You filed your return. You paid what you owed. You waited three years and assumed that chapter of your life was closed for good. But what if that window never actually closed?
Under a little-known interpretation of the “fraud exception” to the statute of limitations, misconduct by your tax preparer—not you—can keep an IRS audit window open indefinitely. In many courts, it doesn’t matter if you never intended to cheat or never even knew anything was wrong. Because you signed that return, the preparer’s fraud can be imputed to you.
The IRS Knocks—27 Years Later!
Consider the recent case of Murrin v. Commissioner. Stephanie Murrin, a New Jersey resident, filed her 1993–1999 tax returns on time. There was no evidence that she personally intended to evade taxes. However, her preparer, Duane Howell, inserted false items on those returns to understate her tax liability. Howell eventually pled guilty to federal tax fraud in 2007—all without Murrin’s knowledge.
Fast-forward to 2019: Twenty-seven years after those returns were filed, the IRS issued a notice of deficiency. Relying on the fraud exception in Section 6501(c)(1), the IRS bypassed the normal three-year statute of limitations. They asserted that Murrin owed:
$65,000 in back taxes
$13,000 in penalties
Over $250,000 in interest
The government’s position was simple: because the returns were fraudulent (even if the fraud was the preparer’s), the assessment period never closed.
Why “I Didn’t Know” Is Not a Defense
In October 2025, the U.S. Court of Appeals for the Third Circuit affirmed that fraud by a preparer is enough to trigger an unlimited audit window. This follows previous rulings like Allen, Magill, and Kooyers, which emphasize that the taxpayer—not the preparer—has the ultimate responsibility to file a correct return.
In the eyes of the Tax Court, delegating the preparation of your taxes does not delegate your legal responsibility. Ignorance is not a defense.
How to Protect Yourself
To keep decades-old tax returns from coming back to life, you need to be proactive. Here are five ways to protect your future:
Read Your Return Like an Auditor: Compare every line to your W-2s, 1099s, and K-1s. Challenge any “strategy” or deduction you can’t support with paper. If a deduction looks too good to be true, it probably is.
Keep a Long Paper Trail: Since the three-year rule can vanish in fraud cases, you may need to prove your good faith decades later. Keep digital copies of filed returns, workpapers, and emails with your preparer indefinitely.
Be Wary of “Fraud” Language in Agreements: Never sign a stipulation or settlement saying your return was “fraudulent” without understanding the impact. Once fraud is admitted, a 75% civil fraud penalty can attach, and it is nearly impossible to unwind.
Fix Problems Quickly: If you find a mistake, amend and pay as soon as possible. This won’t erase existing fraud, but it shows you aren’t trying to keep an improper benefit and can reduce ongoing interest.
Be Deliberate About Where You Litigate: If the IRS comes knocking on a “forever” audit, the choice of court matters. The Tax Court often rules against the taxpayer in these scenarios, while other courts focus more on the taxpayer’s personal intent. Strategic selection of your legal forum is vital.
The Takeaway
At Howard Tax Prep LLC, we always say: We fix tax problems. But the best way to fix a problem is to prevent it. You are legally responsible for every number on your return. Don’t let a dishonest preparer turn your “three-year window” into a “forever” nightmare.
Is your current preparer giving you answers you can’t support? It might be time for a second opinion.
The goal of this article is simple—to help you put more money back in your pocket. While the IRS probably won’t mail you a check (though that can happen in some instances), the real benefit comes from paying less in taxes. In other words, this article is all about smart tax strategy. I’m breaking down three powerful business deduction moves you can easily understand and put into action before the end of 2025 to reduce your taxable income and keep more of what you earn.
1.) Prepay Eligible Expenses (The 12-Month Rule)
The tax code IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS. Under this little-known rule commonly referred to as the 12-Month Rule, cash-basis taxpayers can often deduct certain expenses in the current tax year, even if the service extends into the following year, provided the benefit doesn’t extend beyond the end of the next tax year.
Common prepaid items include:
Business Insurance Premiums: Paying the full 12-month premium in December 2025 instead of January 2026 allows you to deduct the expense this year.
Rent: Prepaying the first month of 2026 rent in December 2025.
