Danbury Tax Law Blog

Have tax debt? Here are 3 things you may want to do

Not being able to pay one's taxes can cause a person to experience a lot of stress. Connecticut residents with tax debt may put off filing and paying for years because they fear the consequences of failing to pay on time and in full. For anyone who is struggling to meet his or her tax obligations, here are three things to consider doing as soon as possible.

Suggestion number one: file taxes anyway. Even if a person is not able to pay what is owed, filing on time anyway will accomplish two things. First, it will help one avoid monthly penalties, which can be anywhere from 5 and 25% of the balanced owed. Second, it will at least show the IRS that one is not trying to evade his or her tax obligation, which has criminal consequences.

Filing an income tax return for a recently deceased person

When a Connecticut resident passes away, there are a lot of things that need to be taken care of -- including the filing of his or her taxes. This is different than filing estate taxes, which may or may not be necessary, depending on the size of the decedent's estate. Filing state and federal income tax returns is a must, and it is up to the executor of the estate to get this done.

Filing an income tax return for someone who has died is done in the same way as filing for someone who is living. All income the decedent earned in the year of his or her death must be reported on a Form 1040 or 1040-SR, and credits and deductions claimed. If taxes are owed, they must be paid. If a tax refund is due, it may be collected by the individual responsible for closing out the decedent's estate.

IRS seeking help dealing with cryptocurrency tax evasion

The Internal Revenue Service has been short-staffed and underfunded for quite some time, which has resulted in specific issues not receiving the time and attention they actually require. For example, cryptocurrency tax evasion is a known problem, but there are not enough IRS agents available to devote their time to investigating potential cases. This is a problem that is about to change, however, which means those Connecticut residents who have cryptocurrency in their financial portfolios may need to prepare for the IRS to come calling.

According to a recently published article, the IRS is looking to hire outside consultants to investigate discrepancies in what taxpayers report on their tax returns concerning cryptocurrency versus trackable transactions. Various technology companies now have software available that allows for the obtaining of cryptocurrency transaction data through a number of sources. It is these companies that the IRS is looking to hire.

There is another tax relief method for spouses

If your spouse or former spouse owed money to the IRS, you may have attempted to obtain innocent spouse relief in order to avoid the IRS seizing your portion of a refund or to keep from being liable for your spouse's taxes, but it didn't work. You may have then taken it to the next level and tried to get relief by separation of liability, but that option did not work either.

Now you wonder whether you will have to remain responsible for your spouse or former spouse's tax liability because it seems as though you have no other options available to you. Fortunately, you may still have another option.

How long should I keep my income tax returns?

Filing taxes is something many Connecticut residents dread doing. It takes time, mistakes are easy to make, and no one wants to find out how much more they may owe the government. However, most people file them anyway because the consequences of not doing so can be significant. Once income tax returns are submitted and approved by the Internal Revenue Service, one might be tempted to throw out all documentation -- who wants to carry it around, right? Doing this is not suggested, as it can cause a person a lot of problems if the IRS eventually comes knocking.

Numerous people may be unaware that the IRS has several years to audit one's tax return. For personal taxes, there is a three-year window from the date of filing that an audit can be started -- unless one is thought to be hiding income from the government, then the window expands to six years. Along with keeping tax returns, hanging on to all accompanying documentation is strongly recommended.

Tax audits: What you can expect

Every year, quite a few Connecticut residents find out the Internal Revenue Service is auditing them. Those who are facing tax audits will receive notification in the mail. Within that notification is a lot of information about what is needed to review one's case and how to contact the agent assigned to one's case, but it typically contains little information about the actual audit process. For this reason, it seems appropriate to share what one can expect when being audited.

After receiving an audit notice, the taxpayer will discover the overall process can be completed in several ways. The most common method of dealing with an audit is through correspondence. This is where the IRS and taxpayer address the matter through the mail. However, it is possible to meet in person at an IRS office or in one's home to discuss the situation.

Why dealing with tax debt now is a good idea

There are numerous Connecticut residents who, for various reasons, are behind on paying their taxes. Letting tax debt go for too long will only increase how much one owes in the end, thanks to penalties and fees that the Internal Revenue Service will tack on. Dealing with tax debt sooner rather than later is always a good idea.

It is recommended that those who have the ability to pay their tax bills in full do so as soon as they are able. This can be done via check by mail or online -- online being the faster option. The sooner the bill is paid, the sooner interests and fees will stop accruing.

How often do sales tax returns have to be filed?

Business owners in Connecticut and elsewhere have a duty to collect taxes on non-exempt items that they sell, regardless if they run their businesses from brick-and-mortar stores or online. This sales tax ultimately needs to be passed on to the state, either monthly, quarterly or annually. How will one know how often sales tax returns have to be filed?

The state has made it fairly clear how often sales tax has to be reported and when returns have to be filed. According to the Department of Revenue Services, when one files depends on his or her tax liability, though many businesses, after they first register with the state, will be required to file monthly sales tax returns for a while. Numerous companies are eventually switched to quarterly reporting; however, the state will inform them in writing if they need to change to annual or monthly sales tax filings.

When does tax avoidance cross over into tax evasion?

Like just about everyone else across the country, including here in Connecticut, you don't want to pay even one dollar more than you have to at tax time. The U.S. Tax Code allows taxpayers to work toward that goal through the use of numerous credits and deductions that are available for those who qualify to use them.

If you use credits and deductions correctly, you are guilty of nothing more than legal tax avoidance. Another way you could legally avoid taxes is by participating in your employer's retirement plan. By taking these steps, you are avoiding paying more taxes than you have to, and this is not tax evasion.

Offer in Compromise -- who sets the terms?

Being unable to pay one's tax bill can be defeating. A lot of Connecticut residents are struggling financially right now, and the last thing they need is to have penalties and fees attached to tax bills that are already outrageous. Thankfully, those who do end up owing more than they can pay do have options to ease their financial situation. One such option would be seeking an Offer in Compromise.

An OIC is a deal reached between the Internal Revenue Service and a taxpayer for the taxpayer to pay less than what he or she owes. This option is not available to everyone. There are specific qualifications that must be met by the taxpayer, such as the ability to show a lack of the funds to meet one's full tax liability through other means, like an installment agreement.

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Baker Law Firm, P. C.
24 Delay Street, Suite 1
Danbury, CT 06810

Phone: 203-648-4737
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