When Can I file my 2016 Taxes in 2017?

Tax season will begin Monday, Jan. 23, 2017, and reminded taxpayers claiming certain tax credits to expect a longer wait for refunds. This is the first day that you can file a 2016 tax return.

The IRS will begin accepting electronic tax returns that day, with more than 153 million individual tax returns expected to be filed in 2017. The IRS again expects more than four out of five tax returns will be prepared electronically using tax return preparation software.

 

When can I file my 2016 Tax Return?

Many software companies and tax professionals will be accepting tax returns before Jan. 23 and then will submit the returns when IRS systems open. The IRS will begin processing paper tax returns at the same time. There is no advantage to filing tax returns on paper in early January instead of waiting for the IRS to begin accepting e-filed returns.

 

When can I claim the earned income tax credit?

You can claim when earned income tax credit when you file your 2016 tax return. The IRS reminds taxpayers that a new law requires the IRS to hold refunds claiming the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until Feb. 15. In addition, the IRS wants taxpayers to be aware it will take several days for these refunds to be released and processed through financial institutions. Factoring in weekends and the President’s Day holiday, the IRS cautions that many affected taxpayers may not have actual access to their refunds until the week of Feb. 27.

 

What is the 2017 Tax Deadline?

The filing deadline to submit 2016 tax returns is Tuesday, April 18, 2017, rather than the traditional April 15 date. In 2017, April 15 falls on a Saturday, and this would usually move the filing deadline to the following Monday — April 17. However, Emancipation Day — a legal holiday in the District of Columbia — will be observed on that Monday, which pushes the nation’s filing deadline to Tuesday, April 18, 2017. Under the tax law, legal holidays in the District of Columbia affect the filing deadline across the nation.

 

When will you get your 2016 tax refund?

Beginning in 2017, a new law requires the IRS to hold refunds on tax returns claiming the Earned Income Tax Credit or the Additional Child Tax Credit until mid-February. Under the change required by Congress in the Protecting Americans from Tax Hikes (PATH) Act, the IRS must hold the entire refund — even the portion not associated with the EITC and ACTC — until at least Feb. 15. This change helps ensure that taxpayers get the refund they are owed by giving the IRS more time to help detect and prevent fraud. After refunds leave the IRS, it takes additional time for them to be processed and for financial institutions to accept and deposit the refunds to bank accounts and products. The IRS reminds taxpayers many financial institutions do not process payments on weekends or holidays, which can affect when refunds reach taxpayers. For EITC and ACTC filers, the three-day holiday weekend involving President’s Day may affect their refund timing.

 

Filing Taxes and Nominee payments

If you are receiving payments for someone else, you need to follow the procedure for “nominee payments.” This is where payments are made in your name but you are not the beneficiary of the payments.

I assume that you received a 1099-K. You must obtain a blank Form 1099-K and a blank Form 1096. You must use official forms, you cannot print these forms out over the internet. You can order copies of each form from the IRS.
https://www.irs.gov/Businesses/Online-Ordering-for-Information-Returns-and-Employer-Returns
You can also buy them from amazon.com, Staples, Officemax, and other office supply stores.

You fill out the 1099-K using YOUR name, address, and Social Security number as the payor. You list your partner’s name, address, and Social Security number as the payee.

You then give your partner the payee copy, and send the IRS copy to the IRS together with Form 1096.

On your tax return, attach Schedule C. Show the amount from the 1099-K as income and show the amount your partner received as a business expense. That will net out your income as $0 and you won’t have to pay any taxes and it will not affect your AGI.

Technically, you are supposed to give the 1099-K to your partner by Feb 1, but unless he files a complaint with the IRS, there’s no harm if you are late. You have to file the 1099-k and 1096 with the IRS by Feb 29.

And do print out account statements or other documents that show that your partner was the ultimate recipient of the money and that you did not keep it for yourself.

 

What is a Nominee Payment?

A “nominee” is someone who is given limited authority to act on behalf of an entity, usually for a limited period of time, and usually during the formation of the entity.  The “principal officer, general partner,” etc., as defined by the IRS, is the true “responsible party” for the entity, instead of a nominee. The “responsible party” is the individual or entity that controls, manages, or directs the entity and the disposition of the entity’s funds and assets, unlike a nominee, who is given little or no authority over the entity’s assets.