Software Licenses/Subscriptions: Prepaying annual fees in December.
Example: Shifting a Lease Deduction
Imagine you pay $\$3,000$ in lease payments each month, and you would like to secure a $\$36,000$ deduction for tax year 2025.
On Wednesday, December 31, 2025, you mail your landlord a rent check for $\$36,000$ to cover the entire 2026 lease.
Your landlord does not receive the payment in the mail until Friday, January 2, 2026.
Here’s what happens:
Your Deduction (2025): You deduct the full $\$36,000$ this year (2025—the year you paid the money).
Landlord’s Income (2026): The landlord reports the $\$36,000$ as rental income in 2026 (the year they received the money).
Actionable Tip: Look at any annual or multi-month expenses coming due in early 2026. If the service covers only 12 months, prepay it in December 2025 to shift the deduction forward.
2. Stop Billing Customers, Clients, and Patients
Here is a rock-solid, time-tested, and easy strategy to reduce your taxable income for this year: simply stop billing your customers, clients, and patients until after December 31, 2025. Please note, this strategy assumes your business is on the cash basis of accounting and operates on the calendar year.
As a business owner, it may come as no surprise to you that most customers, clients, patients, and insurance companies don’t pay until they are billed. By delaying your invoicing until the end of the year, you effectively delay cash receipt. Since a cash-basis business only recognizes income when the cash is received (not when the service is performed), delaying the receipt pushes that income into the next tax year. This is one of the easiest ways for small business owners to postpone paying taxes on current year income.
Example: The Contractors Delayed Billing
Jake, a general contractor, usually invoices his customers at the end of each week.
This year, however, he sends no bills for services performed throughout December 2025.
Instead, he gathers up all those bills and mails them the first week of January 2026.
The Result: The payments for his December 2025 work will not be received until January or February 2026. He just postponed paying taxes on all his December income by successfully moving that income from 2025 to 2026.
Actionable Tip: Pause all non-essential billing runs starting around December 15th. Instruct your billing department or staff to hold all new invoices and statements until January 1, 2026.
3. Use Your Credit Cards Correctly
The rule for taking a tax deduction depends entirely on who owns the credit card being used for the purchase.
If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit cards for last-minute purchases of office supplies and other business necessities.
If you operate your business as a corporation (S-Corp or C-Corp) and the corporation has a credit card in its name, the same rule applies: the date of charge is the date of deduction for the corporation.
However, if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that deduction happens on the date of reimbursement—not the date of the charge.
Example: The Consultant’s Last-Minute Purchase
A consultant, Maria, needs to buy $1,500 worth of new software on December 30th to get a deduction for the current year (2025).
If Maria is a Sole Proprietor: She uses her personal credit card on December 30th. Deduction Date: December 30, 2025.
If Maria runs an S-Corp: She uses her personal credit card on December 30th. She submits the expense report on January 2nd, and the corporation reimburses her on January 5th. Deduction Date: January 5, 2026.
Actionable Tip: If your corporation owes you money for business expenses charged to your personal card, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.
In our South Loop of Chicago Tax Preparation office, and our Homewood, Il tax preparation office, we often come across taxpayers who haven’t filed their tax returns in quite some time. However, once a taxpayer chooses to file back tax returns, the IRS and the state Department of Revenue will assess the tax due along with penalties and interest. Although not often discussed, in some cases, the IRS can waive penalties assessed against you or your business if there was “reasonable cause” for your actions.
The IRS permits reasonable cause penalty relief for penalties arising in three broad categories:
Filing of returns
Payment of tax
Accuracy of information
Contrary to what you might think, the term “reasonable cause” is a term of art at the IRS. This seemingly simple phrase has a precise and detailed definition as it relates to penalty abatement.
Here are three instances where you might qualify for reasonable cause relief:
Your or an immediate family member’s death or serious illness or your unavoidable absence
Inability to obtain necessary records to comply with your tax obligation
Destruction or disruption caused by fire, casualty, natural disaster, or other disturbance
Here are five instances where you likely do not qualify for reasonable cause penalty relief:
You made a mistake.
You forgot.
You relied on another party to comply on your behalf.
You don’t have the money.
