When attempting to reduce one’s debt, the Internal Revenue Service (“IRS”) needs to be provided with an accurate picture of one’s finances.
Editor's note: This is the sixth podcast in a series of seven by tax attorney Senen Garcia...find part 6 podcast at the bottom of this page.
If you are seeking to et your tax debt reduced or permanently eliminated, your tax professional will need certain information from you that they will provide to the IRS.
As we discussed in part five, income has to be reported; but, income is not the only thing that needs to be reported – the IRS also has to be provided with information about the taxpayer’s expenses. In order to ensure accuracy, information should be based on the last three months.
Regarding taxpayer expenses, the IRS has generally designated expenses.
In fact, they have even set pre-determined amounts for many categories. However, keep in mind that these pre-determined amounts will be used instead of the amounts provided by the taxpayer only if the pre-determined amounts are less than the amounts the taxpayer has provided.
Let’s move on now to discuss a breakdown of items you didn’t know had to be reported.
Generally, the IRS breaks down expenses into two major categories: expenses related to self-employment and personal expenses.
When the taxpayer is engaged in self-employment, there are a number of expenses the IRS takes into account.
These include gross wages and salaries, rent, and utilities. Self-employment expenses, however, also include materials purchased for the business. A material purchased qualifies as an expense if it was an item purchased that was directly related to the production of a product or service (for example, if your business is the sale of tee shirts, the cost of the tee shirt would fall under this sub-category).
A second sub-category is inventory purchased, which includes goods that the taxpayer bought for resale.
Expenses related to supplies must also be reported. However, keep in mind that supplies only include items used to conduct business and used up within one year. Supplies may include books, office supplies, and professional equipment. Also to be included are vehicle costs, which range anywhere from the purchase of gas to repairs and maintenance of the vehicle.
Last to be included within the self-employment category are expenses directly tied to the business.
Business insurance, current business taxes, secured debts, and other business expenses all fall under this sub-category. Of importance to taxpayers is the fact that current business taxes include real estate taxes, excise taxes, franchise taxes, occupational taxes, taxes on personal property, sales taxes, and the employer’s portion of employment taxes.
Additionally, keep in mind that secured debts do not include credit card debt.
A number of expenses qualify as personal expenses for purposes of reporting to the IRS.
Generally speaking, personal expenses include the following: food and clothing, housing and utilities, costs related to a vehicle, public transportation, healthcare payments, taxes, and debts. Let’s break these down further.
When reporting expenses related to food and clothing, the IRS allows the taxpayer to use a reasonable estimate of the items. Examples that fall under this sub-category include housekeeping supplies, personal care products, and minimum payments the taxpayer made on his/her credit cards.
Under the spectrum of housing and utilities is the more obvious rent or mortgage payment, but also the average monthly cost of property taxes, home insurance, maintenance, and dues and fees owed. Utilities include electricity, gas, other fees, trash collection, waste, cable, television and internet, and telephone (both landline and cell phone).
Costs related to a vehicle include vehicle ownership or loan payments, but also include the average monthly costs of maintenance, repairs, insurance, fuel, registration, licenses, inspections, parking, tolls, etc.
For everything but vehicle ownership and loan payments, the IRS allows the taxpayer to use a reasonable estimate. A reasonable estimate may also be used for the cost of public transportation, which includes fares for bus, train, ferry, and taxi.
Healthcare costs include health insurance, as well as out of pocket costs.
Out of pocket costs may include the monthly cost of prescription drugs, medical services, and medical supplies.
A tax payer may also report court ordered payments, such as child support and alimony, and child or dependent care, such as daycare payments. The taxpayer may also report payments made for life insurance.
Finally, the tax payer may report both taxes and debts.
Taxes include current year taxes – federal, state, local, and personal property tax – as well as any delinquent state or local taxes. Debts that may be reported are secured debts. Keep in mind, secured debts are loans where an asset is pledged as collateral not previously listed, such as, for example, a government guaranteed student loan.
Find Small Business Tax podcast 6 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