Taxpayers who have a tax debt they cannot pay may have heard that they can settle their tax debt for less than the full amount owed. It’s called an Offer in Compromise.
Before applying for an Offer in Compromise, here are some things to know:
In general, the IRS cannot accept a settlement offer if the taxpayer can afford to pay what they owe. Taxpayers should first explore other payment options. A payment plan is one possibility. Visit IRS.gov for information on Payment Plans – Installment Agreements.
A taxpayer must file all required tax returns first before the IRS can consider a settlement offer. When applying for a settlement offer, taxpayers may need to make an initial payment. The IRS will apply submitted payments to reduce taxes owed.
The IRS has an Offer in Compromise Pre-Qualifier tool on IRS.gov. Taxpayers can find out if they meet the basic qualifying requirements. The tool also provides an estimate of an acceptable offer amount. The IRS makes a final decision on whether to accept the offer based on the submitted application.
Taxpayers wishing to file for an Offer in Compromise should visit IRS website’s Offer in Compromise page for more information. There taxpayers can find step-by-step instructions as well as the required forms. Taxpayers can download forms anytime at /forms or call 800-TAX-FORM (800-829-3676) and ask for Form 656-B, Offer in Compromise booklet.
Members of the military may qualify for tax breaks and benefits. Special rules could lower the tax they owe or give them more time to file and pay taxes. In addition, some types of military pay are tax-free.
Here are some tips to find out who qualifies:
Combat Pay Exclusion. If someone serves in a combat zone, or provides direct support, part or even all of their combat pay is tax-free. However, there are limits for commissioned officers. See Earned Income Tax Credit below for important information.
Deadline Extensions. Some members of the military, such as those who serve in a combat zone, can postpone most tax deadlines. Those who qualify can get automatic extensions of time to file and pay their taxes.
Reservists’ Travel. Reservists whose duties take them more than 100 miles away from home can deduct their unreimbursed travel expenses on Form 2106, even if they do not itemize their deductions.
Moving Expenses. Taxpayers who serve may be able to deduct some of their unreimbursed moving costs on Form 3903. This normally applies if the move is due to a permanent change of station.
Uniform. Members of the military can deduct the cost and upkeep of their uniform, but only if rules say they cannot wear it off duty. Also, they must reduce their deduction by any uniform allowance they get for those costs.
Earned Income Tax Credit or EITC. If those serving get nontaxable combat pay, they may choose to include it in their taxable income to increase the amount of EITC. That means they could owe less tax and get a larger refund. For tax year 2016, the maximum credit for taxpayers is $6,269. It is best to figure the credit both ways to find out which works best.
Signing Joint Returns. Both spouses normally must sign a joint income tax return. If military service prevents that, one spouse may be able to sign for the other or get a power of attorney.
ROTC Allowances. Some amounts paid to ROTC students in advanced training are not taxable. This applies to allowances for education and subsistence. Active duty ROTC pay is taxable. For instance, pay for summer advanced camp is taxable.
Separation and Transition to Civilian Life. If service members leave the military and look for work, they may be able to deduct some job search expenses, including travel, resume and job placement fees. Moving expenses may also qualify for a tax deduction.
Tax Help. Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after the April deadline. Check with the installation’s tax office (if available) or legal office for more information.
For more, refer to IRS.gov/Military or Publication 3, Armed Forces’ Tax Guide, on IRS.gov.
Miscellaneous deductions are tax breaks that generally don’t fit into a particular tax category. They can help reduce taxable income and the amount of taxes owed. For example, some employees can deduct certain work expenses like uniforms as miscellaneous deductions. To do that, they must itemize their deductions instead of taking the standard deduction on their tax return.
Here are several tips from the IRS about miscellaneous deductions:
The Two Percent Limit. Most miscellaneous costs are deductible only if the sum exceeds 2% of the taxpayer’s adjusted gross income (AGI). For example, before being able to deduct certain expenses, a taxpayer with $50,000 in AGI must come up with more than $1,000 in miscellaneous deductions. Expenses may include:
Unreimbursed employee expenses.
