The number of electronic filing and payment options increases every year,
which helps reduce your burden and also improves the timeliness and accuracy of
tax returns. When it comes to filing your tax return, however, the law provides
that the IRS can assess a penalty if you fail to file, fail to pay or both.

Here are eight important points about the two different penalties you may
face if you file or pay late.

1. If you do not file by the deadline, you might face a failure-to-file
penalty. If you do not pay by the due date, you could face a failure-to-pay
penalty.

2. The failure-to-file penalty is generally more than the failure-to-pay
penalty. So if you cannot pay all the taxes you owe, you should still file your
tax return on time and pay as much as you can, then explore other payment
options. The IRS will work with you.

3. The penalty for filing late is usually 5 percent of the unpaid taxes for
each month or part of a month that a return is late. This penalty will not
exceed 25 percent of your unpaid taxes.

4. If you file your return more than 60 days after the due date or extended
due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid
tax.

5. If you do not pay your taxes by the due date, you will generally have to
pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each
month or part of a month after the due date that the taxes are not paid. This
penalty can be as much as 25 percent of your unpaid taxes.

6. If you request an extension of time to file by the tax deadline and you
paid at least 90 percent of your actual tax liability by the original due date,
you will not face a failure-to-pay penalty if the remaining balance is paid by
the extended due date.

7. If both the failure-to-file penalty and the failure-to-pay penalty apply
in any month, the 5 percent failure-to-file penalty is reduced by the
failure-to-pay penalty. However, if you file your return more than 60 days
after the due date or extended due date, the minimum penalty is the smaller of
$135 or 100 percent of the unpaid tax.

8. You will not have to pay a failure-to-file or
failure-to-pay penalty if you can show that you failed to file or pay on time because
of reasonable cause and not because of willful neglect.

Employer payments and benefits

Examples are expense account reimbursements, deductible employer-paid moving expenses, qualified adoption assistance and dependent care, fringe benefits for commuting expenses and up to $5,250 of qualified education assistance as well as prizes and awards given for an achievement (employee awards).

Gifts, bequests and inheritances

Gifts and inheritances are never taxable to the recipient since they are primarily transfers of assets rather than bona fide income; however there may be some taxes to the estate or the giver of the gifts.

Insurance claims and life insurance proceeds

Workman’s compensation benefits and compensatory damages awards for physical injury or illness are not taxable, nor are life insurance proceeds provided you did not cash out a policy.  As long as you received the proceeds as the beneficiary of the life insurance policy the funds are not taxable to you.  Further, typically insurance claims that compensate for property damages are not taxable, however if you are over compensated for a property claim, this could trigger a taxable event.

Some other examples of non-taxable income are child support payments received (nor are they deductible by the parent who pays them), welfare and public assistance, and cash rebates received from dealers or manufacturers.

Not exactly a free lunch but….  until next time.

Many Happy Returns!

Disclosure:  the nature of taxation is complex and information used to complete your personal tax return is dynamic – meaning that one area of your tax return can affect others, while our goal is to provide you with good general information, IRS may require certain documentation or substantiation to support any tax position you take on your tax return.  If your issue is complex we recommend you talk to a tax professional who can better understand your entire tax situation and advise you appropriately.

1.  Did the business make any payments in 2011 that would require it to file form(s) 1099?

2.  If yes, did the business file or will it file all the required Forms 1099?

Now if you have a business and you utilize subcontractors or independent contractors as part of your labor pool, you should be filing 1099’s anyway.  A 1099 is a form that reports the amount of fees paid to independent workers along with their name, address and social security number.  IRS then cross references the 1099’s they receive from payers like you with the tax returns filed by the independent workers to make sure they are claiming the appropriate income on their tax returns. 

With the addition of this question on business tax returns, IRS is putting businesses on the hook to ensure these forms are getting filed.  If a business doesn’t file any form 1099’s and it should and it answers yes to the first question and no to the second it’s an invitation to be audited.

If you find yourself in this situation, my advice to you is to have any independent workers you hire complete a form W-9 (similar to the W-4 folks fill out for employers) – available at www.irs.gov and make sure you file your Form 1099s for last year (2011).   The Form 1099’s are required to be sent to the independent worker by January 31, 2012.  Copies of Form 1099 along with a Form 1096 which reconciles and summarizes all Form 1099’s should be sent to the IRS by February 29, 2012.  The state of Maryland does not require businesses to send them copies of Form 1099.  Form 1099’s can be found at office supply stores or can be picked up at the any IRS office or consult your local tax pro.

A Word About Independent Contractors vs. Employees

There are circumstances a business must take into consideration when deciding whether to pay a worker as an independent contractor versus an employee where payroll taxes are withheld.  It has nothing to do with convenience or saving money.  IRS has a questionnaire you can go through to decide if your workers should be an employee or if they are independent contractors.  Check out http://www.irs.gov/businesses/small/article/0,,id=99921,00.html .

Since October of 2010, Maryland has been more aggressively enforcing its own requirements which are a more conservative than the IRS’s standards.  Maryland has been more actively enforcing them within the construction and landscaping industries where it is felt the most abuse takes place.  Maryland uses the ABC test to determine if a worker is an independent contractor versus an employee.

