Simply Junior

Tax Problem Solver – Why You Need Professional Help

Tax problems come in different forms; IRS tax problems, State tax problems, and Sales tax problems. Tax authorities are constantly increasing their tax enforcement efforts through tax collection and tax audit.

When taxpayers receive the dreaded tax notice that their tax return or their business is going to be audited and examined, the first thing they should do is seek professional tax advice. Same thing when taxpayers receive collection letters threatening levying and garnishing their wages or paychecks, or the tax levy letter for their bank account, taxpayers should seek professional tax advice to resolve their tax problems.

The most common options to resolve your tax problems are:

* Full Payment: paying the amount on the tax notice and avoiding the confrontation with the taxing authority. Most of the time, this option is not the best option for the taxpayer to resolve their tax problem, as often the tax bill is inaccurate.

* Pay The Correct Tax Only: paying the actual amount of taxes if you can afford it is usually a good solution to your tax problem. This will entail working with the taxing authority to abate the penalty assessed. The success of penalty abatement is based on reasonable cause and not willful neglect.

* Installment Agreement: paying the tax amount through an installment agreement is a common way to resolve your tax problem. You should seek professional tax advice, as the taxing authority will usually request a large monthly payment, while professional tax representatives will work on attaining an installment agreement that is reasonable and you can live with without causing a financial and economic hardship on you and your family.

* Offer In Compromise: an offer in compromise, OIC, will usually be accepted by the taxing authority to resolve your tax problem if the amount offered to settle your tax problem is equal or exceed the taxpayer’s Reasonable Collection Potential, RCP. The IRS, or the State, or the Sales Tax Agency determines RCP by using the financial analysis tools like the 433-A for individuals and 433-B for business entities.

No matter which option is correct to resolve your tax problems, usually there are more than one viable option, it is essential that the taxpayer comply with the tax law going forward. That is, all tax returns are filed timely; all estimated income taxes and payroll deposits must be paid timely.

An experienced tax professional who specializes in tax representation would be the best person to have in your corner when the IRS, the State, or the Sales Tax Agency contacts you.

The most surprising fact of all after plumbing the depths of what to do when the IRS contacts you regarding a tax problem is how shallow the well really is. With the lull in activity on the IRS tax audit and collection front, there are relatively few pronounced tax-experts. The $345 billion dollar tax gap remains fascinating to the US Congress and the IRS. It is a high profile item!

The IRS released tax records on their most famous tax problem cases that imprisoned Al Capone, they inadvertently nabbed the Governor of New York allegedly spending tens of thousands of dollars for what they least expected. From Will Smith, to Wesley Snipes to Nicolas Cage IRS audits and collection are on the rise, and is expected to continue for many years to come!

So, do you have a tax problem yourself? Do yourself a favor and take action to resolve your tax problems.

Years ago family budgeting was so simple. People were paid in cash bi-weekly. We took the cash and made up envelopes with totals on the outside of all our bi-weekly or monthly expenses. We just filled the envelopes and what was left over went into our “Savings” envelope. That was a laugh as most paydays only left about $2 in savings but at least we knew all our expenses were taken care of.

As things evolved what with inflation we realized one day that we were keeping to much cash in our home. So we deposited our income into the bank. To keep track of our budget we bought a ledger book with lots of columns. We made up a column for each envelope writing the total amount needed for that expense across the top row.

Each payday we added the new total to whatever was left in each individual column. When a bill was paid we subtracted from the column’s total. All the column headers must total the expected income. If the income varied we made adjustments to the “Savings” column. Some expenses are only due once a year such is the case with property taxes. That expense was divided by 12 and each month it grew.

When starting a new budget it is important to take into account that for example your property taxes may be due in 6 months so you would be short come time to pay them. To rectify this one needs to make a one time only adjustment and double up the payment to that column just until you make your payment and then you can reduce the payment to that account to 12 equal payments. All your column totals should equal your bank balance.

If the total expenses are divided equally by 24 paydays a year those of you that are paid bi-weekly will find that there are 2 months that you receive 3 paychecks. This becomes your bonanza! All that is needed from those extra 2 paychecks is your grocery and gas money. Whatever is left over can go into your “Savings” column. Doing this twice a year gave us Christmas savings from one and holiday savings from the other.

