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Small Business Video #1 – Choosing the Right Name and Business Structure

 

Take a look at the first video in our video series about setting up your new business. It is important to set up your business properly; your business structure will dictate what protections you do or do not have. There can be legal and tax consequences to the way you start your business. It is important to understand all your options.

The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by state statute. If you choose an LLC, you must also inform the Internal Revenue Service on how you want to be taxed. If you are a sole owner, you have two options: as a sole proprietorship (listed on a Schedule C) or S-Corp. If you have multiple owners, your only option is usually as an S-Corp. There are pros and cons to each type of taxation; you should talk to a tax and legal professionals before deciding on how to set up your business.

Additionally, most individuals set up a business structure to ensure protection for personal liability. In order to get these protections, you must make sure you are following corporate formalities, such as separate bank accounts, accounting, operating agreement. Even if you are a sole owner, you must have an operating agreement that dictates how decisions for the company must be made. Legal protections only continue to exist when formalities exist; otherwise, the courts will see the business as just an extension of the owner(s) and not a separate entity.

Package of documents for new hire.

Business Legalities: Proper Hiring Practices For Your Company

Every business, both small and large, needs to have good hiring practices in place. Proper hiring practices can help save you significant time and money down the road.

There are many things that go into running a successful business; one of those things is making sure you are crossing your Ts and dotting your Is on your hiring practices.  The government requires that you have all the proper documentation for each and every employee your business hires.  The government can “audit” (or review) your paperwork at any given time.  They can also raid your business if they suspect you have undocumented workers working for the business.  Since the Trump administration came into power in early 2017 the number of large raids on businesses has increased.  Most recently a gardening company in Ohio had 114 people arrested by U.S. Immigration agents. Not only can undocumented workers get in trouble for working, employers can get in trouble for hiring those individuals and business owners can face fines and jail time for not complying with federal law.

Many business hire undocumented workers; most employers offer various reasons, including that it is cheaper to do so and/or the type of work does not usually appeal to people individuals who can legally work in this country. This is not always the case, and if it is proven to be true, the penalty for hiring undocumented workers is very high.  In the past many employers knowingly participated in the hiring of undocumented employees because the risks appeared to be limited to a warning or a small fine.  Some business owners even called it the “cost of doing business.” However, the position of the current administration is to crack down on these hiring practices. Potential consequences of hiring undocumented worker include: costly fines, immigration raids, and even criminal charges against the business owners.

Potential Fines & Jail Time

First offenders can be fined $250.00 to $2,000.00 per undocumented employee, as a civil penalty.  The fine can more than double for a second offense, up to $5,000.00 per undocumented employee.  Three of more offenses can carry up a $10,000.00 fine per undocumented employee.  At that point the employer is risking the government coming after them for showing a pattern of knowingly employing undocumented workers and facing up to six months in jail.  There is also a provision called “harboring,” where an employer employs ten or more undocumented individuals in one year.  Additionally, there are criminal penalties for employing undocumented workers can result in monetary fines and possibly jail time. These criminal penalties are separate from any civil penalties assessed.

I-9 Forms

U.S. Immigration and Customs Enforcement is the agency within the Department of Homeland Security that enforces the requirements for proper documentation of employees.  Employers need to make sure their I-9 forms are properly filled out and supporting documents are kept in a secure location.  It is important for employers to keep the I-9 documents in a location separate from other personal files of employees due to other sensitive documents that the ICE agents won’t need. You are allowed to store this information electronically, but it is important to comply with all current federal regulations regarding the documents.

Independent Contractors

Some businesses try to get around the requirements of verifying whether an individual can work legally in the United States by hiring independent contractors.  Businesses are not obligated to confirm work authorizations for independent contracts; however, if they know they are hiring undocumented workers they can still be held liable. Additionally, the practice of hiring an individual and labeling them an independent contractor, while he/she is really an employee can also cause additional problems. The general rule of classifying an individual as an employee or independent contractor focuses on control. An individual is considered an independent contractor, if the individual is given an assignment/goal, but has control over when the work will be done and how it will be done.

Tax Compliance

The Internal Revenue Service also requires that you use a Social Security Number when issuing W2s at the end of a year.  If the potential employee gives you an ITIN they may not be eligible to work in the United States.  An ITIN starts with the number “9” and is formatted in the same way a SSN is.   Other concerns that the IRS might look into is an audit of your business tax returns.  If you are claiming W2 wages for undocumented work as a business expense, the IRS may disallow those expenses through an audit and your business will then be hit with a higher tax liability, as well as additional penalties and interest.

W-4 Forms

Along with the I-9, an employer should also have the proper withholding documents for the IRS (W-4) and for the state, if the state has state income tax.   Keeping copies of the withholding documents, along with required I-9 documents, will ensure you are taking the necessary steps to comply with federal and state law regarding hiring individuals who are authorized to work in the United States.

