Author: JKCCPA

It’s so easy to get behind on our taxes.  We work all day, come home, eat and sleep and do it all over again the next day.

Tax resolution can be a marriage saver! I’ve seen a lot of marriages end due to tax problems. Money problems are stressful. But the biggest issue I’ve seen over the years is the shame associated with tax problems, and even sharing with your spouse can be overwhelming.

I want to state unequivocally, YOU ARE NOT THE PROBLEM. Tax problems can happen to anyone and everyone.

So, what is tax resolution?

Dealing with the IRS is also overwhelming and stressful.  When dealing with your IRS tax problem, it’s important to understand the concept of tax resolution and the available options for resolving these problems.

 In this article, we’ll explore the meaning of tax resolution, common IRS tax problems, what you can do to relieve yourself of these problems and the thinking behind these options.  We’re only discussing personal tax debts (including tax owed from your sole proprietorship.)  If you have tax debts from your business, we will address these in a later article.

Be prepared to engage a tax professional though since these processes are not always easy, depending on the details of your case.  Let’s go through the typical issues and the resolutions available to deal with them.

We’re dealing with Joe and Jill Jones.  He has a construction company and she does the books and runs payroll.  In total they owe about $75k from the past 4 tax filings.  They have filed all returns, but things are tough right now.

They own their house and are current on their mortgage, but barely.  The home has equity of around $25k.  Thankfully, assets used in your business are protected.   They have no other assets.  They have 2 kids, ages 11 and 13.

I. What’s your IRS Tax Problem?

Before delving into tax resolution, it is crucial to understand the types of tax problems that individuals may encounter with the IRS. These include unfiled tax returns, prior years unpaid taxes, tax audits and examinations, and tax liens and levies. Failure to address these issues can result in serious consequences such as penalties, interest, wage garnishments, and asset seizures.

I want to be clear about this next statement. The IRS is not in the business of putting people in jail for failing to pay their taxes. Sure, some people have spent time in jail for tax issues, but not because you got behind.

If jail is a consequence, you did a lot worse than not pay. You lied on your returns and lied a lot. If you under reported your income by more than 25% you need to talk with a criminal attorney, not a CPA.

Let’s take a look at some common problems:

Unfiled tax returns: Easily the most common problem.  If you had a 1099 or W2 issued to you, the IRS will prepare a return for you using just the Standard Deduction with a filing status of Single.  If this return renders a tax underpayment, you will start to get notices.

Individual tax past due: This can come about in several ways.  Usually it stems from a filed return not including payment at filing.  Other ways of finding yourself behind a tax debt notice from the IRS is from an incorrectly prepared return, i.e. missing 1099 or W2 (income) or deductions not matching such as a 1098 mortgage interest statement showing a smaller amount than what is on the return.

Payroll taxes:  This one is pretty common.  If you have a business that has employees on payroll, or if you work for a company as their payroll clerk, and the statutory withheld payroll taxes aren’t timely submitted to the IRS, you will be held personally liable.  The penalty is 100% of the payroll taxes owed.

Changes from an audit:  There are more kinds of audits than the one people typically think of.  Correspondence audits are the easiest and are handled through the mail.

The above are much more typical than the much feared “line-by-line” audit.  Line-by-line audits should always be handled by a tax professional. They have the training needed to deal directly with the IRS Revenue Officer.  

II. How Tax Resolution Can Resolve Your Tax Problems?

Dealing with the IRS is never an easy thing.  I think your choice with fixing your problem is directly related to the amount you owe.

When it comes to resolving IRS tax problems, here are the primary methods the IRS has given us.

1. Installment Agreement plans: The IRS will give you up to 72 months to pay your tax off via an Installment Agreement.  This is the most used tool simply because it’s the easiest.  Without dire circumstances you will most likely be held responsible to fully pay your tax debt.   This option allows individuals to make monthly payments based on their financial situation.
   