You are ignorant of the tax law.
What If the IRS Rejects My Request?
You should consider requesting an appeal if the IRS denies your initial request. There is a saying among tax professionals: “The deals are in appeals.” One reason to appeal is that if you have a complex case, the IRS might not have considered all the aspects of your explanation.
Here in our South Loop of Chicago Tax Preparationoffice, and our Homewood, Il tax preparation office, we specialize in tax preparation for real estate investors, and small business owners. Working with this client base, we come across many general contractors that operate 95% in cash. Although cash only taxpayers are entitled to tax deductions, they (like every other taxpayer) must have proof of income received, and proof of expenses incurred. While in most cases we can help taxpayers reconstruct their income and expenses, in some cases the IRS will deny the expenses due to lack of documentary (paper) evidence. In the tax court case of NNABUGWU C. EZE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, not only did the taxpayer lack documentary evidence for expenses, he also didn’t have proof of income received.
In 2015, and 2016 NNABUGWU C. EZE, owned and operated 2 sole proprietor businesses: a consulting business, and a residential construction business (while we’ll touch on issues related to the consulting business, the main focus of this article will be the residential construction business). “For 2015 he reported taxable income of $3,314 and claimed a refund of $774. For 2016 he reported taxable income of zero and claimed a refund of $744.”1 For his consulting business, Eze claimed to have generated $142,675 in gross revenue, $30,533 in auto expenses, 2,815 in business travel, and $9,662 in other expenses.2 While his auto expenses were high, the return might have avoided audit had Mr. Eze not reported that his construction business spent $99,275 (business expenses) to generate $27,875 in gross revenue. In the court opinion, the court noted that Mr. Eze:
Described his Schedule C2 business as “home improvement.”
Allegedly “did handyman, construction, and residential rehabilitation projects for individual customers.”
Claimed to have written contracts with his customers, but never produced the contracts into evidence.
Didn’t specify how he was paid by his customers, or what type of arrangements he had with his customers.
The court also noted that:
There was no proof of electronic or paper (documentary evidence) invoices being submitted to customers.
There were no bank statements to prove the income or expenses claimed on his schedule C profit and loss.
None of his alleged customers reported payments to him on Forms 1099-MISC, Miscellaneous Income.
As in typical fraudulent tax return behavior, the expenses reported on the tax return far exceeded the reported income.
Auto Deductions
When it comes to the business use of a vehicle, one of the best tax deductions for business owners is the ability to deduct either mileage, or actual expenses. In this case, Mr. Eze owned 3 vehicles: “a 2008 Mercedes Benz, a 2002 Ford SUV, and a 2004 Chrysler.”3 Mr. Eze testified that the Mercedes was used 100% in his consulting business; the Ford was used 100% in his residential construction business, and that he used the Chrysler “exclusively for personal and family purposes.” To prove that he drove the business mileage, Mr. Eze submitted a calendar with the places that he allegedly drove to for his consultation business, and a second calendar with drives for his construction business. Although Mr. Eze created the calendars, he couldn’t explain how he was able to remember information from 3-4 years ago. “When asked asked how he kept track of start and finish odometer readings for hundreds of trips, Mr. Eze said that he jotted them down on scraps of paper (since discarded)”4 to which the IRS responded kick rocks (okay, they actually said “we do not find that testimony credible”, but we like our version better). Since Mr. Eze couldn’t prove his business mileage (see our video here on how to prove business mileage), the mileage deduction wasn’t allowed.
