The Tax Code has made some changes in terms of reducing tax debt with the IRS.
Editor's note: This is the fifth podcast in a series of seven by tax attorney Senen Garcia...find part 5 podcast at the bottom of this page.
The Tax Code has made some changes in terms of reducing tax debt with the IRS. Keep in mind, however, that if you had debt prior to the enactment of the Code, you still have this debt balance.
Therefore, if you are seeking to get your tax debt reduced or eliminated, your tax professional (e.g., Enrolled Agent, Attorney) will need certain pieces of information from you.
In order to expedite the process of reducing your tax debt, there is certain information you need to provide to your tax professional to report to the Internal Revenue Service (“IRS”). Specifically, the IRS is interested in your current financial situation, and will require the reporting of both personal and business income, if applicable. Here is some more information about the income you didn’t know you have to report when you want to reduce your tax debt.
For the purposes of this blog, we will separate income into two parts: Self-Employed Income and Personal Income.
Also, the information reported is on a monthly basis so the figures should be monthly. Also, please be sure to provide the last three months of this information to ensure accuracy in reporting.
An individual is considered to be self-employed if they are a sole proprietor of a business, or an independent contractor; if they are a member of a single member limited liability company (LLC) that carries on a trade or business; or if they are otherwise in business for themselves.
Self-employed income does not include pass through entities such as S-Corporation or multimember LLC’s. For self-employed income, you would need to include all income derived from self-employed business. You would also need to include corresponding expenses, which will be discussed in further detail in next week’s blog.
Now, considering the precarious nature of having to report business income, you may wish to incorporate your business to avoid future comingling of your business income with your personal income or, in the case of single member LLC’s, making a tax election to avoid the issue in the future.
If this is something you are considering, you may want to consult with our firm about incorporating your business and/or electing to file as an S-Corporation.
Personal income may include any of the following: gross wages, interest, dividends, distributions, income from rent, child support and alimony received, and additional sources of income to support the household.
Gross wages are simply wages and salaries received as compensation for work performed for your employer.
Remember you are to report your gross amount not your net amount that you would receive after taxes. If the amounts fluctuate, please advise your tax professional so they can ensure the amount is property reported to the IRS.
Interest income reported would be the amounts received by you during the month. If the amounts differ month, it is not an issue. Simply provide the interest received for the last 3 months so that your tax professional can surmise what amount should be reported.
Dividends you receive is also factored. Now, some may argue these amounts are usually not seen as they stay in the person’s money market account.
Bear in mind, it is still income as per the IRS whether one actually withdraws the funds so, it must be considered in the calculation of income.
It is important to note that a shareholder may be deemed to receive a dividend if the corporation pays the debts of the shareholder, the shareholder receives services from the corporation, or the shareholder is allowed the use of the corporation’s property.
If a shareholder provides services to a corporation, said shareholder may be deemed to receive a dividend if the corporation pays the shareholder service-provider in excess of what it would pay a third party for the same services.
Distributions, like dividends are also considered as part of income even if the fund are not actually received by the owner of the company. Therefore, be sure to include them in the calculation of income
Rental income is the gross income of all amount received as rent less expense associated with the rental income.
Rental income must be reported to the Internal Revenue Service for every property that the taxpayer receives a rent payment on. Rental income also includes advance rent, regardless of the period covered or the method of accounting used (this includes security deposits used as final payment of rent); payment received for cancelling a lease; expenses paid by the tenant; and property or services received in the place of money for rent.
Now, if the rent amount fluctuated or if you had vacancies in your rental properties, this could be factored into the income calculation to ensure accurate reflection of your financial position.
While child support is normally not factored into calculating income tax it is considered when determining IRS tax reduction. As such, you will need to report the child support received. If you have not received child support for a lengthy period of time, please be sure to notify your tax professional of this fact.
Regarding alimony received, like when one includes it on his/her tax return, it also must be listed under the income section when calculating for IRS tax reduction.
Please be sure to advise your tax professional if there has been any change in alimony payments or if the alimony amount will change in the near future.
Finally, list any other sources of income not specifically mentioned above to support the household. As is the case with the other sources of income, please be sure to provide the previous three months’ worth of income to your tax professional to account for any fluctuations.
Find Small Business Tax podcast 5 below...
As with all of our blogs, if you have any questions regarding the information we have provided, please contact office. We would be happy to help you.
This article/podcast is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document, we encourage you to contact the author or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this article may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this article is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal
About the author
Senen Garcia operates SG Law Group LLP a thriving law practice in multiple states assisting clients with their corporate, real estate, estate planning, and property insurance claim needs. Additionally, Mr. Garcia has accounting practice assisting small businesses with tax and accounting needs. Along with his work with SCORE, Mr. Garcia has also provided assistance with the local Small Claims Clinic that provides assistance to individuals filing small claims cases. Mr. Garcia has spoken on a variety of topics such as: How to start a business, Communication within your organization, Importance of Capital Accounts, What’s in Business Name Anyway?, and Stock Purchase Agreements vs. Asset Purchase Agreements.Website