The Internal Revenue Service has become aware that nominee individuals are being listed as principal officers, general partners, grantors, owners, and trustors in the Employer Identification Number (EIN) application process. A nominee is not one of these people. Rather, nominees are temporarily authorized to act on behalf of entities during the formation process. The use of nominees in the EIN application process prevents the IRS from gathering appropriate information on entity ownership, and has been found to facilitate tax non-compliance by entities and their owners.

The IRS does not authorize the use of nominees to obtain EINs. All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor. This individual or entity, which the IRS will call the “responsible party,” controls, manages, or directs the applicant entity and the disposition of its funds and assets.

To properly submit a Form SS-4, the form and authorization should include the name, Taxpayer Identification Number and signature of the responsible party. Third party designees filing online applications are reminded of their obligation to retain a complete signed copy of the paper Form SS-4 and signed authorization statement for each entity application filed with the IRS. Nominees do not have the authority to authorize third party designees to file Forms SS-4, and should not be listed on the Form SS-4.

If a nominee is used in the state formation process and the true responsible party has not yet been identified, the entity must identify that individual before applying for an EIN.

The IRS will continue to pursue enforcement actions to prevent the misuse of EIN applications.

If you used a nominee for the EIN Application process, visit Correcting Business Information Where a Nominee Was Used to learn how to correct your information.

Tax Debt and Other IRS Information About Having Debt

People facing financial difficulties may find that there’s a tax impact to events such as job loss, debt forgiveness or tapping a retirement fund. For example, if your income decreased, you may be newly eligible for certain tax credits, such as the Earned Income Tax Credit. The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence.

IRS Treatment of Mortgage Debt Forgiveness

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief. This provision applies to debt forgiven in calendar years 2007 through 2014. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

 

What if I lose my home through foreclosure?

Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers generally can exclude income from the discharge of debt on their principal residence or mortgage restructuring. This exception does not apply to second homes or vacation homes. In some cases, you may be able to file an amended tax return for previous tax years. For more information, see The Mortgage Forgiveness Debt Relief Act and Debt Cancellation.

 

What if I sell my home for a loss?

Losses from the sale of personal–use property, such as your home or car, are not deductible. It is not eligible for the capital gains loss of up to $3,000 annually. For more information, seeAbout Publication 523, Selling Your Home.

 

What if my debt is forgiven?

The tax impact of debt forgiveness or cancellation depends on your individual facts and circumstances. Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. There are several exceptions to the taxability of cancelled debt, such as insolvency or bankruptcy.

 

What if I am insolvent?

A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may be excluded as income under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. For more information, see highlights of the Mortgage Forgiveness Debt Relief Act.

 

What if I file for bankruptcy protection?

Debts discharged through bankruptcy are not considered taxable income. If you are an individual debtor who files for bankruptcy under chapter 7 or 11 of the Bankruptcy Code, a separate “estate” is created consisting of property that belonged to you before the filing date. This bankruptcy estate is a new taxable entity, completely separate from you as an individual taxpayer. Please note, however, that some tax debts are not dischargeable in a bankruptcy action. For more information, see Publication 908, Bankruptcy Tax Guide.

What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

 

IRS Form 1099-C, Cancellation of Debt

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Tax Issues Related to Having a Job and Employment Tax

What if I lose my job?

The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-loss related tax issues. For more information, seePublication 4128, Tax Impact of Job Loss.

 

Paying Taxes After Job Loss

The IRS is working and coordinating with state departments of revenue and state workforce agencies to help taxpayers who are having problems meeting their tax liabilities because of unemployment or other financial problems. Taxpayers who are unemployed or struggling financially can find information on a new page on the IRS Web site, IRS.gov. This online tax center has numerous resources including links to information on tax assistance and relief to help struggling taxpayers

 

What if I receive unemployment compensation?

Unemployment compensation you received under the unemployment compensation laws of the United States or of a state must be included in your income. It is taxable income. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld. For more information, see Publication 525, Taxable and Nontaxable Income.

 

What if my income declines?

There are many tax credits that are subject to income limitations. If you had a reduction in income this year you may be eligible for some credits or deductions. For example, the Earned Income Tax Credit is available for working families and individuals. Eligibility is determined by income and family size. You must file an income tax return in order to claim EITC. See 1040 Central for more information on EITC, other tax credits and tax law changes.