From the MD DLLR website http://www.dllr.state.md.us/workplace/wfworkerfaqs.shtml

The ABC test is a three pronged test, under which an employer-employee relationship is presumed unless the individual performing the work is either an exempt person (an individual who operates their own business and does not have any employees other than their family members) or the employer demonstrates that:

1. The individual is free from control and direction;

2. The individual customarily is engaged in an independent business of the same nature; and

3. The work is outside of the usual course of business of the employer or performed outside of any place of business of the employer.

   Work is “outside the usual course of business” if the individual: 1) performs the work off the employer’s premises; 2) performs work that is not integrated into the employer’s operation; or 3) performs work unrelated to the employer’s business.

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Disclosure:  the nature of taxation is complex and information used to complete your personal tax return is dynamic – meaning that one area of your tax return can affect others, while our goal is to provide you with good general information, IRS may require certain documentation or substantiation to support any tax position you take on your tax return.  If your issue is complex we recommend you talk to a tax professional who can better understand your entire tax situation and advise you appropriately.

We lost our home last year and this year I received a form 1099-A with the amount of the mortgage on it.  Do I have to claim that on my return?

Beth

Reisterstown, Md

Dear Beth,

I’m so sorry to hear about your bad luck; but I’ve got some good news for you, although you have to report the foreclosure on your tax return, you will not be taxed on any income from the debt forgiveness on your mortgage. 

Typically if you have a debt that is forgiven like a credit card where you only had to pay a portion of your debt and the credit card company writes off the rest, the amount of the debt that is forgiven is taxable as income to you. 

So if you were one of those poor souls who found themselves owing more on their home than the house was worth and the home was foreclosed on, under ordinary circumstances the difference would be taxable to you.  But Congress set out to try and assist folks who were upside down in their homes and passed legislation that excluded foreclosure debt forgiveness from being taxed. 

Now there are some specific guidelines you need to follow to qualify for the exclusion.  The home must be your primary residence and the same rules that apply to deductibility of mortgage interest apply to this exclusion.  The debt must be money borrowed to buy or improve the home plus up to $100,000 in home equity debt with a maximum exclusion of $2,000,000.  The forms are a little tricky to complete but well worth it if you find yourself in this situation.   Also the exclusion is a temporary reg that only applies to debt discharges that happened after January 1, 2007 and before January 1, 2013.  I hope this helps – good luck!

Last year I went to Atlanta for a business trip.  I was there for a convention and then I stayed an extra day and enjoyed the sights.  Can I deduct all of my expenses?

Sue in Owings Mills

Dear Sue,

It sounds like your trip was mostly business and only part recreational.  Here’s how Business Travel works.  If the trip is undertaken solely for business reasons and in the United States, reasonable and necessary travel expenses, including travel fares, lodging, meals and incidental expenses are usually deductible on your federal return (subject to the 50% disallowance for meals and entertainment).   The tricky part is when you mix business with pleasure; the proper treatment on your tax return depends on how much of the trip was actually business related.  The following general guidelines should be helpful in determining your tax deduction:

If the trip was mainly for business, your deductible travel expenses include the costs of getting there and back and any business-related expenses while you are out of town.  Personal expenses while out of town will not be deductible.

If the trip was mainly for personal reasons, visiting family or vacation, the travel costs to get there and back as well as other personal expenses are NOT deductible.  However, any business costs incurred while at the destination will be tax-deductible since they relate to your business activity while out of town.

Sounds like most of your costs with the exception of your extended hotel, meal and incidental costs incurred during your extra day in Atlanta can be written off.  Not a bad deal for taking care of business especially when it’s in a fun place.  If you are an employee the deductible expenses you incurred out of pocket will be deducted on Schedule A under Miscellaneous Deductions subject to a 2% limitation and the 50% limitation for Meals and Entertainment; if you have a business they will be deducted on your business tax return or schedule subject to the 50% limitation for Meals and Entertainment.

Many Happy Returns!

Note that there is a little exception to the dependency rules that allows parents of full-time students under 24 to be claimed as dependents regardless of the student’s income; if you are paying all the living expenses and college expenses for your student, you can still claim them as a dependent, even if they are living at school. When the student files their own tax return they can get a dependent level standard deduction but won’t get to claim their own personal exemption. The dependent level standard deduction can be up to $5,700 so the student may not be required to even file a return if they made less than that. If the student did earn less than that on their W-2 but had federal or state taxes withheld it might be worth it to file just to get the taxes paid refunded.

TIP: There are some great education deductions and credits available when there are tuition and fees for higher education, whether you paid for them out of pocket or borrowed money to pay for them. It’s important to note that the write off goes with the dependency deduction which makes it all the more important that you coordinate with your student.

If you file a paper return I strongly recommend you don’t mail your return in until IRS is ready to process your return. Employees are being told to “shelve” tax returns they can’t process until later. Sounds to me like this could be recipe for problems.

If you are an e-filer, IRS will reject the return until they are able to process the forms. Once they have the software re-tooled you can resubmit your return for processing.

Filer’s who claim the higher education deduction using form 8917 or the Educator Expense Deduction on the front of the form 1040 will also have to wait until IRS has updated it’s software.

I’ll keep you posted as to when IRS is ready to process these returns.

Many Happy Returns,
Alice