Disallowed American Opportunity Tax Credit (AOTC) IRS Audit

What will happen if someone receives a CP2000 with a proposed assessment of $2,500 + interest?

The notice indicates you claimed the American Opportunity Tax Credit (AOTC) on your return, and the Service is proposing to disallow the credit.

If this is the case, I suggest you review the Form 1098-T from Kaplan University (or contact them if you did not receive one).

Also, have a look here at the eligibility rules for claiming the AOTC. If you don’t meet all the rules, you were not entitles to claim the credit and you will have to repay the credit you claimed, plus interest.

 

Disallowed American Opportunity Tax Credit (AOTC) IRS Audit

If you do meet all the rules, it may be an issue with the employer and how they reported your payments to them in 2012. If you determine the notice is correct and are unable to pay in full by the response due date, you may request a payment plan, called and Installment Agreement (IA). With a balance due of ~$2,600, your minimum monthly payment will be about $37.00. The IA has a one-time user fee of $120. You may qualify for a reduced fee of $43. Failure To Pay (FTP) penalty and interest accrue on the unpaid balance due, so try to make the largest payment you can afford each month.

 

Requesting Direct Debit Installment Agreement (DDIA)

You can choose to request a Direct Debit Installment Agreement (DDIA) on the form by including your checking account RTN and Account number. The fee would be reduced to $52, or the $43.

If your balance due can be paid in 120 days or less by your refund from your 2014 tax return, consider a Full Payment agreement instead of an IA. The Full Payment agreement is a payment plan with no user fee and no fixed monthly payments. After you receive your first notice asking for payment (the CP 2000 is not a bill, and you will receive another notice before the tax and interest is assessed), you can request up to 120 days to pay the balance due, plus the accruals of Failure To Pay (FTP) penalty and interest. During the 120 days, you can make payments at any time, or make one payment on day 120 to complete the agreement. If your 2014 refund pays the balance, you are done.

Using a PIN to File Tax Return Electronically

If you file your tax returns electronically using software to file online, you must sign the tax return using the method of self-signed personal identification number ( PIN).This method allows taxpayers to electronically sign your tax on personal income by selecting a PIN five digits.

 

Using PIN to file Tax

The PIN consists of five digits (excluding all zeros) you choose to enter as your electronic signature. Each taxpayer who files a joint return need a PIN and each can select any combination of five digits. As part of the identity verification process, each taxpayer enters his birth date and the adjusted gross income ( AGI , for its acronym in English), as entered on the original return for the preceding year, or PIN last year .

If you can not access information from your tax return for tax year 2012 for purposes of verification of electronic signatures, the IRS will issue a PIN for electronic filing temporarily  to taxpayers who qualify . If you need an EFP, you can access the application on the IRS website.

 

E-File your Tax Return

Generally, you can electronically file your tax return even if you are required to submit certain paper forms or certain corroborating documents. Use  Form 8453, Report of Individual Income Tax in the United States by Means of E-filing IRS e-file, to transmit paper forms or corroborating documents required.

Taxpayers appearing as the main respondent who are under 16 years of age who have never presented and secondary taxpayers under age 16 who did not show for 2012 can not use the method of self-signing PIN to sign. Affected taxpayers can still file electronically using the method of PIN professional preparer.

Using a PIN to File Tax Return Electronically

The IRS advised taxpayers to retain a copy of your return for your records, so that this helps with the electronic signature of the declaration submitted electronically next year. If you need a copy of your tax transcript, you are also able to do this from the IRS website.

Information about Tax Penalties for Filing and Paying Taxes Late

What happens when you do not pay your taxes on time?

April 15 is the tax day deadline for most people. However, remember, ff you’re due a refund there’s no penalty if you file a late tax return past the deadline. But if you owe taxes and you fail to file and pay on time, you’ll usually owe interest and penalties on the taxes you pay late.

 

Here are eight facts that you should know about these penalties for paying taxes late.

  1. If you file taxes late and owe federal taxes, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late. Remember, if you had taxes withheld from your paycheck and are probably owed a refund, there will be no penalty.
  2. The failure-to-file penalty is usually much more than the failure-to-pay penalty. In most cases, it’s 10 times more, so if you can’t pay what you owe by the due date, you should still file your tax return on time and pay as much as you possibly can. You should try other options to pay, such as getting a loan or paying by credit card. The IRS will work with you to help you resolve your tax debt. Most people can set up a payment plan with the IRS using the Online Payment Agreement tool on IRS.gov.
  3. The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It 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 for late filing is the smaller of $135 or 100 percent of the unpaid tax.

 

What is the Failure to Pay Penalty

  1. The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.

 

What is the Failure to File Penalty

  1. If the 5 percent failure-to-file penalty and the 0.5 percent failure-to-pay penalty both apply in any month, the maximum penalty amount charged for that month is 5 percent.
  2. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.
  3. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time.