   Under certain circumstances, you could do a partial pay Installment Agreement where, surprise, you don’t pay the entire debt in the 72 months
   
2. Offer in compromise: This is what people want the most.  They want a reduction or complete elimination of their tax debt.
   
   Unfortunately, to qualify, your financial life needs to be in turmoil now and for the foreseeable future.  And due to the cost (to do this for a client  we generally charge starting at $3-5,000).
   
   To qualify, you must prove that your current financial situation would take on a big hardship if forced to pay the tax.  You also must prove that this financial situation
   will continue for the foreseeable future.
   
   Medical issues, loss of career, loss of home…As you can see, this option isn’t going to be available to many.  Just those who most need relief.  Typically, those who are granted this relief have had several years of taxes due and have shown a pattern of declining income due to an outside influence.
   
3. Innocent spouse relief: This option has limited use.  Being in a community property state (California) this doesn’t have the same bang as some of the others.  I have used this option successfully several times for divorced spouses to get them out of the jointly and separate nature of taxes.
   
   To qualify, the damaged spouse must prove that they had no idea of the issues and may not have even benefited.  This has generally been a tool I use for Women who trusted their husbands to do the right thing, but who invariably did not.
   
   The cases I have seen were a husband hiding another family or girlfriend from their spouse.
   
4. CNC or Currently Not Collectible status:  The relief granted with this option is time.  You still owe the tax, but the IRS has promised to stop collection activity for six – twelve months.
   
   Once your situation is under better control, you will most likely enter into an Installment Agreement to pay your debt off over time.  Penalty and interest charges will continue to accrue during this period.
   
   If granted CNC status, the IRS will stop all collection activity for the period in effect, usually 6-12 months.
   
5. Penalty abatement: Penalties and interest are statutory, which means they are law and it’s tough to get out of them. FTA (First Time Abatement) is available as long as you have been a good taxpayer for the three years prior to the year you received a penalty.

III. Now What?  What do you do now?

Now we take stock of your financial situation.  This should also include your health situation since there is a direct correlation between the two. This is where Tax Resolution can really help you!

Here’s when you have to be honest with yourself.  I’ve had people walk in my office who have plenty of assets, but simply don’t want to pay ask me to prepare an Offer in Compromise for them.

If you have sufficient assets with enough value to pay your debt, you WILL NOT QUALIFY for an Offer in Compromise.  So forget this option.

1. Gathering your financial and tax information:  Bank statements, financial statements (if you have a business).  You will need to put together a personal financial statement showing your monthly income and expenses, and what is left over after paying your living expenses.  The IRS will want three months of third party information to corroborate your financial statement (bank statements, paid bills, copies of leases, mortgage statements, etc…)
   
   There are limits to the amount you can claim.  If you have a $4,000 mortgage, but the max allowable deduction for your area is $2,500, you get a $2,500 deduction.
   
   Really, the only area of life that the IRS will consider more than statutory limits is with medical expenses.
   
2. So which option should you use?:  After preparing (or having prepared for you) a personal financial statement, you will have a better idea of your ability to pay.  Your ability to pay determines the options available for use.
   
3. Chose your option:  Based on your personal financials, your choices could be as follows:
   
   • If Joe and Jill’s personal financials show they have an extra $1,000 each month after paying all their bills, they could try for an Offer in Compromise, but they would have to access the equity in their house.  And the lowest amount they could offer would be $32k (($1kx12)+$20k).
   • They would qualify for an Installment Agreement.  Under their fact pattern, this might be my first choice, although I’d fully investigate the Offer option further.
   • Since they have positive cash flow of $1,000 each month, they probably won’t be considered for Currently-Not-Collectible status.
   • They’re still married with two kids.  She is active in the business.  They won’t qualify for Innocent Spouse Relief. If the tax is derived from missing Payroll Tax deposits, she will be liable for that personally.
   • I always request penalty abatement with every case.  Although not part of the IRS’ collection process, I think they give this relief out as a courtesy.  I’ve never been denied at least a partial abatement in 40 years of doing this.
     
