to be greater than one presented by an accountant.

In other words, if you don’t file your taxes on time you will face not only a failure-to-file penalty but a higher overall tax bill, as well — that’s not to mention the interest which will also accrue on your tax debt.

Failure-to-Pay Penalty

One of the more common reasons businesses incur back taxes is due to economic downturn. In this situation, it’s not uncommon for businesses to pay off their vendors instead of paying taxes, or to suppress withholdings for payroll taxes from the IRS.

If you didn’t pay your taxes by the due date, you’ll face the failure-to-pay penalty on top of your back taxes. (If you also incurred the failure-to-file penalty, both penalties will apply.) Generally, the failure-to-pay penalty will be 0.5 percent of your unpaid taxes per month. This penalty begins accruing immediately — the day after taxes are due — and continues to apply for every month (or partial month) your taxes remain unpaid (not to exceed 25% of your unpaid taxes).

While there are extreme scenarios in which a business won’t be subject to back taxes or penalties — such as natural disasters, a death in the family, or Innocent Spouse Relief — these are rare occurrences. More likely, your best option will be to work with an experienced tax attorney to resolve your back taxes, interest, and associated penalties as soon as possible.

Asset Seizure

If your company is subject to back taxes, the IRS is permitted to withhold any future tax refunds you and your business are entitled to receive until those taxes are paid off. If you are self-employed you may also find your retirement savings affected; this is because, during the period of unpaid back taxes, your income is not being reported to the Social Security Administration. In this situation, you’ll likely find it harder to receive future loans or financing for your business, particularly if the IRS has placed a lien on your business.

The IRS may also seize your assets in order to pay the outstanding balance your business owes. They also have the authority to levy or lien personal assets of the business owner and any other responsible party. In more extreme cases, the IRS  can shutter your business and seize your property without warning — no court order required.

How to Respond to the IRS

Tax payments simply cannot be avoided. The statute of limitations for pursuing tax debt is a lengthy ten years, and most people cannot avoid the IRS’ long financial reach for a decade or longer. To avoid the harsh repercussions of back taxes, do not put off or ignore the IRS’ demands, even if you have not been personally visited by an agent.

Contact the IRS immediately to ask for an extension, set up an installment plan, apply for an offer in compromise, or even request a temporary halt to the collection process. If none of these options fit your current situation, simply calling to acknowledge that you’ve received the collections notification will show good faith and work in your favor.

Once you’ve made contact with the IRS, begin making adjustments to lender and supplier payments as well as other expenditures in order to find the money to pay your tax bill. Working with a professional tax attorney can help you communicate with the IRS in the smoothest way possible. For the best approach tailored to your unique financial situation, contact the tax attorneys at Milikowsky Tax Law to discuss your options for resolving your tax debt.