If you are concerned about complying with federal laws, please contact Ashley F. Morgan Law, PC. Our office can conduct an audit of your files to ensure you are complying with current regulations. Additionally, our attorneys regularly work with Human Resource departments or employees to guide them through current regulations and educate individuals about laws and expectations. Ensuring proper hiring practices can prevent many problems and additional costs down the road. Attorneys Ashley Morgan and Arthur Rosatti can help businesses ensure they are complying with federal and state laws.

 

 

Hand writing payment owed for taxes

Till Death Do Us Part: Guide on Tax Debt in Marriage and Divorce

Guide on Tax Debt in Marriage and Divorce

Being married comes with the allure of additional tax benefits. With the passage of the new tax bill at the end of 2017, married couples who file a joint return can take advantage of a $24,000 standard deduction. This can help many couple who never itemized their returns in the past. However, you do lose your individual exemptions with the new law. Overall, the new tax bill was supposed to make filing your taxes easier; the law attempts to eliminate the number of people who would qualify to itemize on their taxes. However, the new law does not change the possibility of couples incurring tax debt.

However, trouble arises when during the course of the marriage the couple, or either spouse in a community property state, ends up with a tax debt. From that point, many different scenarios can happen whether the couple stays together or divorces. The easiest and most often occurring situation is that the couple has some tax debt, they are both aware of it and both agree to take the necessary steps to deal with it. In these situations a simple payment plan with the Internal Revenue Service can keep both spouses in a protective status with the IRS and away from collection activity such as levies and garnishments.

Innocent Spouse

Things can get significantly more complicated, even for couples that are still married, when one spouse claims that they are not responsible for the debt. The IRS denies most innocent spouse claims. The “innocent” spouse has to meet very specific criteria to state a successful claim, such as duress at signing, forged signature, and other things that basically point to the fact that they were not responsible for the debt. Now, the IRS can check income records and determine whether the “innocent” spouse would have owed if they filed a Married Filing Separate return, which would make the innocent spouse claim moot. When dealing with debt from taxes the occurred in a marriage, this option is just very rarely viable.

Injured Spouse

A relationship can also get tense when one spouse brings debts into a marriage. Sometimes, one spouse will have tax debt that he/she incurred pre-marriage. If the couples file a joint tax return, the IRS will seize the entire refund. Then the IRS will apply the funds to help satisfy the debt owed by only one spouse. For example, if a husband owes $5,000.00 in back taxes, any refund generated by the filing of a joint tax return, may be withheld by the IRS and applied toward tax arrearage, even if the refund is entirely attributable to the wife’s over-withholding.  The IRS may consider the wife an “insured spouse,” since the IRS seized money that she solely contributed.

The injured spouse then must prove that he/she has no responsibility to the debt and can request a refund of his or her allocation of the joint return refund. Injured spouse claims can also apply to other debts, such as: child or spousal support, delinquent federal student loan debt, or state income tax. Conversely, some couples file “Married Filing Separately” to ensure the injured spouse receives his/her refund. But the IRS limits certain deductions for couples filing taxes as “Married Filing Separately.” Talk to your tax professional about benefits to both options.

Bankruptcy

Another situation we see here at the firm is when one spouse files for bankruptcy protection when the couple has joint tax debt. This gives protection to both spouses during the bankruptcy but causes the balances to be “mirrored” at the IRS after the bankruptcy is discharged or dismissed. Mirroring of the balances means that the joint debt is split and each spouse is individually responsible for the debt. Bankruptcy will reduce the interest and penalties due by the filing spouses; this means there will be two different balances for both parties. Additionally, debtors may discharged certain taxes during a bankruptcy; however, in most cases, there will still be tax debt after only one spouse files for bankruptcy. When that happens, the IRS will start collection activity against the non-bankrupt spouse.  When a spouse in bankruptcy pays the priority tax debt in the bankruptcy and/or the balance is discharged, then only one spouse may owe taxes. These are things to consider when dealing with debt issues and whether to file bankruptcy jointly or separately.

Divorce

If the marriage falls apart and the couple decides to get a divorce, things with the IRS become more complicated. Not only does the jointly held debt become mirrored but the couple’s divorce decree and property settlement agreements can come into play. Divorce decree does not control collection by the IRS; the divorce decree only controls issues between the two spouses, not outside parties. If that document says the husband is completely responsible for the tax debt, but he does not do anything and the wife has to get herself into an agreement to pay the debt, she cannot argue to the IRS that she doesn’t have to pay it because of the divorce decree.

If you are filing for divorce and have joint debt there a things to keep in mind. You need to clearly define who is responsible for the debt and the remedies that available to the other spouse if they are the ones who end up paying some or all of the debt.

Handling your Tax Debt

Tax debt can be a serious issue if not handled properly. It is important to understand your rights and responsibilities in reference to the debt. It is also important to understand why the tax debt occurred and prevent it from happening in the future. Additionally, if you have outstanding tax debt, the taxing agencies can garnish, levy accounts, or issue tax liens. Talk to an experienced tax professional today.