Job search costs for a new job in the same line of work.
Work-related travel and transportation.
The cost paid to prepare a tax return. These fees include the cost paid for tax preparation software. They also include any fee paid for e-filing a return.
Deductions Not Subject to the Limit. Some deductions are not subject to the 2% limit. They include:
Certain casualty and theft losses. In most cases, this rule is for damaged or stolen property held for investment. This may include property such as stocks, bonds and works of art.
Gambling losses up to the total of gambling winnings.
Losses from Ponzi-type investment schemes.
Taxpayers can’t deduct some expenses. For example, personal living or family expenses are not deductible. To claim allowable miscellaneous deductions, taxpayers must use Schedule A, Itemized Deductions. For more about this topic, see Publication 529, Miscellaneous Deductions. Get them on IRS.gov/forms at any time.
Identity theft happens when someone steals personal information for financial gain. Tax-related identity theft happens when someone uses another person’s stolen Social Security number (SSN) or Employer Identification Number (EIN) to file a tax return to obtain a fraudulent refund.
Many people first find out they are victims of identity theft when they submit their tax returns. That’s because the IRS lets them know someone else already used their SSN to file.
The IRS continues to work hard to stop identity theft with a strategy of prevention, detection and victim assistance. So far, the agency has stopped millions of dollars from getting into the hands of thieves.
Check out these eight tips on how to protect against identity theft:
Taxes. Security. Together.The IRS, the states and the tax industry need everyone’s help. The IRS launched The Taxes. Security. Together. awareness campaign in 2015 to inform people about ways to protect their personal, tax and financial data. Learn more at www.IRS.gov/TaxesSecurityTogether.
Protect Personal and Financial Records.Taxpayers should not carry their Social Security card in their wallet or purse. They should only provide their Social Security number if it’s necessary.Protect personal informationat home and protect personal computers with anti-spam and anti-virus software. Routinely change passwords for online accounts.
Don’t Fall for Scams. Criminals often try to impersonate banks, credit card companies and even the IRS hoping to steal personal data. Learn to recognize and avoid those fake communications. Also, the IRS will not call a taxpayer threatening a lawsuit, arrest or to demand immediate payment.Beware of threatening phone callsfrom someone claiming to be from the IRS.
Report Tax-Related ID Theft.Here’s what taxpayers should do if they cannot e-file their return because someone already filed using their SSN:
File a tax return by paper and pay any taxes owed.
File an IRS Form 14039, Identity Theft Affidavit. Print the form and mail or fax it according to the instructions. Include it with the paper tax return and/or attach a police report describing the theft if available.
File a report with the Federal Trade Commission using the FTC Complaint Assistant.
Contact Social Security Administration atwww.ssa.govand type in “identity theft” in the search box.
Contact financial institutions to report the alleged identity theft.
Contact one of the three credit bureaus so they can place a fraud alert or credit freeze on the affected account.
Check with the applicable state tax agency to see if there are additional steps to take at the state level.
IRS Letters.If the IRS identifies a suspicious tax return with a taxpayer’s stolen SSN, that taxpayer may receive a letter asking them verify their identity by calling a special number or visiting an IRS Taxpayer Assistance Center.
IP PIN.If a taxpayer is a confirmed ID theft victim, the IRS may issue them anIP PIN. The IP PIN is a unique six-digit number that the taxpayer uses to e-file their tax return. Each year, they will receive an IRS letter with a new IP PIN.
If summer plans include starting a business, be sure to visit IRS.gov. The IRS website has answers to questions on payroll and income taxes, credits and deductions plus more.
New business owners may find the following four IRS tax tips helpful:
Business Structure. An early choice to make is to decide on the type of structure for the business. The most common types are sole proprietor, partnership and corporation. The type of business chosen will determine which tax forms to file.
Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax a business pays depends on the type of business structure set up. Taxpayers may need to make estimated tax payments. If so, use IRS Direct Pay to make them. It’s the fast, easy and secure way to pay from a checking or savings account.
Employer Identification Number (EIN). Generally, businesses may need to get an EIN for federal tax purposes. Search “EIN” on IRS.gov to find out if the number is necessary. If needed, it’s easy to apply for it online.
Accounting Method. An accounting method is a set of rules used to determine when to report income and expenses. Taxpayers must use a consistent method. The two most common are the cash and accrual methods:
Under the cash method, taxpayers normally report income and deduct expenses in the year that they receive or pay them.
Under the accrual method, taxpayers generally report income and deduct expenses in the year that they earn or incur them. This is true even if they get the income or pay the expense in a later year.
Mistakes happen and tax returns are no exception. Filing an amended tax return corrects information that changes tax calculations. This includes making changes to filing status and dependents, or correcting income credits or deductions. Don’t file an amended return to fix math errors because the IRS will correct those.
The IRS offers tips on how to amend a tax return:
File using paper form. Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct errors to an original tax return the taxpayer has already filed. Taxpayers can’t file amended returns electronically. Mail the Form 1040X to the address listed in the form’s instructions.
Preparing Form 1040X. Many taxpayers find the easiest way to figure the entries for Form 1040X is to make the changes in the margin of the original tax return and then transfer the numbers to their Form 1040X. Taxpayers should be sure to check a box at the top to show the year they are amending. Form 1040X will be the taxpayer’s new tax return, changing the original entries to include new information. Taxpayers should explain what they are changing and why on the second page of Form 1040X in Part III.
Know when to amend. Taxpayers should amend a tax return to correct their filing status, the number of dependents or total income. They should also amend to claim deductions or credits not claimed or to remove deductions and credits they are not entitled to on the original return. The instructions for Form 1040X, Amended U.S. Individual Income Tax Return, list more reasons to amend a return.
Know when NOT to amend. In some cases, it is not necessary to amend a tax return. Taxpayers should not worry about math errors because the IRS will make the correction. Taxpayers do not need to amend their return if they forgot to include a required form or schedule. The IRS will mail a request to the taxpayer, if needed.
Use separate forms for each tax year. Taxpayers amending tax returns for more than one year will need a separate 1040X for each tax year. Mail each tax year’s Form 1040X in separate envelopes. See "Where to File" in the instructions for Form 1040X for the correct address.
Include other forms or schedules. If a taxpayer makes changes to any form or schedule, they should attach them to the Form 1040X when filing. Not doing so could cause a delay in processing.
Wait to file for corrected refund for tax year 2016. Taxpayers should wait for the refund from their original tax return before filing an amended return. It is okay to cash the refund check from the original return before receiving any additional refund. Amended returns can take up to 16 weeks to process.
Pay additional tax. Taxpayers filing an amended return because they owe more tax should file Form 1040X and pay the tax as soon as possible. This will limit interest and penalty charges.
File within three-year time limit. Generally, to claim a refund, taxpayers must file a Form 1040X within three years from the date they timely filed their original tax return or within two years from the date the person pays the tax, whichever is later. For taxpayers who filed their original return early (for example, March 1 for a calendar year return), their return is considered filed on the due date (generally April 15).
Track your amended return. Taxpayers can track the status of an amended return three weeks after filing. Go to “Where’s My Amended Return?” or call 866-464-2050.
Tips your employees receive from customers are generally subject to withholding. Employees are required to claim all tip income received. This includes tips you paid over to the employee for charge customers and tips the employee received directly from customers.
Employees must report tip income on Form 4070, Employee's Report of Tips to Employer (PDF), or on a similar statement. This report is due on the 10th day of the month after the month the tips are received. This statement must be signed by the employee and must show the following:
The employee's name, address, and SSN.
Your name and address.
The month or period the report covers.
The total tips received.
No report is required from an employee for months when tips are less than $20.
Both Forms 4070 and 4070-A, Employee's Daily Record of Tips (PDF), are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer (PDF).