Information about Tax Penalties for Filing and Paying Taxes Late

Tax Topic 653 – IRS Notices and Bills, Penalties and Interest Charges

Fixing Mistakes on Tax Return with Form 1040X

There are several options available to taxpayers who make a mistake on a tax return that they have filed. If you discover an error after you file your tax return, this can be corrected by amending a tax return (Form 1040X).

Here are 10 tips from the Internal Revenue Service about amending your federal tax return:

  1. When amending a tax return- Generally, you must file an amended return if your filing status, number of dependents, total income, tax deductions or tax credits were reported incorrectly or omitted. Additional reasons are listed in the instructions to amend your return.
  2. When NOT to amend a declaration- In some cases, you do not need to amend your tax return. The IRS usually corrects math errors or requests missing, forms such as W-2s or schedules – when the original statement is processed. In these cases, it is best not amend your return.
  3. You must use Form 1040X, Amended U.S. Individual Income Tax Return, to amend a 1040, 1040A, 1040EZ, 1040NR or 1040NR-EZ previously submitted. Be sure to mark the box on Form 1040X for the year of the return you are amending. An amended tax return can not be filed electronically.
  4. Multiple amended returns –  If you-are amending more than one tax year, prepare a 1040X for each return and mail them in.
  5. The Form 1040X, Form 1040X has three columns. Column A shows original figures from the statement. Column B shows the changes that are being made. Column C shows the corrected figures. There is an area at the back of the form explaining the specific changes and the reason for the change.
  6. Other Forms or Attachments- If the changes involve other schedules or forms, attach them to the Form 1040X. Failure to do so will delay processing.
  7. Additional Reimbursement- If you are making a return to claim a refund for an adjustment resulting in an additional refund, wait until you receive your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
  8. Additional tax- If you owe additional tax, you should file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges.
  9. When to file Generally, to claim a refund, you must file Form 1040X within three years from the date you filed your original return or two years from the date you paid the tax, whichever is later.
  10. Processing time Normal processing of amended returns is 8 to 12 weeks

Information When You Cannot Afford to Pay Taxes

What should you do when you cannot afford to pay taxes?

The most important thing that you can do is to send the largest payment you can afford on or before April 15. Even if it’s $20.00, that will be $20.00 paid on time.

After the IRS processes your return, the IRS will send you a notice asking for full-payment of the remaining tax, plus the initial charge of Failure to Pay penalty and interest. If you can full-pay by the notice due date, you are done. If you feel you need a little more time to pay, the IRS can offer you an extension of time to pay of up to 120 days. With this arrangement, there is no fee and no fixed monthly payment. The IRS calculates the balance due out to 120 days, and during that time you could make one payment or 100 payments, as long as it was paid in full by the agreement date.

 

Information When You Cannot Afford to Pay Taxes

The next option is a formal Installment Agreement (IA). With this plan, the IRS establishes a minimum monthly payment and a regular monthly due date. With an $1,900 balance due, the monthly payment could be as low as $27.00.

 

Online Payment Agreement for Installment Agreement

There is a one-time fee to establish an IA of $120, and you may qualify for a reduced fee of $43.00. Missed payments, late payments, and payments of less than your minimum can result in a defaulted IA. There is a $50 fee to reinstate an agreement after it defaults. Another reason for default is a new balance due. You may request a Direct Debit IA also. The fee for this payment plan id $52.00 (or the $43.00), and the payments are debited from a checking account. Another option is a Payroll Deduction IA, where your employer makes your monthly payments on your behalf, deducted from your net wages. The fee is the $120 or $43.

 

Starting an IRS Online Payment Agreement

The IRS website will allow you to set up these plans once you receive a bill. The upper right section of the notice will have a Caller ID number. You use this number to establish a PIN, and then you use the PIN to access the Online Payment Agreement system. If you prefer to speak with a person, they are available M – F 7am – 7pm. Have your notice or return handy. The IRS will ask you some verification questions and discuss your payment ability. The IRS  will ask if you have corrected your W-4 with your employer, and we will verify that you’re current with the last six tax returns. Lastly, they will also ask you for a contact telephone number, which you are not required to provide.

 

What happens if you cannot pay taxes?

After either type of agreement is set up, you will receive a letter that confirms the terms within 2 – 3 weeks. If you request a regular or payroll IA, you will receive monthly reminder notices with an updated balance, a record of your last payment, and a voucher to send along with a check or money order. DDIAs do not have reminder notices.

Each year you make payments on an IA, you will receive an Annual Statement, which says THIS IS NOT A BILL.