 

 

Arthur Rosatti, Esq. is a Florida licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies. His goal with their tax debt and get them into the best plan possible to manage the debt. He has experience dealing with divorce spouses dealing with their joint tax debt.

Bankruptcy basics and bankruptcy options.

Bankruptcy: Is it the right option for me?

Many people fear bankruptcy because it means they will lose everything, or they do not want to file because someone might find out that they filed, or the client believes it is an admission of failure. These are not always correct. When someone comes into our office we try to let them know bankruptcy is not as big of a deal as they think. It is a legal and financial decision that must be taken seriously, but it has a lot benefits.

 

Different Types of Bankruptcy

The bankruptcy court is there to help the “honest but unfortunate debtor.” There are different bankruptcy chapters to fit different people’s needs. Some cases we see are for people that are a few months or years behind on a mortgage, or a few months behind on a car payment.  In other cases you just overspent and you can’t catch up. Or even, perhaps, you just went through a difficult divorce and cannot afford your expenses anymore or have crushing medical bills. Bankruptcy can often help your mange your debt. There are four chapters: Chapter 7 (liquidation), Chapter 13 (restructuring for wage earners), Chapter 11 (restructuring for businesses or individuals with high debts), Chapter 12 (restructuring for farmers and fishermen).  Most of our clients file a Chapter 7 or a Chapter 13. Depending on your situation, one of these bankruptcy options may help you achieve your goals.

Chapter 7

A Chapter 7 is usually what most individuals think of when they hear the terms bankruptcy. It is a fairly quick process (three to four months) and it wipes away most unsecured debt and can relieve your obligation to pay secured debts. Any liens remain on the property, which means creditors can still foreclosure or repossess the collateral if you are not current. You can qualify for Chapter 7 in one of two ways. The first way only requires that your household income is below the median for the state. The second way requires what is called the Means Test. This “test” takes your income and reviews it to see if you have any disposable income at the end of the month after taking out allowable expenses. The court allows for certain actual expenses, such as your taxes, your car payment, and your mortgage payment. Then it allows deductions for other allowable expenses, such as the IRS standard for utilities, food, etc. If, after all the allowable deductions are taken out, only a small disposable income remains, then you are permitted to file a Chapter 7.

The reason a Chapter 7 is called a liquidation is because the court will take non-exempt assets and sell them to help pay off your debt. The Court assigns a Trustee to your case to represent your creditors to review your situation and determine what assets are non-exempt. Non-exempt means that there is not a law that allows you to keep the property. Important exemptions in Virginia include: 100% protection for qualified retirement plans, 100% protection for wedding/engagement rings, and $6,000.00 equity in a vehicle (per person), $5,000.00 wildcard exemption for any cash or cash like assets such as (such as money in the bank or equity in a home). Most of my clients do not have any non-exempt assets and after four months they get their discharge and their case closes. If there are non-exempt assets, the Debtor has the choice on whether he or she wants to file a Chapter 7 bankruptcy and surrender those assets or consider filing a Chapter 13 bankruptcy.

Chapter 13

A Chapter 13 is called a wage earner plan. This type of bankruptcy is for those individuals who have steady income. We use a Chapter 13 when individuals have too high of income to qualify for a Chapter 7 or have assets they could lose in a Chapter 7. The major benefit of a Chapter 13 plan is that you get to keep all non-exempt assets because you pay out the value of those assets in your plan. The plans are usually three to five years, which vary depending on your income. The plan requires that you make regular payments to the court during the life of your plan; at the end of your plan your remaining dischargeable debt is discharged. Some of our clients pay 100% back to all creditors. Even our clients that pay 100% back will often benefit from bankruptcy because the case will freeze your unsecured debts and stop them from incurring more interest. We have other clients who pay between 1% to 99% of all debt in their plans, and then we even have what we call a 0% payout plan. The 0% plans are Chapter 13 cases where you have some debt that is secured (cars and houses) or prioritized (non-dischargeable taxes, child support arrears, etc.) over other unsecured debt, and your plan pays the secured debt and the priority debt, but nothing to your unsecured creditors. One of the most common reasons for a Chapter 13 is to stop a foreclosure and then allow the debtor time to catch up on the arrearages. Sometimes we even use a Chapter 13 to help with student loans when you need to temporarily lower your payments.

If your plan is anything less than 100% the court will review your income every year to see if there is an increase, which means they may require you to pay more in. Additionally, if you get a tax refund or inheritance over the next few years, you will turn over the funds over to the Court.

There is a limit on the amount of debt you can have and be in these plans. These limits are unsecured debts of less than $394,725 and secured debts of less than $1,184,200, which will be updated as of April 1, 2019.