You will also find you are maintaining a nice cash flow in your bank account. How nice when an unexpected expense comes along to be able to borrow from yourself rather than using your credit card and paying interest. Just be sure to make a payback adjustment to that column.

One day I realized I was doing all this work while I knew I had helpful resources on my computer. I now use the Excel program for our budget and it does the math automatically.

If you use this budget system you will often find your bank balance says you have more money than you actually have. But you know what is allocated to expenses. So while the bank tells you there is so many dollars left in your account you know they are spoken for and therefore know how much you can spend on those extras. We often think we have cash left on payday for a dinner out or a new pair of shoes but by using a budget system it may tell you that is not so for this payday. In the long run choosing to run a budget is a very helpful solution when trying to save money!

Nearly 67 percent of all taxpayers around the country are entitled to state tax refunds, and the amount of these refunds is worth lining up for. In the state of California, for example, refunds averaged around $760. The average for most other states was about $550 in 2005.

Guidelines vary from state to state, so it is best to consult an accountant. As a general rule, though, low-income individuals and families could claim property-tax refunds or rent credits if they filed income tax returns. And in many cases, you can still get tax refunds even if you do not meet the tax filing threshold, because you may have money withheld from your paychecks, or because you may be eligible for the federal earned-income tax credit. This applies if you earn less than $33,000 and have more than one child, or earn less than $29,000 and have one child, or earn less than $11,000 and do not have a child.

Are state tax refunds taxable? Yes and no. State tax refunds are typically taxable the year you receive them. If you overpaid your state income tax last year and your state returned your money this year, for example, you must pay taxes on it this year. Expect to receive (if you haven’t yet) a form 1099 from your state, reminding you about that returned money. Your state also sent a copy to the IRS, binding you to pay the appropriate taxes. But there are exceptions.

The state tax refund is fully taxable if you detailed the deductions on your federal tax returns. Check with your accountant, though, because there’s still a chance that part of it is tax-free (even if you did itemize). If you owed the alternative minimum tax during the year of the refund, for example, there’s a chance that your refund may not be taxable.

But if you are among the 70 percent of taxpayers who did not itemize deductions on your return, then you don’t have to worry about a thing. You do not have to pay taxes on the state refund you received.

What Is a Budget?

The purpose of a budget is to give you control of your own money. With a budget, you actively decide what will be spent, and where your money can best be put to good use. There is nothing like the good feeling you get when you are in control of your money, rather than your activities and expenses controlling you.

What Is a Budget Plan?

A budget plan is a plan where you formally draw up a plan for expenditures for a given period of time, usually one year. The budget process includes all income sources and how that income will be allocated to expense categories. The biggest problem or hurdle with budget planning is to stick with it. Most families do not plan to fail, they fail to plan. A good plan will provide an excellent road map for success. A budget is just a tool and periodically, it needs to be fine tuned.

What Are Income Sources?

Do you know where your income is coming from and how much it is? Do you know what should be included as income? Here is a guideline regarding what should be included as income.

Wages. This is your net pay from all paychecks. How do you get paid: weekly, bi-weekly (every two weeks), bi-monthly (twice a month) or monthly. Retirement income. Interest and investment income. Do not include this unless it is consistently the same yearly. Alimony. Do not include this unless you consistently receive it and there is no reason to believe you won’t. Bonuses, a raise or overtime pay from your employer. Do not include these since they could be discontinued at anytime. Tips. Do not include this unless you can average the amount based on what you received in prior years.

What Are Expenses?

Expenses include everything you spend. Do you know how much you are spending for categories such housing, transportation, food, clothing, entertainment, child care, medical expenses, charity and debt? Are you overspending for non essentials and thus not able to meet your necessary obligations?