 

What if I am searching for a job?

You may be able to deduct certain expenses you incur while looking for a new job, even if you do not get a new job. Expenses may include travel, resume and outplacement agency fees. For more information, see Publication 529, Miscellaneous Deductions . Moving costs for a new job at least 50 miles away from your home may also be deductible.

 

What if my employer goes out of business or into bankruptcy?

Your employer must provide you with a Form W-2 showing your wages and withholdings for the year by January 31 of the following year. For example, if you were employed during 2013, your employer should provide you with a W-2 for 2013 by Jan. 31, 2014. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fails to provide you with a Form W-2, contact the IRS and we can help by providing you with a substitute Form W-2. If your employer is liquidating your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA. For more information, see Publication 4128, Tax Impact of Job Loss.

 

What if I close my own business?

If your business is no longer operating, you still are responsible for filing all required tax returns for your business by the due dates. In addition, if you had employees, you must file all required employment tax returns, including Forms 940, 941, 943 or 944. Both business and employment taxes should be paid when due. But, if you are not able to pay in full, contact the IRS immediately to discuss your options. For more information, see Starting, Operating or Closing a Business.

 

What if I withdraw money from my IRA?

Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss. For more information, see Hardships, Early Withdrawals and Loans.

 

What if my 401(k) drops in value?

Generally, you can not claim a capital gains loss on your retirement accounts that already are receiving favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed. For more information, see About Publication 575, Pension and Annuity Income.

 

Losing home and losing job

In addition, the IRS will accelerate lien relief for homeowners if a taxpayer cannot refinance or sell a home because of a tax lien. As previously announced, a taxpayer seeking to refinance or sell a home may request the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. The taxpayer may also request the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

How to Contact the IRS

Find out about IRS Tax Refund

Where’s My Refund? will give you personalized refund information
The IRS issues more than 9 out of 10 refunds in less than 21 days. Where’s My Refund? has the most up to date information available about your refund. The tool is updated once a day so you don’t need to check more often. IRS representatives can research the status of your refund only if you’ve already checked Where’s My Refund? and it’s been 21 days or more since you filed electronically, more than six weeks since you mailed your paper return, or if Where’s My Refund? directs you to contact us.

Report Suspicious Emails to the IRS

Suspicious emails, phishing, and identity theft
The IRS does not send out unsolicited emails asking for personal information. An electronic mailbox has been established for you to report suspicious emails claiming to have been sent by the IRS.

Report Tax Fraud to the IRS

How Do You Report Suspected Tax Fraud Activity?
If you have information about an individual or company you suspect is not complying with the tax law, report this activity.

 

Contact Local IRS Office

Contact Your Local Office
IRS Taxpayer Assistance Centers are available for when you believe your issue is best handled face-to-face. Before you visit, check hours and services offered. Return preparation services are no longer available at your local IRS office. Use IRS Free File, free brand-name software that will figure your taxes for you. Or visit the nearest volunteer site for free help preparing and e-filing your tax return.

 

IRS Mailing Addresses

IRS Mailing Addresses (“Where to File”)
For those who don’t file their federal tax returns electronically, the “Where to File” pages provide mailing addresses for filing all paper tax returns. You may also use your appropriate “Where to File” address for other written correspondence with the IRS.

 

Contact IRS TAS

Contact Your Taxpayer Advocate
If you have an ongoing issue with the IRS that has not been resolved through normal processes, or you have suffered, or are about to suffer a significant hardship/economic burden as a result of the administration of the tax laws, contact the Taxpayer Advocate Service. We have offices in all 50 states, the District of Columbia, and Puerto Rico.

Contact IRS to Make Offshore Voluntary Disclosure

How to Make an Offshore Voluntary Disclosure 
Taxpayers wanting to report undisclosed income or assets should come in through the IRS Voluntary Disclosure Program.

Contact IRS Return Preparer Program

Contact the Return Preparer Program
PTIN call center phone numbers. These phone numbers are for tax professionals only and DO NOT provide assistance with individual income tax return or refund issues

 

Contact International Offices of the IRS

Contact IRS Internationally
International Services: IRS contact information for taxpayers who live outside the United States.

How do I notify the IRS my business address has changed?