Chapter 11

A less common option for bankruptcy is a Chapter 11. This type of bankruptcy usually is only an option for an individual when an individual cannot do a Chapter 7 and has debts over the Chapter 13 debt limits. Businesses also do Chapter 11 to restructure their business. When you hear about major companies filing bankruptcy (such as Toys ‘R’ Us or Sports Authority), they are usually filing Chapter 11. The major benefit of a Chapter 11 is that your repayment plan can be over the course of more than 5 years. However, they are cost prohibitive. It is an expensive and complicated process.

Chapter 12

The last common bankruptcy is a Chapter 12, which is a restructuring of debt for farmers and fishermen. This type of bankruptcy is very similar to a Chapter 13, but provides more flexibility in the payment structure. This is because the court takes into account the seasonal nature of the businesses.

Can People Find Out I Filed Bankruptcy?

As for people finding out that you filed bankruptcy, it may happen. It is not published in the newspaper and notice is not mailed out to family and friends (unless you owe them money or have a joint debt with them). It is a public court filing that can be looked up, but so this can also be said about divorce, collection lawsuits, and foreclosure.

Sometimes people who were referred to our office for help with dealing with debt; they do not know that we help people file bankruptcy. After talking with us, they sometimes figure out that the individual who referred us, likely filed bankruptcy with us, too. Additionally, we have people from all walks of life who are considering bankruptcy, including people who are unemployed, individuals who have multiple properties, people going through divorce, individuals making six figures every year, business owners, and much more. We have other clients who start talking about filing bankruptcy with a friend only to find out the friend filed bankruptcy years ago. You just never know.

Bankruptcy is a Tool to Manage Debt  

As stated before, bankruptcy is a legal and financial decision. Congress included bankruptcy as an option in the law because they understand people need help managing their debts. It is not an admission of failure; it is a way of managing your debts and taking care of your financial situation.

For some, bankruptcy helps wipe away debt and allow a fresh start. For others, bankruptcy can help restructure your payments on various debts, such as your cars, student loans, IRS debt, personal loans, second mortgages, etc.   People often worry they make too much money to file bankruptcy, but there is usually an option out there that will provide some relief. Additionally, even if you make a lot of money, you may still qualify for a Chapter 7 if you have high secured debt payments (car, mortgage, etc.) or court ordered payments (alimony, child support, etc.).

If you will do whatever it takes to start over, perhaps you should consider bankruptcy.  It is not just for the poor and unlucky.  The code was written to allow various options to fit various situations. Bankruptcy is really just a tool in your financial tool box; if you are struggling with debt, it is at least an option you should look into.  For many of our clients, bankruptcy is also a tool to improve their credit, and it helps them get on track for an even higher credit score. We often tell prospective clients that they do not need bankruptcy, or that they have a variety of alternatives; it is not for everyone; it does not solve every financial problem.  But, you really should at least understand how it could benefit your situation. Consider a free consultation with my office; give us a call at 703-880-4881.

 

 

 

 

Ashley F. Morgan, Esq. is a Virginia Bankruptcy Attorney. She helps individuals and business file bankruptcy in the northern Virginia area. She has experience handling Chapter 7, Chapter 11, and Chapter 13 cases. She also understands bankruptcy is only one of many options available to debtors. She wants to help her clients review all potential options to determine what is the best option in each person’s situation. Instead of bankruptcy, Ashley has also helped negotiate settlements and payment plans for her clients when appropriate. Visit Ashley at her Herndon, VA office to discuss options to manage your debt.

Student Loans: Understanding your Options

There have been reports of up to 40% of student loan borrowers are not making their payments. While student loans can often feel overwhelming and overly burdensome, not making payments can create even worse problems. Not making your student loan payments will adversely affect your credit. When you are late making a payment, creditors will report this behavior to the credit bureaus and it will lower your credit score. A lower credit score can result in difficulties in opening new lines of credit and higher interest rates when purchasing a home or car, etc.

If you do not make your payments, the student loan companies have other ways of collection from you. Federal student loan companies have the ability to start garnishing your wages and bank accounts without a judgment. Private student loan companies do have to go to court to obtain a judgment, but they can also start garnishing your wages or bank accounts if you are delinquent. A garnishment allows a creditor to seize all the money in your bank account (up to the amount owed) or take a percentage of every paycheck until the debt is satisfied. This often can put even more of a financial strain on an individual than making the normal payments.

Student loans also usually do not go away with bankruptcy. While bankruptcy can help get rid of your credit cards and medical debt, student loans will not be discharged unless you meet very specific circumstances. A bankruptcy attorney can review whether you might be able to discharge your student loans, but it does require a lot more expense than a traditional bankruptcy and it is often left to the discretion of a judge to determine whether you meet the necessary criteria to discharge. Right now the required criterion for discharging your student loan debt varies depending on where you live and is a very high burden.

If you do find yourself in a difficult situation, and cannot make your normal payments, there are options out there.

Contact your lender and see what options are out there.