Based on US News and World Report for budget allocations, the following is a guideline for how budget expenses should be allocated:

35% Housing - Includes: mortgage or rent, utilities, insurance, taxes and home maintenance. 20% Transportation - Includes: car payments, auto insurance, tag & license fees, maintenance, gasoline, tolls and parking. 28% Other - Includes: food (12), clothing (3), entertainment (5), child care, medical expenses (5) and charity (3). 15% Debt - Includes: student loans, retail installment contracts, credit cards, personal loans, tax debts, medical debts and alimony payments. 2% Savings - You should plan to save this amount throughout your working years, with a goal to increase it to 10%.

How does your spending compare to the guideline? Or is it impossible to determine because you have no idea where your money is going and how to even categorize it?

Here is a list that will help you categorize your expenses.

Fixed ExpensesThese are expenses you have little control over.

Utilities: Phone, disposal, water, electricity, gas heat, sewer

Home: Mortgage (usually includes insurance and property taxes) if not, insurance and property taxes

Health: Dental, health, life, and eye insurance (these items are usually covered by payroll deduction) if not, than add them here.

Income Taxes: Include Federal, state, local and FICA taxes only if you are self-employed.

Additional Outstanding Debt: student loans, retail installment contracts, credit cards, personal loans, medical debts and alimony payments.

Non-fixed Expenses

These are expenses you have more control over.

Food: Groceries, lunch, eating out, snacks, and date night.

Child support: Day care, babysitting and alimony payments (if it applies to you).

Transportation: Gasoline, maintenance, repairs, tolls, taxis, subway, fees and insurance premiums for all vehicles.

Debt Payments: Credit cards, Student loans, other loans.

Entertainment: Cable TV, Computer expense, software, hobbies, dues, subscriptions, videos, movies & admission fees, amusement parks, and vacations.

Clothing: Children and parents.

School: Books, supplies, fees and gym expenses.

Pet Expenses: Food, Grooming, board, Vet shots (if this applies to you).

Miscellaneous Items: Toiletries, household products, gifts, church, other donations, grooming (haircuts, make-up etc.) birthday and anniversary cards, children’s allowance, spouse expense money (amount for each spouse to be spent by them for any reason without explanation) and insurance premiums (not covered by payroll deduction).

Savings: Emergency fund, savings for retirement or children’s college fund and vacation fund.

If you are still unable to determine how you are spending your income, keep track of your expenses for a couple of months or until you can more accurately list your expenses.

Create Your Budget Plan

You are ready to create your monthly budget plan. Using budget software or a Microsoft Excel spreadsheet will aid the process. The budget plan will be divided into monthly buckets. Take your total planned income for the year and divide it by 12. Take your planned categorized expenses based on prior actual expenses and divide the categorized expenses by 12. Enter your total income in monthly columns; then enter your total expenses in monthly columns. Compare planned monthly income with planned monthly expenses. The total monthly expenses must not exceed the total monthly income amounts. If expenses exceed income, planned expenses must be decreased. A good budget plan should show planned expenses less than or equal to planned income.

Share Plan with Family

Sit down with the entire family and provide them copies of the proposed family budget plan. If your children are under the age of 5, do not include them unless they are receiving an allowance. Go over all the details of the plan. Provide information on what will be done with raises, bonuses, and overtime income if received during the year.

Tell the family that this is a plan and is not cast in stone. Indicate that adjustments may be made during the year. Answer all questions. Get each family members buy in. Then, STICK WITH YOUR PLAN. If any major situation should come up, hold another family conference and explain to them the situation.

If you are single, make a commitment to STICK WITH YOUR PLAN. Make adjustments as needed.

What To Do With Amounts in Budget Plan Not Spent For a Given Month?

This is a real good question. As your budget plan is followed throughout the year, there will be months in which you will not spend a planned expense. When this occurs, do not spend this money on something for which it was not designated. Most families have a tendency to spend the money on some other item. To prevent this from happening, keep the unspent planned expense amount in a savings account. When the need for paying the planned expense occurs, the money will be available to transfer from savings into the checking account.

Conclusion

If you follow the process above you will begin to take control of your expenses and have a road map for greater success. As you continue the process year after year, you will see new spending control trends. You will become successful in controlling your spending. Remember, most people do not plan to fail, they just fail to plan.