Construction Expenses
To prove his construction material expenses, Mr. Eze submitted receipts from Home Depot, Lowes, and 84 lumber. While under oath, Mr. Eze stated that all of the purchases were not made by him, but some were made by his wife, and “maybe somebody else.”5 We find it odd that Mr. Eze can remember all of his business mileage locations from 4 years prior, but he can’t remember who the “somebody else” was that purchased materials from Home Depot. Some of the issues the court took with Mr. Eze material purchases were as follows:
All receipts are for cash purchases in excess of $5,000. Mr. Eze said he withdrew the money from his bank, yet he didn’t provide any bank statements, or record that would prove that. 6
He claimed to spend $175,000 for materials for a business that was unprofitable, and he somehow still paid his mortgage, private school tuition, and took care of 2 children. 7
The receipts for materials often show large-volume purchases- on the order of 200 pieces of lumber, 50 sheets of gypsum wallboard, and 100 gallons of paint. These volumes vastly exceeded what would have been needed for the projects shown on petitioner’s mileage log.8
The receipts often show purchases of items that petitioner could not possibly have used in any project that he allegedly undertook during the ensuing months. For example, the receipts show purchases of bathtubs, shower units, and refrigerators, but petitioner could not identify any project that would have required installation of such items. He testified that he made advance purchases of these materials and stored them in his garage until he needed them.9
Petitioner allegedly spent more than $21,000 on tools, but he was unable to explain the function or intended operation of many machines and tools listed on the receipts. He said that he could not remember what these things were used for, having purchased them years ago.10
As we read further into this case, it was clear to us that Mr. Eze thought that the IRS, and the courts were either stupid, or that they wouldn’t look at the documentation he provided. To illustrate, in one instance, Mr. Eze tried to claim the tuition that he paid for his daughter’s tuition as a business education expenses. He also claimed AT&T cellphone expenses of over $2,000, but the AT&T bills submitted covered tv and internet service. Mr. Eze also submitted payments to cricket wireless, claiming that although he didn’t receive invoices from the company “he knew what he owed each month.”
While social media (TikTok, YouTube, & Facebook video’s) will have you believing that you can magically turn personal expenses into business tax deductions (by simply creating a LLC), the truth is that taxpayers have to prove that they are entitled to any business or personal tax deductions claimed. Although courts do have the power to allow approximations (under the Cohan rule if an expense is reasonable), there must be some factual basis for the estimate, and the deduction must not be subject to increased substantiation rules.
To summarize, the guidance says that if a taxpayers PPP loan is forgiven based upon lies, or leaving things out (misrepresentations or omissions) the taxpayer cannot exclude the forgiven loan income from taxation; basically, you will have to pay taxes on the loan amount that you received.
According to the IRS, while many small business owners were entitled to receive the loan (and properly claimed the PPP loan forgiveness), there are many taxpayers who weren’t eligible for the loan, or loan forgiveness. Some taxpayers lied to receive the PPP loan funds, while other’s spent the loan proceeds on ineligible items.
Per IRS Issue Number IR-2022-162: “Under the terms of the PPP loan program, lenders can forgive the full amount of the loan if the loan recipient meets three conditions.
1 – The loan recipient was eligible to receive the PPP loan. An eligible loan recipient:
is a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity;
was in business on or before February 15, 2020; and
had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.
2 – The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.
3 – The loan recipient had to apply for loan forgiveness. The loan forgiveness application required a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.
If the 3 conditions above are met, then under the PPP loan program the forgiven portion is excluded from income. If the conditions are not met, then the amount of the loan proceeds that were forgiven but do not meet the conditions must be included in income and any additional income tax must be paid.”
Per IRS Issue Number IR-2022-162: “Taxpayers who inappropriately received forgiveness of their PPP loans are encouraged to take steps to come into compliance by, for example, filing amended returns that include forgiven loan proceed amounts in income.” In essence, if you know that you lied about how you spent the PPP (paycheck protection program) funds, take the lie back by amending (changing) your tax return to reflect the truth.
IRS Commissioner Chuck Retting said: “This action underscores the Internal Revenue Service’s commitment to ensuring that all taxpayers are paying their fair share of taxes.” “We want to make sure that those who are abusing such programs are held accountable, and we will be considering all available treatment and penalty streams to address the abuses.”
If you, or someone you know had a person “do your PPP loan” (complete the application, and get you the funds), and you need assistance with amending your tax return, please reach out to us for assistance.
In our South Loop Chicago tax preparation office, and in our Homewood, Il tax preparation office, we often receive calls from people that have not filed taxes in years, and they want to know how the IRS knows how much income they have receive. So how does the IRS know when a small business owner is POTENTIALLY hiding income? The IRS has many methods to detect the underreporting of income such as: taxpayer interviews, income probes, Indirect methods, accounting records; QuickBooks files, cash expenditures, bank deposits, net worth, and more; however, this article will be covering a method called the vertical analysis.