If you are in a temporary situation when you cannot make your payments, possibly due to any reason including loss of a job or a health issue, lenders will sometimes work with you. If you contact your lender and explain the situation, they may be able to give you a lower payment for a time period or be able to offer you a deferment or forbearance (where you stop making payments for a certain period of time). Often these options are at the discretion of the lender, but if you need some breathing room, it cannot hurt to ask. The benefit of being in a deferment or forbearance is that even though you are not making payments (or less than a full payment), your lender will still report your loan as current. This ensures your credit will not be negatively impacted by the reporting of a late payment or delinquency. The downside to lower payments or not paying for a time period is that it is usually only for a limited amount of time and your interest will still be accruing. When you get back to making your payments, the payment maybe higher or you might be paying for a longer period of time.

Additionally, if you are disabled and/or receiving Special Security Disability, you may be able to apply for another type of forgiveness. This is an administrative process and is only a viable option if you will not be able to work for the foreseeable future.

There are various repayment options out there.

When your federal loans come due, your loan payments will automatically be based on a standard ten-year repayment plan. However, there are payment options for federal loans that spread out your payments over more years or base your payments on your income. Depending on what your monthly income is and when your federally guaranteed loans were taken out, you could qualify to have your student loan payments capped at 10%, 15% or 20% of your discretionary income. If your income is low enough, your payment could be $0/month. However, you do have to reapply for the income-driven programs every year and submit documentation of your current income so the payment can be recalculated. After payments for 20-25 years (depending on the plan) on an income-driven plan, the remaining balance is forgiven. The downside to these income based programs is that any remaining debt that is forgiven will be taxed as income. Contact your student loan provider for more details. Also note that for most repayment plans, you do have to consolidate your loans and that can take a few months.

While the income-driven plans are only for federal loans, some private lenders do have other options available. Again, if you are having trouble making your payments on your private student loans, your best course of action is contacting your lender and asking about other repayment options.

If you work for a government entity or certain nonprofits, you may qualify for Public Service Loan Forgiveness (PSLF).

Under PSLF, if you work full time for a qualifying employer for ten years AND make 120 on-time monthly payments, the remaining balance of your federal loans will be forgiven. These payments are usually made in conjunction with one of the modified repayment plans offered by the student loan companies because the traditional repayment of student loans occurs over a ten-year period. The benefit for this program is that any remaining balance on your student loans that is forgiven under PSLF is not taxed.

As a last resort, bankruptcy may help buy some time or help with other debt.

While you cannot easily discharge your student loans in bankruptcy, there are options under the bankruptcy code to help find a manageable payment. With income-driven plans, your payment is based on a percentage of your income. These are often the best options available and can really help those with substantial amounts of student loan debt. However, this option is usually not available to those with private student loans. Also, if you have to make substantial payments to other creditors, sometimes even the income-driven payments feel overwhelming. Bankruptcy is an option, but does help everyone.

A Chapter 7 might be an option for those who cannot pay their student loans because of a substantial amount of other debt. A Chapter 7 can help those who qualify wipe away other unsecured debt, such as medical bills and credit cards. A Chapter 7 can also allow you to walk away from a secured debt, such as a car or a house, without having to worry about any deficiency. There are numerous advantages to a Chapter 7, but also some negative affects as well. If you are experiencing substantial hardship due to significant debt and cannot make your student loan payments, then you should consult a bankruptcy attorney. For example, after a major medical procedure, often individuals have trouble handling their payments to the doctors and to the student loan companies. An attorney can help examine your situation and determine whether you could potential benefit from filing. An attorney will also help you determine whether you qualify for this options.

If you have private student loans, and those lenders will not work with you, then you have an option of a Chapter 13. A Chapter 13 is a repayment plan over the course of three to five years. This options does require steady income during the course of the plan, but all creditors are required to participate in this repayment plan or they receive nothing during the course of the plan. Your plan payments are approved by the court, and the amount is based on your income and expenses that the court determines are reasonable. Your plan may pay unsecured creditors anywhere from 0% to 100%, it just depends on what your payments will be. Certain debts, such as tax debt, past due mortgage payments or arrearages on a car, must be paid during your plan. After your plan is complete, any of your unsecured debt (other than student loans and a few other limited exceptions), such as credit card, medical bills, payday loans, etc., will be discharged in accordance with your plan. Your student loans will remain, but the benefit of a Chapter 13 is that it provided you with time to find a better paying job or handle the rest of your debt without the risk of the student loans coming after you. There are various downsides to a Chapter 13. For example, the court will review your income during the course of the bankruptcy to determine if you could potentially pay more to creditors. Similarly, any increases in income or bonuses may be required to go to creditors if you are not paying them in full. For some people, a bankruptcy means the student loan companies are off their backs for a few years and that is enough reason for them. However, you should review all options available before considering bankruptcy to handle your student loans. Talk to a bankruptcy attorney if you believe bankruptcy might help your situation. The attorney will be able to help breakdown whether a bankruptcy might be beneficial in your situation.