Employers must collect income tax, employee social security tax and employee Medicare tax on tips reported by employees. You can collect these taxes from an employee's wages or from other funds he or she makes available.
Allocation of Tips
As an employer, you must ensure that the total tip income reported to you during any pay period is, at a minimum, equal to 8% of your total receipts for that period.
In calculating 8% of total receipts, you do not include nonallocable receipts. Nonallocable receipts are defined as receipts for carry out sales and receipts with a service charge added of 10% or more.
When the total reported to you is less than 8%, you must allocate the difference between the actual tip income reported and 8% of gross receipts. There are three methods for allocating tip income:
Gross Receipt Method
Hours Worked Method
Good Faith Agreement
Employers can request a lower rate (but not lower than 2%) for tip allocation purposes by submitting an application to the IRS. Detailed instructions for computing allocation of tips, reporting allocated tips to employees, and for requesting a lower rate can be found in the Instructions for Form 8027 (PDF).
Note: The amount shown as allocated tip income is for information purposes only. You are not required to withhold Income or Social Security taxes on the allocated tip income. The amount of tip income allocated to each employee is shown in box 8 of their Form W-2.
Tip Reporting Requirements for Employers
Employers who operate large food or beverage establishments must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips (PDF) to report employee tip income. A large food or beverage establishment is defined as business where all of the following apply:
Food or beverage is provided for consumption on the premises
Tipping is a customary practice
More than 10 employees, who work more than 80 hours, were normally employed on a typical business day during the preceding calendar year.
A worksheet for determining whether a business meets the criteria listed above is included in the Instructions for Form 8027 (PDF).
Taxpayers may only claim qualified expenses in the year paid.
Taxpayers can’t claim either credit if someone else claims them as a dependent.
Income limits could reduce the amount of credits.
Taxpayers can’t claim either the AOTC or LLC for the same student or for the same expense in the same year.
The Interactive Tax Assistant tool on IRS.gov can help determine eligibility for certain educational credits including the American Opportunity Credit and the Lifetime Learning Credit.
See IRS Publication 970, Tax Benefits for Education, for details, rules, examples and a complete explanation of benefits.
Avoid scams. The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.
Taxpayers who are divorcing or recently divorced need to consider the impact divorce or separation may have on their taxes. Alimony payments paid under a divorce or separation instrument are deductible by the payer, and the recipient must include it in income. Name or address changes and individual retirement account deductions are other items to consider.
IRS.gov has resources that can help along with these key tax tips:
Child Support Payments are not Alimony. Taxpayers can deduct alimony paid under a divorce or separation decree, whether or not they itemize deductions on their return. Taxpayers must file Form 1040; enter the amount of alimonypaid and their former spouse's Social Security number or Individual Taxpayer Identification Number.
Deduct Alimony Paid. Taxpayers should report alimony received as income on Form 1040 in the year received. Alimony is not subject to tax withholding so it may be necessary to increase the tax paid during the year to avoid a penalty. To do this, it is possible to make estimated tax payments or increase the amount of tax withheld from wages.
Report Alimony Received. Taxpayers should report alimony received as income on Form 1040 in the year received. Alimony is not subject to tax withholding so it may be necessary to increase the tax paid during the year to avoid a penalty. To do this, it is possible to make estimated tax payments or increase the amount of tax withheld from wages.
IRA Considerations. A final decree of divorce or separate maintenance agreement by the end of the tax year means taxpayers can’t deduct contributions made to a former spouse's traditional IRA. They can only deduct contributions made to their own traditional IRA. For more information about IRAs, see Publications 590-A and 590-B.
Report Name Changes. Notify the Social Security Administration (SSA) of any name changes after a divorce. Go to SSA.gov for more information. The name on a tax return must match SSA records. A name mismatch can cause problems in the processing of a return and may delay a refund.
For more on this topic, see Publication 504, Divorced or Separated Individuals. Get it on IRS.gov/forms at any time. Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.