The vertical analysis method identifies the differences between gross income, and net profit reported by the business owner, and the industry standards gross income and net profit. In plain English, the IRS compares what businesses owners say their profit is in relation to expenses, to what other people in the same industry say their profit is in relation to expenses. So what data, or statistics does the IRS use to create the comparison? The IRS uses a website called Bizstats.
Information in Bizstats expresses expense categories as a percentage of revenue. Per the IRS “Potential underreporting of income which equals 10% or more of the reported income should be resolved with the taxpayer’s assistance.”
To give an example, let’s say that we have a caterer that reports $65,000 in gross sales, and $50,000 in expenses, leaving them with a profit of $15,000. The caterer’s expenses to sales ratio is 77% ($50,000 in cost to make sales (expenses)/revenue brought in.) If the industry standard is 60%, the IRS might believe that the taxpayer is hiding an additional $18,333 in revenue (50,000/60%=$83,333. $83,333-$65,000=$18,333).
So who is Bizstats? Per their website, “BizStats is owned and operated by Bizminer of Camp Hill, PA, a leader in online data analysis since 1998. Bizminer also publishes more than 9 million local and national industry statistical reports at its own web site at www.bizminer.com” Bizstats has business statistics and financial ratios for Sole proprietors, Corporations, S-Corporations, & Partnerships.
Where does Bizstats get it’s information? Per their website, Bizstats get it’s data from “the latest available IRS financial information in a useful, readable format.”
What are some drawbacks to Bizstats data? Bizstats are only available for 1 year, and the information is typically 3 years old. At the time of publication, the current stats were showing data from 2017.
How can I protect myself from a vertical analysis?
#1 Always report the GROSS income generated in your business. An accounting mistake that we often see in our Chicago South Loop tax preparation office, is that people don’t do bookkeeping, so instead of reporting their gross receipts, they report gross income less returns, refunds, etc. in the gross receipts area, which is not correct. Gross receipts are gross receipts, and you account for returns in a separate line item.
#2. Invoice clients, or keep copies of receipts if you’re in a business that doesn’t use invoicing.
#3. NEVER COMMINGLE YOUR FUNDS. Your business income and expenses need to be kept separate
1.) underpay your tax, leaving you open to IRS penalties, or 2.) overpay your tax, meaning you gave a gift to the government.
However, if you made an error on your tax return, don’t worry; there’s good news: you can undo your mistake! Here’s even better news: there are two special ways to fix your incorrect tax return that will save you from paying more to the IRS than you would otherwise. We’ll tell you all about them in this article. —there are two easy ways to fix it:
A superseding return
A qualified amended return
A superseding return is an amended or corrected return filed on or before the original or extended due date. The IRS considers the changes on a superseding return to be part of your original return.
A qualified amended return is an amended return that you file after the due date of the return (including extensions) and before the earliest of several events, but most likely when the IRS contacts you with respect to an examination of the return. If you file a qualified amended return, you avoid the 20 percent accuracy-related penalty on that mistake.
Superseding Return Example
You file a joint Form 1040 tax return electronically on February 21, 2022, for tax year 2021, but you later decide you want to file a separate return. Since the joint-filing election is irrevocable, on or before April 15, 2022 (which is the unextended due date for your 2021 Form 1040), you must file a superseding return to undo the joint election.
IRS electronic filing rules for amended returns do not permit you to file this superseding return electronically, because you are changing your filing status (from married, filing jointly, to married, filing separately). That being said, your only other option is to use “snail mail.” Using a paper return via snail mail, you’ll submit either:
1.) A second original Form 1040 return using the married-filing-separately filing status, or 2.) An amended Form 1040X showing the change from joint to separate filing status. Be sure to write “SUPERSEDING RETURN – IRM 21.6.7.4.10” in red at the top of page 1 of either Form 1040 or Form 1040X.
Qualified Amended Return Example
You realize your return preparer left a $30,000 IRA distribution off your 2019 tax return. Ouch! Let’s assume you are in the 32 percent tax bracket and had no federal income tax withholding on the distribution: you owe an additional $9,600 in federal income tax on your 2019 tax return due to this distribution.