There are many options out there for repayment and a lot of information. If you have any questions about what options apply to your situation, your lender is a great place to start. You also need to be carefully of the scams that try to take advantage of vulnerable and desperate debtors. There are many sites that look like legitimate sites or advertise settlements for student loan accounts or debt forgiveness. Often the offers that appear too good to be true are not real. If you are looking for real information about student loan and the repayment option, be sure you on the U.S. Department of Education’s website.

 

 

Ashley F. Morgan, Esq. is a Virginia Attorney. She helps individuals and business file bankruptcy in the northern Virginia area. She also understands bankruptcy should be your last option. She wants to help her clients review all potential options to determine what is the best option in each person’s situation.

 

 

Tax Debt

Tax Debt: Why Do I Owe the IRS?

Tax Debt: One of the most confusing debts out there.

Not many things instill fear into Americans than owing taxes to the Internal Revenue Service.  Chills may go down your spine when you open a letter from the IRS with a bill. Your first question is: “Why do I owe taxes?” While income taxes are as certain as death to us, they can be even more troublesome when you get a surprise bill from the IRS that says you have tax debt to pay.

Owing any amount to the IRS is not a pleasant experience but it is important to understand why you received that tax bill in order to fix the problem for future years.  There are many reasons why you would receive a tax bill, some a lot more common than others.

Withholding

The first reason why you would owe taxes is that you are not withholding enough money from your regular paycheck from your job.  Most jobs have a regular salary or hourly rate in which you are paid.  When you are first starting with that job you are asked to fill out a W4 form for the IRS. This form lets your employer know how much federal income tax to withhold from your regular paycheck.  Multiple factors go into the number of allowances you can claim on your W4.  Typically, a single person can claim 1 or 2 on their W4 and have enough tax come out for the year.  Additional allowances can be claimed depending on the number of dependents you have, as well as your age or if you have a disability.

Where people get themselves in trouble is claiming a number way above the number of allowances they are entitled to or going complete exempt on their W4.  While it is great to have that extra money in your paycheck, you are digging yourself a whole that may be too large to climb out of at the end of the year. Then, when you file your taxes, there is a large tax debt that is due to the IRS.

Married couples with kids have another thing to keep in mind when filling out their W4 forms.  If both spouses are working, they can only claim the total number of allowances they are allowed combined between the two spouses.  For example:  married couple with 3 children under the age of 16 has a total of 5 allowances to claim on their W4 forms.  Husband claims 4 allowances on his W4 and the wife claims 4 on her W4 as well.  Combined they are claiming 8 allowances, which is 3 too many.  This will likely result in the couple not having enough taken out of their paychecks by the end of the year.  To be proper, the person with more income should have fewer allowances claimed than the other spouse.  So if the wife is making more money she should either claim 1 or 2 allowances and allow the husband to claim 3 or 4.  More specific calculations can be made depending on the amount of total income to determine how to either give the family a large refund or closer to the exact amount of tax needed by the end of the year.

Self-Employment

One of the most common reasons individuals have tax debt is due to a new business or venture. People who are self-employed have a completely different situation when it comes to paying their federal taxes.  They do not have the benefit of simply filling out a W4 form and have their employer paying the taxes to the IRS.  Self-employed individuals are responsible for paying their own taxes.  This is typically done on a quarterly bases with what are called estimated tax payments.  Individuals have to calculate their tax based on their net business income.  The typical self-employed individual is a truck driver or a construction/labor worker.  These individuals can claim expenses incurred in the pursuit of earning income as business deductions and that reduces their amount of taxable income.

In the past few years, the expansion of the “shared economy” has seen a rise in reported 1099 self-employed income.  When most of these companies started they were not always on point with their 1099 filing for all their users.  This allowed certain individuals to not report all their income.  This has changed and almost all the companies like Paypal, Uber, Lyft, Etsy, and Airbnb will report any income you have earned through them to the IRS.  So it may be nice to earn a couple thousand dollars over the course of the year driving for Uber, you have to remember that that income is still taxable and will have an effect on your tax returns.   However, the problem lies with a lot of self-employed people is the fact they do not make their tax payments throughout the year and then do not have enough saved come filling season to pay their tax bill.  This can cause a snowball affect where they can’t afford to pay both the back amounts owed and keeping current with the taxes that are owed on their current income.  It’s important to consult with a tax professional before this cycle gets too large.  They can help you get into a plan on the tax debt and help you with a game plan to stay current with your taxes moving forward.

Additional Income

The next reason why people end up with tax debt is because they left a source of income off of their tax return.  This can happen in many different circumstances, ranging from a missing W2 or 1099, or even all the way to not reporting a cancellation of debt (1099-C).  If you worked as a subcontractor during any year and earned $600.00 or more, the person or the company is required to provide you with a 1099. Additionally, if a creditor has deemed a debt delinquent and believe it is uncollectable, then they report it to the IRS. Not including these situations in your taxes creates a situations called “under-reporting of income.”  They are like mini-audits.  The IRS has records of all the tax documents that are reported to your individual social security number.  If those records do not match what is filed on your return, it can trigger this type of mini-audit.  Typically, these can be handled pretty straightforward with documentation of why something was left off.  However, it is also a possibility that you made a mistake and will have to accept the changes the IRS makes to your tax return, including additional penalties and interest.  What causes taxpayers to owe in these situations is that they were originally issued a refund, but when the IRS adds additional income it causes the taxpayer to owe additional tax.  At that point the IRS will want the additional tax as well as the refund they already paid you.  It is important to make sure you are reporting all forms of income on your tax returns to avoid having this type of situation arise.