4. After deciding which tack to take, the process of communicating this to the IRS is the next step.
   
   • If you will be doing an Installment Agreement, you would fill out form 9465 and submit.  You can even do this online.  There is a fee to implement but its nominal.
   • If you are doing an Offer-In-Compromise, you will fill out form 433-OIC.  I recommend you engage a tax resolution specialist at this point.  Don’t fall for those ads claiming to get you off with pennies on the dollar.  If you don’t have a tax preparer or CPA at this time, ask around.  Not all CPA’s do tax resolution, so you may have to talk with several.
   • If you are trying to get Currently-not-Collectable status, you will need to prepare forms 433A and in Joe and Jill’s case, 433B (since they have a business).  Again, I suggest you reach out to a professional.
     
5. Communicating your option to the IRS:  After collecting all your supporting data (bank statements etc…) and preparing the appropriate form for submission, you file and wait.
   
   • There is no doubt that the IRS will ask for additional information or documents.  You must get this to them as soon as possible.
   • Regarding an Installment Agreement, they will let you know within a month or so.  During the time the IRS is in the process of approving your payment plan, you are tasked with making interim payments as if the agreement had been approved.
   • If you requested Currently-not-Collectible status, they will follow up with additional document requests before they approve.  I have had some where the IRS requested additional documents after 6 months to make sure nothing changed with your financial condition.
   • An Offer-in-Compromise will take the longest.  They may ask for additional documents within a few months, but prior to approving you will need to go through the data collection process again.
   • If you are approved for any of the above options, you must stay clean for the next 60-72 months.
   • This means, no late payments, filing your returns on a timely basis, paying your estimates on a timely basis and generally having no issues with your tax life.

IV. Working with a Tax Resolution Professional: I’ve suggested you hire a professional several times during this post.  It sounds self-serving, but it’s not.  This is incredibly complex stuff once you get past simply applying for an Installment Agreement.

In my mind, the reason for the complexity is simple.  People don’t want to pay their taxes.  So they lie.  Or fudge.  Or “forget” to report something they don’t see as relevant.

Don’t try to trick the IRS.  They have access to all banking information associated with you, your spouse and your kids.

If you attempt to “trick” the IRS, or strategically “leave out” documents they expect, you can count on them taking an even deeper look at your taxes

If you do choose to go it alone, be honest and complete with your filings.

VI. Conclusion: If you are having problems with the IRS (or your states taxing agency) don’t hide your head in the sand.  Ignoring this will make it worse.

Identify the problem year(s).  Compare what you filed to what the IRS clams.

Look at your personal financial situation.  This will determine what options are best for your situation.

If you become overwhelmed, find someone to help.  And be totally honest with them.  I’ve fired clients who lied to me about there situation.  I had one client crying poor over a $75k tax bill and him claiming he had no assets, liquid or otherwise.  Turns out he had over 25 classic cars he was storing at a warehouse in another state.  He lied to the IRS and ended up losing two houses he also forgot to tell me about.

If the IRS determines you are lying, I (or any other tax resolution specialist) can’t help you. At this time you probably need a criminal defense attorney versed in taxes.

Once you determine your direction and file the appropriate paperwork, be ready to submit additional papers at the IRS request.

Once your tax repayment (or abatement) plan has been approved, you MUST adhere to the terms of your agreement plan.  Don’t miss any payments.  Don’t file your returns late.  Make your estimated tax payments.  Don’t stray.  You don’t want to end up in this space again.

If you have any questions or comments, I check back weekly (I’m still running an accounting practice).  I will reach out to you to answer your questions.

I can’t directly discuss your issues with you, but can discuss the process and what you can expect.

Have a great day and talk later.

Stay cool people.

JKC

We’re back!  With another of our Specific Industry articles.  Today we’ll be talking to you dentists about their best money saving tax deductions.  So here goes.