Electronic payment options are available on irs.gov. If you prefer electronic payments,  use the heavily recommended EFTPS. Credit or debit card service providers generally charge a “convenience fee” for each transaction.

 

Failure to Pay (FTP) penalty rate

The current interest rate is 3% per year, and the rate can be adjusted quarterly. The Failure to Pay (FTP) penalty rate is 1/2% per month computed on the unpaid tax liability. If you establish a formal IA, the FTP rate is reduced to 1/4% per month. The FTP is calculated on the unpaid tax, and the interest is calculated on the unpaid tax and penalties. Payments you make are applied to the tax first, not like a mortgage or car payment. Your payment reduces the tax every month, which reduces the accrued penalties and interest for that month. If you have an overpayment (refund) on a future return, it would be applied to the balance due first, and the Service would send a notice explaining the offset. If your refund is more than what you owe at the time, you’re done.

Missing Tax Filing Deadline

What should you do if you miss the tax filing deadline?

The IRS has some tips for taxpayers who missed the deadline for filing taxes.

  • File as soon as possible. If you have to pay federal income taxes, you must file and pay as soon as possible to reduce penalties and interest. There is no penalty for filing a late if you are due a refund. This tip cannot be repeated enough, file as soon as possible to reduce any fines and penalties you may owe.
  • You may owe penalties and interest. If missed the April 15 deadline, you may have to pay penalties and interest. The IRS may charge penalties for late filing and for late payment. In general, the law does not allow the exemption of interest payments. However, the IRS will consider a reduction of these fines if you can show reasonable cause for filing late. It is best to document everything and have an explanation.
  • E-file is your best choice. IRS e-file  options are available until October 15. E-file is the safest and most accurate way to file taxes. With e-file, you will receive confirmation that the IRS has received your tax return. If you use e-file to get a refund, the IRS normally will ship within 21 days.
  • Free File is still available. Everyone can use IRS Free File. If your income is $ 57,000 or less, you qualify to e-file your return through the free software program. If you entered more than $ 57,000 and feel comfortable preparing your own tax return, use the Free File Fillable Forms.This program uses the electronic versions of IRS paper forms. IRS Free File is available only through IRS.gov and is highly recommended. Certain tax software programs may also have options for free extended deadline tax filing options.
  • Pay as much as you can. If you owe taxes but can not pay in full, you should pay as much as possible when filing taxes. Pay the balance due as soon as possible to reduce the penalties and interest charges.
  • Payments Term Agreements are available. If you need more time to pay your federal income taxes, you may request a payment agreement with the IRS term. Apply online using the Electronic Application Tool for Payment Agreement Term IRS or file Form 9465, Application for Payment Agreement.
  • Refunds may be waiting.   If you are due a refund, you should file as soon as possible. Even if you are not required to file, you may be entitled to a refund. This could apply if you have taxes withheld from their wages, or if you qualify for certain tax credits. If you do not file your tax return within three years, you may lose your right to a refund.

 

Paying Taxes Late Failure to Pay Penalty

What happens if you do not pay your taxes by April 15?

The IRS has several options available to taxpayers who cannot pay their taxes in full on the tax day deadline.

Paying Taxes Late Failure to Pay Penalty

If you owe a balance due after 4/15, the current Failure To Pay penalty rate is 1/2% of the tax liability per month or part of a month. The current interest rate is 3% per year, charged on the unpaid tax and penalties, and it’s compounded daily. Ideally, the Service wants you to pay in full on time regardless of how (cash or credit). If you use a credit card to full-pay, the service providers shown here charge what the call convenience fees per transaction in addition to their interest.

 

Paying Less Than Full Tax Balance before April 15

If you pay less than the full balance on 4/15, the IRS will process your return and send you a notice asking for full payment of the remaining unpaid tax and the initial charges of P&I. If you can pay that notice balance by the due date, you’re done. The IRS can also offer you up to 120 days to full-pay. The IRS calculates out the payoff figure through 120 days, and during that time there’s no requirement for a monthly payment. You could make one payment or one hundred payments, as long as the balance due was paid in full by the 120th day, and then you’re done.

 

Who owes taxes on April 15 Deadline?

Oftentimes people have to pay tax at the end of the tax year because they are not properly withholding for taxes throughout the year. This might mean they are taking to many exemptions or a life event has occurred that requires them to change the amount that is withheld from each pay check. You can adjust the amount withheld from each paycheck by filling out form W-4.  See the following for more information about changing paycheck withholding on Form w-4.

8 Facts About Penalties for Failure To Pay Taxes

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 failure to file taxes, failure to pay taxes or both.

 

Here are eight important points about the two different penalties you may face for failure to file taxes or failure to pay taxes.

    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.

You can e-file your extension request through TurboTax.

  1.  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.
  2.  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.
  3.  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.