Audits

The next situation that causes someone to owe taxes is the scariest to most taxpayers:  The audit.  The audit process can seem daunting for many reasons.  The main reason is that people think the IRS is out to get them.  This is not the case.  Most cases the IRS initiates an audit because something on your tax return was flagged as being irregular.  Your schedule A deductions or your schedule C business income are the two sections that are most likely to be audited.  Typically, an audit is nothing to worry about if you have the documentation to back up what you are claiming on your tax returns.  The problem comes into play when you either “guess” the numbers or have destroyed any documentation that was used to determine your numbers on your tax returns.   The entire audit process can take 6 to 12 months and requires a lot of back and forth with the IRS over specific numbers.

If you do not have a trained accountant who helped you with your tax returns and can help with the audit it is important to contact a tax professional to go over your options.

These are just the broad strokes to why an individual may end up with a tax bill after they file their returns.  It may come within a month  or years later in the form of an audit.  What is important to remember is that you have rights and options as a taxpayer.  Contact your local tax professional to go over those rights and options.  Ashley F. Morgan Law, PC can help you figure out your tax debt, help you address any taxes you owe, and also aid you getting everything in line going forward.

 

 

Arthur Rosatti, Esq. is a Florida licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies. His goal is to help his clients ensure their tax debt is accurate and get them into the best plan possible to manage the debt.

 

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Scrabble letters of bankrupt

Options When You Are Facing Foreclosure

Many people walk into my office looking for advice about bankruptcy. Often, major life events drive people to consider bankruptcy, such as divorce, significant illness, foreclosure, etc. Foreclosure is an especially interesting reason to consider bankruptcy because it provides options to either limit liability and/or help handle any arrearages. It really can help those who are in default with their mortgage; however, bankruptcy is not always the only option.

Foreclosure can affect anyone. Maybe you were the perfect borrower; you made all your payments on time, even prepaying a little every month. Or maybe you had trouble making your mortgage payments, but you worked two jobs, got renters in your house, and did everything in your power to make the payments. Your payments were sometimes late, but never more than 30 days. Nonetheless, one day, you lose your job, you get sick, you are in a car accident, or something else happens and you cannot make your payments. You get one month behind, then two, and then a few more. Finally, a notice from your lender appears in your mailbox – your account is being referred out for foreclosure.

Most lenders only start the foreclosure process when you are three months behind or more. If you are approaching three months or more, then you really need to consider whether you will be able to bring your account current or if there any other options available to you. In some states, the foreclosure process is slow and can take months or years. In other states, after the foreclosure process starts you only have two months. For example, in Virginia, the foreclosure can occur in as little as two to three months after you get notice you are in default. Being proactive with your situation can help alleviate the stress and panic. However, if you have not considered your options prior to getting notice from your lender, then you should immediately figure out a plan and start talking to the right people. You do have various options, and it is important to understand them.

  1. Seek a loan modification with your lender.

Lenders can sometimes understand that life happen. As a result, from time to time you can get them to work with you. For example, you lost your job and could not make your mortgage payment for six months, but now you have a new job. You have no problem making your mortgage payment going forward but cannot quickly pay off the money you are behind (the arrears). A modification can potentially spread your arrears over the course of the life of your loan or potentially tack them on to the end. For another example, maybe you did not lose your job, but your hours at your job have been cut. You can still make a mortgage payment, but not the full mortgage payment each month. A modification can sometimes lower your interest rate and potentially lower your payment.

A modification may seem like a miracle, and for some it is. Often it is a great option when you can make payments, but need a little help either with your payment amount or arrearages. The first step in getting a modification is often talking to your lender and giving them a heads up about the situation. A modification is at the sole discretion of your lender – they do not have to offer you one and they do not have to give you one. But, it cannot hurt to try and often it is beneficial for them as well. Your lender will ask for significant amounts of information and documents. Make sure you get the documents to them as quickly as possible.

Beware of the companies out there that advertise offering modifications services. Many of these services are scams. There are some individuals and companies that are legitimate and can really help with the process, and even make the situation easier for you. If you want/need help with the modification process make sure you find a legitimate company. Ask people for recommendations and search the web for reviews.