If you file an amended return before the IRS contacts you about the missing income, then it’s a qualified amended return, and you avoid $1,920 (20percent of $9,600) in audit penalties.
If you don’t file the amended return, and if the IRS contacts you about the missing income, the IRS will propose the $1,920 penalty. You may be able to request penalty relief, but you’ll have to make your case, and the facts may or may not be on your side.
In both circumstances, you’ll also pay interest on the $9,600 back to July 15, 2020 (the COVID-19-postponed 2019 Form 1040 due date). Of course, the earlier you pay the tax, the less interest you’ll accrue. You’ll pay less interest with a qualified amended return because you’re paying the tax sooner.
If you are married like many of our clients in our Chicago south loop tax preparation office, most likely you’ve always filed a joint tax return with your spouse. Most of the time, a joint return shows less overall tax than two separate tax returns do, because the married-filing-separately status has many tax disadvantages.
Fast-forward to the 2020 tax filing season, however—and nothing is as it was. This year, four tax provisions will be key to determining whether you’ll be better off filing a joint tax return or separate tax returns for tax year 2020:
Tax-free unemployment
Recovery rebate, round 1
Recovery rebate, round 2
Recovery rebate, round 3
Tax-Free Unemployment
TheAmerican Rescue Plan Act of 2021, which was signed into law on March 11, 2021, excludes from tax the first $10,200 of 2020 unemployment benefits paid to an individual with 2020 modified adjusted gross income (MAGI) of less than $150,000.
Recovery Rebate, Round 1
The recovery rebate, round 1, is a refundable tax credit on the 2020 tax return, equal to
$1,200 ($2,400 on a joint return), plus
$500 for each dependent under age 17.
Your credit decreases by 5 percent of the amount your adjusted gross income (AGI) exceeds
$150,000 if married, filing a joint return;
$112,500 if head of household; or
$75,000 if single or if married, filing separately.
The IRS gave you an advance payment of this credit based on either your 2018 or 2019 AGI and dependents. And now the IRS looks at your 2020 tax return and does the following:
Smiles on you if the tax credit based on your 2020 tax return exceeds the advance payment. What do we mean by “smiles on you”? You get the additional amount as a refundable tax credit.
Smiles on you (again!) if your actual credit is less than the advance payment. You keep the money. You don’t have to pay back any excess received.
Recovery Rebate, Round 2
This is a refundable tax credit on the 2020 tax return, equal to
$600 ($1,200 on a joint return), plus
$600 for each dependent under age 17.
Your credit decreases by 5 percent of the amount your AGI exceeds
$150,000 if married, filing jointly;
$112,500 if head of household; or
$75,000 if single or if married, filing separately.
The IRS gave you an advance payment of this credit based on your 2019 AGI and dependents. And now the IRS looks at your 2020 tax return and
Smiles on you if the tax credit based on your 2020 tax return exceeds the advance payment. What do we mean by smiles on you? Once again, you get the additional amount as a refundable tax credit.
Smiles on you (again!) if your actual credit is less than the advance payment. You keep the money. You don’t have to pay back any excess received.
Recovery Rebate, Round 3
This is a refundable tax credit on the 2021 tax return, equal to
$1,400 ($2,800 on a joint return), plus
$1,400 for each dependent, regardless of age.
Your credit phases out over the following AGI ranges:
$150,000 to $160,000 if married, filing jointly;
$112,500 to $120,000 if head of household; or
$75,000 to $80,000 if single or if married, filing separately.
The IRS will give you an advance payment of this credit based on your 2019 or 2020 AGI and dependents. If your first advance payment used your 2019 return information, then the IRS will send an additional payment based on your 2020 tax return if the IRS processes your 2020 tax return by August 15, 2021.
You then reconcile your advance payment(s) on your 2021 tax return:
If your actual credit amount exceeds the advance payment, you get the difference as a refundable credit.
If your actual credit is less than the advance payment, you keep what you have. You don’t have to pay back the excess benefit.