Success in any kind of business really comes down to commitment.  One of the key things you have to commit to is keeping good records of taxable income and tax deductible expenses (money-in, money-out). Running a dental practice has a few little quirks that most other small business types, while available to anyone, dental practices seem to take advantage of the most.  Experience tells me this is the industry, and due to their need for cutting edge equipment. In this article, we will explore the key deductible expenses that dentists can leverage to their advantage.

I. “Normal” Business Expenses are Tax Deductions:

Money spent in the pursuit of more money.  That’s the general rule for claiming deductible expenses.  If you spend money on something that has a DIRECT influence over your ability to make money, it’s probably deductible.  A direct expense would be something like toner for the printer that prints invoices, or coffee to brew a strong cup so your employees are wired as soon as they come to work.  Indirect expenses exist on the fringes and some are deductions.  An indirect expense might be your car which you also drive for personal reasons, or travel to a seminar where you also stay an extra day to visit your brother. Some deduction, some not.  For a dentist, these may include:

Office and Occupancy Expenses:

• Rent and CAM charges for the office.  If you own the building and are reporting as s Sole Proprietor you may be able to write off the mortgage interest, property taxes and Insurance.  If you report your practice income on an entity return (like an LLC or corporation) you should rent the premises to your entity from you personally.  This may open up tax planning opportunities.
• If you have an off site storage facility to store practice items, this is deductible.
• Utilities and maintenance costs for the office space.  This includes your internet access, disposal and sewage as well as gas and electric and telephone/fax lines.
• Office supplies such as administrative materials, paper, toner and envelopes.  The bottled water service you may have is deductible as an office expense.
  

Staffing and Payroll Expenses:

• Salaries and wages for all employees (including yourself if you are reporting as a corporation).  This includes all bonuses and “commissions” paid out.
• Payroll taxes and benefits, including contributions to employee retirement plans and health insurance premiums.  I’ll discuss the various retirement plans available in a later post.
  

Professional Fees and Licenses:

• Fees associated with renewing dental licenses.
• Continuing education courses, seminars, and conferences attended by the dentist.
• Professional association dues and subscriptions to industry publications.
• Practice development costs (Mastermind groups, coaching, marketing programs).
  

Equipment and Technology:

• Costs of dental equipment and instruments, such as dental chairs, X-ray machines, and imaging systems.  If you purchase or lease your equipment, make sure to give your tax person all documentation.  This industry tends to “lease” their equipment, but the lease is really a purchase and should be recorded as a purchase.  This allows you to depreciate the equipment and allows for different tax planning strategies.
• Computer hardware and software used for patient records, billing, and other practice management tasks.

II. Medical and Laboratory Expenses:

You will have outsourced and in house items here.  All are tax deductible.  Some common expenses are:

1. Dental Supplies and Materials:
   • Expenses related to dental implants, prosthetics, and restorative materials.
   • Costs of preventive materials like dental sealants and fluoride treatments.
   • Sterilization and infection control supplies.
   • If you are doing your fabs in house, that’s a 100% deductible item.
     
2. Laboratory Fees:
   • Payments made to dental labs for the fabrication of prosthetic work, such as crowns and bridges.
   • Outsourced dental services, such as denture fabrication or orthodontic appliances.

III. Facility and Operation Expenses:

Maintaining a functional and well-equipped dental facility entails certain deductible expenses:

1. Facility Maintenance and Repairs:
   • Costs associated with office build outs or repairs to the practice premises.  Be sure to properly distinguish between repairs and improvements.  Repairs are deductible in the current year.  If there was a major renovation (not repairs) this is depreciated over 39 years.
   • Upgrades to safety equipment and compliance with health and safety regulations.
     
2. Leasehold Improvements:
   • Expenses related to improving the leased space, such as cabinetry and fixture installations.
   • Flooring and painting expenses to enhance the dental office’s aesthetics and functionality.  I would typically expense painting in the current year.
   • Even amongst improvements, you should categorize properly.  A new wood floor can be depreciated over 15 years while a remodeled bathroom will be depreciated over 39 years.
   • Although not a “tax deduction” in the usual way of thinking, improvements are depreciated over a statutory period so a kind of tax deduction.
     