  1. File Chapter 13 to help repay arrearages.

If a loan modification does not work, or is not an option at the time, there is the option of a Chapter 13. In a Chapter 13, the Bankruptcy Court basically helps you work out a repayment plan. This is for those individuals with regular income. The repayment plan allows you to make your normal mortgage payment going forward, while also making monthly payments to the court in order to catch up on your arrears. Plans are usually payments over the course of three to five years. The other benefit of a Chapter 13 is that it can help you handle all the rest of your debt, whether it is tax issues or credit card debt. The plan payments are approved by the court, and the amount is based on your income and expenses that the court determines are reasonable, as well certain assets. The plan must pay your arrearages and other important debts such as taxes. Your plan may also pay unsecured creditors anywhere from 0% to 100%, it just depends on what your payments will be.

The benefit to a Chapter 13 is that if you can afford to catch up over the next three to five years and bring your mortgage current, the bank has to accept the plan. A modification is optional for the lender, bankruptcy is not. However, the downside is that it is up to the court to determine whether your plan is feasible. For many, they make expect to be making more money a year or two down the road, but without proof (such as a contract or a guaranteed future lump sum payment), it is too speculative and the court will not allow approve your plan. An experienced bankruptcy attorney can help point out the pros and cons of a Chapter 13 in your situation, and whether a plan would even be feasible in your situation.

  1. Sell your home to take advantage of your equity.

If there is no way to bring your loan current, and there is equity in your home, you should consider selling it. A bank does not want to sell your home; selling your home means it costs them time and money. Also, if a bank forecloses, the possibility of you receiving any of the equity in the home in slim to none. If you sell the home, you can take that money and do what you want with it. Sometime, if you are actively trying to sell your home or you get a contract of the house, a lender will delay the foreclosure. But, just like a modification, it is in their sole discretion. Having an experienced realtor on your side in this situation is important. You need a realtor who not only knows how to act quickly, but who has also dealt with lenders before. An experienced realtor can present your situation to the lender in the most effective way and be your advocate.

If there is no equity, a short sale may be an option. This allows you to sell your house for a loss (and not pay off the entire mortgage). There can be tax consequences to a short sale and the lender may still come after you for a deficiency.

  1. File Chapter 7 to stop to limit liability and stop the foreclosure.

If there is little or no equity in your home, and you have decided you likely cannot save it, then you may want to consider a Chapter 7 bankruptcy. A Chapter 7 can stop a foreclosure and give you enough time to figure out where you want to go. The bankruptcy also discharges your obligation to pay on the mortgage. While the lien will continue to exist on the property, the bank will foreclosure against the property after the bankruptcy is done and you will not be responsible for any deficiency on the property. This can also help wipe away any other unsecured debt that you may have. Importantly, after a bankruptcy, a debtor only must wait two years to qualify for a mortgage. If you allow the lender to foreclose or you file bankruptcy AFTER the foreclosure then you must wait 7 years to qualify for a mortgage.

Not everyone can qualify for a Chapter 7. The bankruptcy court does consider your income and number of dependents in determining whether you can file a Chapter 7. If you cannot qualify for a Chapter 7, a Chapter 13 (that is discussed above) can be an option to surrender the house and limit any potential liability after the foreclosure. An experience bankruptcy attorney can help talk to you about the pros and cons of filing a bankruptcy and whether you could qualify.

  1. Do nothing and let the foreclosure happen.

Sometimes, if you have to deal with other issues in your life and you just want to walk away from the house, doing nothing is your best option. If you do nothing to stop the foreclosure, it will proceed. The bank will continue with its course of action and after the sale, the house will no longer be your responsibility. There are many factors to consider here. After a foreclosure, you cannot qualify for a mortgage for 7 years. You will also be liable for any deficiency on the house after the sale. You lender can try to collect this remaining debt by taking you to court or garnishing part of your paycheck or your bank account. Even considering these negative factors, sometimes doing nothing is the best option. However, usually you can only come to this decision after reviewing your entire situation and considering all options.

It is important to remember, all of these options should be considered in conjunction with each other. For example, if you are seeking a loan modification, you can still talk to a realtor so you have a backup plan. Similarly, you may also want to consult a bankruptcy attorney, so you can be prepared in case you cannot sell the house or the modification is unsuccessful. Similarly, a modification may also be an option while in a Chapter 13 or after a Chapter 7, it all depends.

Just remember, sometimes Plan A works, but if it fails and you do not have a backup plan (or two), you can find yourself out of luck. Up until the day of the foreclosure you have options – take advantage of that time. Talk to a bankruptcy attorney today. Timing can be an issue, especially if you have the option of selling your house or filing bankruptcy. Make an appointment with a bankruptcy attorney as soon as the possibility of foreclosure arises. Most bankruptcy attorneys offer free consultations, as does my office. Having more knowledge and information never hurts. Understanding all your options can only help you make the best decision for you and your family.

 

 

Ashley F. Morgan, Esq. is a Virginia Bankruptcy Attorney. She helps individuals and business file bankruptcy in the northern Virginia area. Ashley understands bankruptcy should be your last option. She wants to help her clients review all potential options to avoid foreclosure to determine what is the best option in each person’s situation.