If you move after filing your return, you should have the post office forward mail to your new address. Some post offices do not forward government checks, so you may also want to change your address with the IRS. You can use IRS Form 8822-B, Change of Address to notify them of an address change.

 

When to use Form 8822-B

Use Form 8822-B to notify the Internal Revenue Service if you changed your business mailing address, your business location, or the identity of your responsible party. Also, any entities that change their address or identity of their responsible party must file Form 8822-B, whether or not they are engaged in a trade or business. If you are a representative signing for the taxpayer, attach to Form 8822-B a copy of your power of attorney. Generally, it takes 4 to 6 weeks to process your address or responsible party change.

 

Responsible Party and EIN

Change of responsible party. Any entity with an EIN is now required to report a change in its “responsible party” by: (a) completing Form 8822-B as appropriate, including entering the new responsible party’s name on line 8 and the new responsible party’s SSN, ITIN, or EIN on line 9; and (b) filing the completed form with the Internal Revenue Service within 60 days of the change. See Responsible Party, later, for more information

 

Written statement to address change with IRS Form 8822-B

Send us a signed written statement with your:

  • full name
  • old address
  • new address
  • social security number (or individual taxpayer identification number or employer identification number)

Mail your statement to the address where you filed your last return.

 

Oral statement to address change with IRS

You can tell us in person or by telephone. We’ll need to verify your identity and address. Please have ready the information we have on file for you, such as:

  • your full name
  • your address
  • your date of birth
  • your social security number (or individual taxpayer identification number or employer identification number)

 

Electronic Statement to address change with IRS

You can only notify us electronically if your refund check was returned to us. Use Where’s My Refund? to complete your change of address online. You will need your social security number, filing status, and the amount of your refund. For more information, see Understanding your CP31 Notice.

If you filed a joint return, you should provide the information and signatures for both spouses.

If you filed a joint return and you and your spouse have since separated, each of you should notify us of your new, separate address.

 

Form 2848, Power of Attorney and Declaration of Representative

Representatives filing a change of address for a taxpayer by form or written statement must attach a copy of their power of attorney or a Form 2848Power of Attorney and Declaration of Representative. Unauthorized third parties cannot change a taxpayer’s address.

 

Changing Address of IRS Power of Attorney

Any new address you provide to the U.S. Postal Service (USPS) may also update your address of record on file with us based on what the USPS retains in its National Change of Address (NCOA) database. However, even if you notify the USPS, you should still notify us directly as not all post offices forward government checks. If the change of address relates to an employment tax return, the IRS will issue notices of confirmation (Notices 148A and 148B) for the change to both the former and new address. It can take four to six weeks for a change of address request to be fully processed.

2016 Filing Season Update on IP PINs

Identity Protection PINs

Due to an error, taxpayers are receiving Identity Protection PIN letters with an incorrect year listed. Taxpayers and tax professionals should be advised the IP PIN listed on the CP 01A Notice dated Jan. 4, 2016, is valid for use on all individual tax returns filed in 2016.

The notice incorrectly indicates the IP PIN issued is to be used for filing the 2014 tax return when the number is actually to be used for the 2015 tax return. The IRS emphasizes the IP PIN listed on the CP 01A notice is valid for the 2015 returns. Taxpayers and their tax professionals should use this PIN number for 2015 tax returns, which the IRS will begin accepting from taxpayers starting Jan. 19, 2016.

The IRS apologizes for the confusion and any inconvenience. For more information, see the questions and answers below.

 

When were the CP01A notices mailed?

The notices are all dated Jan. 4, 2016, but were mailed in late December. Taxpayers are receiving these now through mid-January.

 

What does an IP PIN do?

An IP PIN helps the IRS verify a taxpayer’s identity and accept their electronic or paper tax return. When you have an IP PIN, it prevents someone else from filing a tax return with your SSN.

If a return is e-filed with your SSN and an incorrect or missing IP PIN, our system will reject it until you submit it with the correct IP PIN or you file on paper. If the same conditions occur on a paper-filed return, we will delay its processing and any refund you may be due for your protection while we determine if it’s yours.

 

Does this issue affect anything else involving the IP PIN process?

No.