There are two main reasons you may have net lower federal tax with separate returns versus a joint return.First, if your MAGI is $150,000 or more on a joint return, but the spouse who received the unemployment compensation earns under $150,000 on a separate return, then that spouse can take the full exclusion up to $10,200 (except possibly in a community property state).
Second, if one spouse has AGI of $75,000 or less, but your joint AGI is over $150,000, then that spouse can claim the dependents and get all the available round 1 and round 2 credits on the 2020 tax return as well as the entire round 3 advance payment.
When considering the above, keep two important notes in mind:
For a couple that got joint advance payment(s), the law says you allocate 50 percent of the payment to each spouse. The higher-earning spouse doesn’t pay back any of his or her allocated advance payment, while the lower-income spouse will get the difference as a refundable tax credit.
Married taxpayers who agree how to allocate dependents on separate returns do not have to use the “tiebreaker” rules and can choose who claims which dependents.
Important note. You may lose other deductions and credits on a separate return. The only way to know which is better in light of these temporary provisions is to run your tax returns both ways and see which puts you ahead. For example, separate returns can change your health insurance premium tax credit and perhaps some non-tax items such as your Medicare premiums.
Has the IRS sent you a collections letter? How serious is that letter? Can you stroll to the phones, or do you need to break and run to the phones and call for help?
Listed below are the most common IRS collection letters that one may receive when they have tax debt. I’ve listed them in order from stroll to the phones (low detection on the IRS radar) to break and run to the phone lines & get help (requires immediate action).
CP14 – Casually stroll (No sense of real urgency).
CP501 – Put a little pep in your step (Take notice).
CP503 – Speed walk (Decide to do something).
CP504 – Start Jogging (things are getting very serious).
Letter 1058/LT11 – (Final Levy Notice)—Run like you’re trying to lose weight. —act now or lose your collection due process rights (your right to a hearing and a stop of collection).
CP90/CP91 – Run like you’re trying to lose weight. Another form of Final Notice of Intent to Levy.
CP71 – 10 Day Final Notice of Intent to Levy. RUN LIKE YOU’RE BEING CHASED IN A HORROR MOVIE. Act now, you are out of time.
We’re getting closer and closer to the end of a tumultuous 2019 and almost daily in our Chicago tax office, we’re handling phone calls from clients asking for more ways to save on their tax bills.
Now, that’s nothing new, but these days, the strategies are. One of the biggest savings, long-term, is converting traditional retirement savings structures to Roth-based structures.
The granddaddy of all of these, of course, is the Roth IRA. What makes it so special? Well, for starters, you pay taxes up front. In 401(k)s and Traditional IRAs, those taxes a deferred until retirement or a certain age is reached.
Guess what? That’s a terrible idea! Who knows what thetax bill could look like in two, three or even four decades! Pay those taxes now and get them out of the way.
Here’s what makes most people nervous about converting a traditional 401(k) or IRA into a Roth structure.
You gotta pay taxes on it. Period. That’s it! You’ll pay – at least this year, on what you converted. In the future, of course, you’ll have already paid taxes on those monies or earnings prior to placing them into a Roth, but for a lot of people, that one-time conversion “tax” can be painful.
Don’t let it be. You’d have to do nearly the same thing if you took an “emergency” dispersion due to a financial challenge that forced you to crack open one of those retirement accounts. In most cases, anyway, the funds will be diverted out automatically, so your “payment” is really painless.
Just a little mental anguish.
Besides, you’re paying taxes on money you literally have in your hands!
Once you actually have a Roth set up, it’s surprisingly easy to convert old accounts to them.
You’ll essentially do one of three things:
• Execute a “Rollover” where monies from one account are drafted in a check to you, the account holder, and deposited into the new account within 60 days.
• Execute a “trustee to trustee transfer” where your current institution will transfer the monies from your account there to your Roth account elsewhere.
• Or execute a “same-trustee transfer” where you’ll merely instruct the institution to convert the current account to a Roth standard.
See? It’s not hard and, in fact, it’s easier than many types of banking we all do on a daily or weekly basis. In the long run, though, the tax savings can be considerable, and when you consider this is the money you’ll be using to fund your retirement, it’s important to understand – or know – all that money is yours, not the taxman’s!
SMALL BIZ TAX LADY 