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IRS and State Tax Compliance

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The Internal Revenue Service (IRS) and all state taxing authorities expect taxpayers to be “compliant” and to know what compliance means. But what does “compliant” mean? Compliance can be defined as filing all required returns and or extensions on time AND paying all taxes due on time. To be sure, there are consequences of non-compliance.

Many compliance issues arise from either inadequate withholding from wages, not making sufficient and or timely estimated payments {self-employed individuals and 1099 earners}, and or not filing tax returns timely.

Common Tax Compliance Pitfalls:

  1. Not having withholdings deducted from their wages or claiming too many exemptions on Form W-4.
  2. Not filing a return{s} on time either due to a balance being due or procrastination.
  3. Not making timely or sufficient estimated tax payments for self-employed individuals and or 1099 earners.

W-4 Exemptions: Claiming too many exemptions on Form W-4 has the same consequences as not having sufficient withholding deducted from wages. Each exemption claimed reduces withholdings from a taxpayer’s paycheck. A taxpayer can accumulate a significant balance as a result of claiming too many exemptions.

On the IRS website, there is a withholding calculator for employed,W2taxpayers at https://www.irs.gov/individuals/irs-withholding-calculator. This calculator will assist anyone wanting to ensure they are withholding sufficient funds for taxation purposes.

How Many Exemptions Should I Claim?: The number of exemptions claimed by a taxpayer is largely contingent upon the filing status of the taxpayer and the number of dependents claimed on the taxpayer’s return.

If a taxpayer is single, this taxpayer should claim 0 – 1 exemptions on Form W-4. If the taxpayer files as head of household claiming 1 dependent, the suggested number of exemptions to claim is 0 – 2.

If a husband and spouse with children file jointly, the number of exemptions claimed on Form W-4 should not exceed the number of exemptions for the husband, spouse, and 1 for each child.

Pro Tip – Do not claim excessive exemptions on Form W-4 and assume or rely on credits and/or deductions to compensate for the lack of withholding. You do not want to claim exemptions on the Form W-4 in excess of the number of exemptions claimed on the tax return.

When Are you Required to File?: IRS and state taxing authorities require taxpayers to timely file their return or extension and to pay the liability by April 15th. If an extension has been filed, the return is due on October 15th.

Filing Requirements: If you are single and under 65, you must file a return if your gross income is at least $12,000 or higher. If you are single and over 65, you must file a return if their gross income is at least $13,000 or higher.

The income filing requirement for married joint filers if both spouses are under 65 years of age is $24,000. If one spouse is 65 years of age or older, the income filing requirement is $25,300. If both spouses are over 65 years of age, the income filing requirement is $26,600. Those who file as married filing separately are required to file at any age if gross income is $5 or more.

Head of household filers under 65 years of age are required to file if their gross income for the year was $18,000 or higher.  Head of household filers over 65 years of age are required to file if their gross income for the year was $19,000 or higher. If the taxpayer is a qualifying widower under 65, the income filing requirement is $24,000 and if their over 65 its $25,300.

If you are self-employed and your net self-employment income is $400 or higher, you are required to file a tax return.

Common Reasons for Not Filing Timely: There are a variety of reasons a taxpayer does not file their return on time. The most common reasons are:

  1. Fear and/or apprehension of having inadequate funds to pay the tax due;
  2. Procrastination;
  3. Lack of organization resulting in an inability to file an accurate return.

Substitute for Returns: You would be wise to file even if you are not going to owe. When tax returns remain unfiled, the IRS and State taxing authorities file SFRs {Substitute for Returns} or Estimated balances on behalf of the taxpayer.

Substitute for Returns are never in your best interest. SFRs typically result in a tax bill in excess of either the balance that would have been reported had the taxpayer filed the original return. No credits, deductions, expenses, additional dependents, or other filing statutes apart from single are reported on SFR returns.

In most instances, the balances attributed to SFRs or estimated balances can be resolved by filing the original return.

Filing Requirements for 1120 Filers: Calendar year 1120 filers must file 1120 returns no later than April 15th even if the entity did not generate any taxable income for the year. Fiscal year 1120 filers with a June year end must file 1120 returns no later than March 15th.

1065 returns are due March 15th. Partnerships must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes.

Employer Withholding Requirements: The IRS and State agencies expect employers to deposit the correct amount of employee withholding with each 941-return filed. When an employer does not deposit sufficient withholdings, the result is a Trust Fund Recovery Penalty. Importantly, the Trust Fund Recovery Penalty may be assessed against the employer personally.

940 and 941 Due Dates: Federal and state quarterly 941 returns are due:

  • April 30
  • July 31
  • October 31
  • January 31

The annual federal 940 returns are due January 31. The due date for annual withholding returns for state taxing authorities can vary. In Michigan, the due date is February 28th.

The Electronic Federal Tax Payment System: The IRS offers an online Electronic Federal Tax Payment System to make 941 deposits. You can also utilize the IRS voice response system by calling 800.555.3453.

Estimated Payments: Self-employed taxpayers and those who receive non-employee compensation on 1099 Forms as independent contractors are responsible to pay federal, state, and possibly city estimated tax payments on the following dates:

  • April 15
  • June 15
  • September 15
  • January 15

A self-employed or 1099 taxpayer who receives non-employee compensation will likely owe estimated tax payments – that is, unless the taxpayer meets requirements for refundable credits {e.g. EIC: Earned Income Credits, Additional Child Tax Credit, etc.}. However, you should never rely on refundable credits to offset self-employment tax unless they are absolutely sure these credits offset the tax.

The most convenient way to make federal estimated tax payments is online: https://www.irs.gov/payments/direct-pay. Payments submitted to IRS via this website process much faster as opposed to mailing a personal check or money order.