Understanding Tax Return Preparer Credentials and Qualifications

Any tax professional with an IRS Preparer Tax Identification Number (PTIN) is authorized to prepare federal tax returns. However, tax professionals have differing levels of skills, education and expertise. An important difference in the types of practitioners is “representation rights.” Here is guidance on each credential and qualification:

UNLIMITED REPRESENTATION RIGHTS: Enrolled agents, certified public accountants, and attorneys have unlimited representation rights before the IRS. Tax professionals with these credentials may represent their clients on any matters including audits, payment/collection issues, and appeals.

 

What are Enrolled Agents?

Enrolled Agents – Licensed by the IRS. Enrolled agents are subject to a suitability check and must pass a three-part Special Enrollment Examination, which is a comprehensive exam that requires them to demonstrate proficiency in federal tax planning, individual and business tax return preparation, and representation. They must complete 72 hours of continuing education every 3 years. Learn more about the Enrolled Agent Program.

 

What are Certified Public Accountants?

Certified Public Accountants – Licensed by state boards of accountancy, the District of Columbia, and U.S. territories. Certified public accountants have passed the Uniform CPA Examination. They have completed a study in accounting at a college or university and also met experience and good character requirements established by their respective boards of accountancy. In addition, CPAs must comply with ethical requirements and complete specified levels of continuing education in order to maintain an active CPA license. CPAs may offer a range of services; some CPAs specialize in tax preparation and planning.

 

What are Attorneys?

Attorneys – Licensed by state courts, the District of Columbia or their designees, such as the state bar. Generally, they have earned a degree in law and passed a bar exam. Attorneys generally have on-going continuing education and professional character standards. Attorneys may offer a range of services; some attorneys specialize in tax preparation and planning.

 

What are limited IRS representation rights?

LIMITED REPRESENTATION RIGHTS: Preparers without one of the above credentials (also known as “unenrolled preparers”) have limited practice rights. They may only represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives, and similar IRS employees, including the Taxpayer Advocate Service. They cannot represent clients whose returns they did not prepare and they cannot represent clients regarding appeals or collection issues even if they did prepare the return in question.

Annual Filing Season Program Participants – This new voluntary program recognizes the efforts of return preparers who are generally not attorneys, certified public accountants, or enrolled agents. The IRS issues an Annual Filing Season Program Record of Completion to return preparers who obtain a certain number of continuing education hours in preparation for a specific tax year.

Beginning with Filing Season 2015, unenrolled return preparers could opt to participate in this IRS program, which was designed to encourage education and filing season readiness. Learn more about the new program.

PTIN Holders – Tax return preparers who have an active preparer tax identification number, but no professional credentials and do not participate in the annual filing season program, are authorized to prepare tax returns. In 2015 they also have limited representation rights. This is the final year this category will have limited representation rights. Beginning in 2016, only annual filing season program participants will have limited representation rights.

DIRECTORY OF FEDERAL TAX RETURN PREPARERS WITH CREDENTIALS AND SELECT QUALIFICATIONS: To help taxpayers determine return preparer credentials and qualifications, the IRS has launched a public directory containing certain tax professionals. The searchable, sortable database includes the name, city, state, and zip code of attorneys, CPAs, enrolled agents, enrolled retirement plan agents, and enrolled actuaries with valid PTINs for 2015, as well as Annual Filing Season Program Record of Completion recipients.

REMINDER: Everyone described above must have an IRS issued preparer tax identification number (PTIN) in order to legally prepare your tax return for compensation. Make certain your preparer has one and enters it on your return filed with the IRS. (They are not required to enter it on the copy they provide you.)

Tax return preparers who have PTINs but are not listed in the directory may provide quality return preparation services, but choose any return preparer wisely. Always inquire about their education and training.

IRS Early Interaction Initiative Will Help Employers Stay Current with Their Payroll Taxes

The Internal Revenue Service has launched a new initiative designed to more quickly identify employers who are falling behind on their payroll or employment taxes and then help them get caught up on their payment and reporting responsibilities. The effort is called the Early Interaction Initiative.

 

What is Early Interaction Initiative?

The initiative is designed to help employers stay in compliance and avoid needless interest and penalty charges. The initiative will seek to identify employers who appear to be falling behind on their tax payments even before an employment tax return is filed. The IRS will offer helpful information and guidance through letters, automated phone messages, other communications and in some instances, a visit from an IRS revenue officer.