3. Insurance Premiums:
   • Deductions for malpractice insurance to protect against professional liability.
   • Business liability insurance coverage.
   • Property and equipment insurance premiums.
   • Disability premiums can be reported in a few ways.  If you claim it on your taxes, any disability you receive will be taxable income.  If you don’t deduct the premiums then no tax is due if you receive any payments.

IV. Marketing and Advertising Expenses:

Promoting your dental practice is essential for attracting new patients. Dan Kennedy (a well-known marketing guru) claims “the company who can spend the most to acquire a client, wins”. Dentists can claim tax deductions for various marketing and advertising expenses, including:

1. Website Development and Maintenance:
   • Costs associated with designing, hosting, and updating a professional dental practice website.  I suggest you drive this section.  Don’t let a “web” pro tell you how your website should look.  They are most comfortable creating a brochure site, which is useless and won’t generate any kind of return.
     
2. Print and Digital Advertisements:
   • Expenses related to printing brochures, flyers, or business cards.
   • Costs of online marketing like Google Ads, Search Engine Optimization of your website and any consulting fees you may incur for the management of your website and online campaigns.
   • Don’t forget to include the costs of responding.  A lot of times you’ll see a practice respond by sending out a free item of importance (to the prospect) or some kind of welcome packet.
     
3. Direct Mail Campaigns:
   • Expenses for targeted direct mail marketing campaigns, such as postcards or newsletters.  If you pay someone to create the copy for these campaigns, the copywriter expense is also deductible.
     
4. Promotional Materials and Business Cards:
   • Costs of branded promotional items, such as pens, magnets, or toothbrushes/floss/little tooth care packages.

V. Employee Benefits and Healthcare:

This is typically the largest tax deduction. Another good investment in your practice is your employees.  And without stating the obvious, the better trained your employees are, the more billable work they can do for you.  I’ve never bought the narrative that “I don’t want to spend the money on someone who’s just going to move on to a better job as soon as I train them”.  Seriously.  Make this job the better job.   Dentists can claim deductions for the following expenses:

1. Health Insurance Premiums for Employees:
   • Get a group plan.  You can even offer Dental!  Another option I’ve seen offered are medical reimbursement plans, Health Savings Accounts and Flexible Spending Arrangements (or accounts).  And by making these kinds of benefits available through a cafeteria plan (Sec 125 plans) you even save a little on payroll taxes.
     
2. Retirement Plan Contributions:
   • While the contribution will be made from the employee’s paycheck, any matching funds you make are fully deductible.  For smaller practices I suggest setting up a SEP vs. 401k.  To administer a 401k plan costs thousands a year.  The administration fee for a SEP is usually around $30-50/employee.
   • Husband/wife teams would benefit from a Solo 401k plan.  There is an opportunity to sock away a lot more than with a SEP.
     
3. Employee Training and Education Expenses:
   • As mentioned above, trained employees make you money.  There are so many products and services you can offer, with much of the work being done can be done by a non DDS person (check your states regulations on this one.  I’m in California so those are the rules I know).

VI. Record-Keeping and Documentation For Your Tax Deductions:

You have to do your books.  Monthly.  Weekly even.  If you don’t know how, or necessarily want to do your books, hire someone.  Check with your tax preparer to see if they offer this service.  If not they probably have someone they work with that they can refer.  Utilize technology by using QuickBooks Online and scan your receipts and invoices.  If you don’t have something like this set up, ask your tax preparation office if they can set you up.

I can’t stress the importance of what I just said.  The quickest way to fail is by letting this stuff go until the last minute.  And really, that last minute is usually late.

Conclusion:

I think one of the most important things for me to be aware of is that your financing agreements are properly calculated and the determination made to whether the lease is a loan or are you simply “renting’ the equipment.  The proper designation could greatly affect your taxes in the current year.  Taking advantage of the myriad available tax deductions, and understanding how different treatments can affect your tax bill can contribute to the financial success and growth of a dental practice.