We’re always here to offer a lending hand come tax season, but did you know we also offer tax preparation services to help create resolutions with the IRS or State? You must be fully compliant in order to have an accepted resolution. You may be thinking, “What exactly does tax compliance entail and why is it important?” Here’s the low-down:
What is Tax Compliance?
Outstanding federal or state tax liabilities can happen to anyone – be it a personal or family crisis, illness, lack of funds, or simple oversight. But in order to be eligible to resolve outstanding liability on a voluntary basis (e.g. with an Installment Agreement or Offer in Compromise), as opposed to having it resolved forcefully (e.g. levies, garnishments, and seizures of assets), the IRS requires that you file “in compliance.” That means all outstanding tax returns that are required of you have been filed. This part seems simple enough and generally can be resolved quickly once individuals identify the delinquent returns that need to be filed.
The IRS also requires that you are current with all required federal tax deposits and/or quarterly estimated deposits in order to remain compliant. This process can be confusing and this is where some folks run into problems should they miss a deposit. Many good, honest people fall out of compliance and run into tax-related issues – but we’re here to help you avoid that situation. If you’re feeling overwhelmed, let us answer your questions. For starters, here are a few deposits that are required to be eligible for voluntary resolution.
Estimated Deposit Requirements for Individual Income Taxes
The deposit requirements for individuals are much simpler than those for businesses as there is only one deposit that may be required. If a federal tax liability has been assessed against you and you wish to seek voluntary resolution, it is a prerequisite that any required quarterly estimated payments be made.
How do you know if you’re required to make a quarterly estimated payment? Simply review your previous year’s federal income tax return, Form 1040. If the return was filed with a liability of over $1,000 (after federal tax withholding and credits), and you expect the federal withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2015 federal tax return, or 100% of the tax shown on your 2014 return (that is if your 2014 tax return covered 12 months – otherwise refer to the 90% rule above), then you are required to make quarterly estimated payments toward your next income tax return.
There are two different ways to determine the amount required for each quarterly estimated payment. The easiest is just to divide the tax liability of your most recently filed return by four. E.g. If you filed your 2014 income tax return with a tax liability of $5,000, you are required to make quarterly estimated payments of $1,250 toward your 2015 return. If, however, you anticipate your next return to be substantially different than your present one, there is another way to determine what you owe: an IRS estimated tax worksheet found at IRS.gov. This worksheet is a series of calculations and estimates to determine your amount of quarterly estimated payments in an attempt to eliminate future liability on your next return.
If you’re an individual whose income is derived from a W2 wage, an easy way to eliminate your need for quarterly estimated payments is to increase the income taxes being withheld from your wage. The end result is the same as the quarterly estimated payments that you’d otherwise remit to the IRS the following year – without the hassle of having to make those additional payments.
Quarterly estimated payments are due on the April 15th, June 15th, September 15th, and January 15th – so be sure to mark your calendars in advance so you never miss a payment! (And keep in mind that if you file your tax return by February 1st, you can pay the entire balance due with your return and skip the January 15th payment.)
IRS Deposit Requirements for Businesses
Similar to individuals, businesses may also have to make quarterly estimated payments toward future returns. The same criteria for individual estimated payments apply to businesses, however, with one difference. In addition to being current with quarterly payments, businesses must also be current with their required federal 941 employment tax deposits and possibly with their 940 unemployment taxes, as well. 941 employment tax deposits are due either quarterly, monthly, or semi-weekly depending on the amount of wages that are issued each quarter. Refer to IRS Notice 931 that details which category your business falls into and how to comply with corresponding requirements.
Businesses may also be required to make quarterly deposits toward future 940 unemployment tax returns. This can be determined by looking at the current quarter’s tax liability. If the 940 unemployment tax is $500 or less for that quarter, it can be carried over to the next quarter without making a deposit. You may continue to carry the tax liability over to the next quarter until the cumulative tax is more than $500 – at which point a deposit is required for the current quarter. This deposit is due by the last day of the month after the end of the quarter. If the cumulative tax liability never exceeds $500, then you may pay the liability with the return at the end of January of the following year.
Deposit and payment compliance is the IRS’s way of ensuring that liabilities aren’t incurred for future returns. So long as you do your “homework,” you should stay out of trouble. Remember, if you ever get confused we’re always here to answer any question. Be sure to browse our services page and fill out the form for a free consultation. Or give us a call at 844-841-9857!