 

IRS Contacting Employers About Payroll Taxes

In the past, the first attempt by the IRS to contact an employer having payment difficulties often did not occur until much later in the process, after the employment return was filed and the employer’s unpaid tax obligation had already begun to spiral out of control.

“Employers play a key role in our tax system, and we want to offer them the information and assistance they need to carry out their responsibilities,” said IRS Commissioner John Koskinen. “With early interaction, we will be able to offer help weeks or even months sooner, when it can often do the most good.”

What are IRS Payroll Tax Collection Techniques?

Two-thirds of federal taxes are collected through the payroll tax system. By law, employers must withhold federal income, Social Security and Medicare taxes from employees’ wages.

Shortly after employees are paid, employers typically must turn over withheld amounts, along with employer-matching contributions, to the federal government. Though payment schedules vary, these payments, known as federal tax deposits (FTDs), are made electronically through the Electronic Federal Tax Payment System (EFTPS). These FTDs are later reported on a return, usually filed quarterly, with the IRS.

 

Early Interaction Initiative Helps Collect Payroll Tax

Employers, especially those facing liquidity difficulties, sometimes inappropriately divert funds withheld from employees’ pay for working capital or other purposes. Even when well-intentioned, such diversions can quickly result in mounting tax liabilities for the employer, along with interest and penalties, potentially threatening the employer’s financial viability.

IRS Problems with Payroll Taxes

Also, employers may have a payroll processor or others handling their payroll, withholding, matching, remittance, and/or reporting responsibilities, which sometimes leads to miscommunication between the parties and may result in tax deposits and reporting not being made as required. Such miscommunication may also quickly result in mounting tax liabilities, interest and penalties that are costly and risky to the business.

IRS Identifying Employers Late Depositing Payroll Tax

To help employers avoid these problems, the new IRS initiative will monitor deposit patterns and identify employers whose payments decline or are late. Employers identified under this initiative may receive a letter reminding them of their payroll tax responsibilities and asking that they contact the IRS to discuss the situation. In addition, some employers may receive automated phone messages from the IRS providing information and assistance. Where appropriate, an IRS revenue officer will also contact some of these employers at their place of business.

A variety of useful information is available to employers on the IRS website. Visit IRS.gov and type “employment taxes” in the search box. Helpful links include:

Interest that the IRS must pay you on overpayments of tax to them

What happens when you overpay the IRS?

Interest is paid by the government on overpayments, whether refunded or credited against tax liabilities for other years, at three percentage points above the federal short-term rate, rounded up to the nearest full percent—the same rate that applies to underpayments. However, this is a little different For corporate taxpayers the interest rate on overpayments is one percentage point below the rate used to compute interest payable on underpayments. However, if the overpayment by a corporation for a taxable period exceeds $10,000, the interest rate is reduced to 0.5 of a percentage point above the federal short-term rate.

 

When does the IRS start paying interest on overpayments?

Interest is computed from the date of the overpayment, defined by the regulations as the date when the first amount is paid that, when added to previous payments, exceeds the tax liability (including any interest, additions, or additional amounts).

 

Calculating Interest on Tax Overpayments

Amounts paid before the return is due, payments of estimated tax, and credits for amounts withheld from wages are treated as paid on the last day prescribed for the filing of the return; hence, they do not bear interest between the date of actual payment and the date when they are credited against the tax shown on the return.

Tax Overpayment Credit

An overpayment that is credited against tax liability for another period bears interest until the due date of the amount against which it was credited; but if the credit is applied to the following year’s estimated tax, interest is not allowed.

 

How does the IRS refund overpayments and interest payments to taxpayers?

When refunding overpayments, the IRS is allowed an interest-free grace period of forty-five days from the due date of the return (or the filing date, if the return was filed after the due date), determined without regard to extensions. If the refund is not paid within this period, however, interest runs in the taxpayer’s favor from the due date (or the filing date, if later) of the return until a date, determined by the IRS, not more than thirty days prior to the refund check. Similarly, if the IRS receives a timely administrative request for a refund and pays the refund within forty-five days of filing, interest on the refund stops running on the day the refund request was filed; and if a refund results from an audit, forty-five days are subtracted from the period with respect to which interest is due.

Cannot Invest with IRS

Laws prevent taxpayers from earning interest on their spare cash by merely dumping money as taxes on the IRS of amounts not computed in pursuance of the actual or reasonably apparent requirements of tax laws