Nick Magone, CPA, CGMA, CFP®

What is a Levy? IRS and Other Asset Levies Explained

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Falling behind on your debts is never a fun position to be in. It’s less fun when a levy is placed on your assets. In this article, we take a look at what an IRS levy is, why it happens, and what you can do about it.

What is an IRS levy?
Simply put, if you owe back taxes and you ignore the IRS, they can seize your property, take money from your bank accounts, or sell your assets in order to satisfy the balance due.

The IRS will give you plenty of notices via mail before they take this step. If you do not satisfy the debt or make payment arrangements by the specified date, the IRS will attempt to take the amount of the levy directly out of your bank account.

Other types of levies
Private creditors may issue a levy against your bank account with a court order. Court orders are not required for levies by government agencies. The creditor must notify you of the upcoming levy at least 21 days before removing any funds from your account. You may not withdraw money or close the account during this waiting period.

Funds earned from child support, social security, unemployment, workers’ compensation settlements and certain other types of government agency payments are exempt from levy. You must request the exemption and offer proof of the source of the funds.

Wage garnishments
Government agencies may also garnish an employee’s wages for back taxes, child support and other delinquent payments required by law.

The IRS has the authority to levy up to 85 percent of your paycheck. The levy notice will be sent to your company’s payroll or human resources department, which will then withhold the appropriate amount of money from each paycheck and send it to the IRS or state tax board. You must provide a wage garnishment release if you’re able to work out a payment arrangement.

If you are behind on your taxes, the IRS may levy most payments from federal agencies. This includes railroad retirement benefits, Medicare supplier and provider payments and federal retirement annuities, among others.

Seizing your assets
The IRS may also seize your real estate and personal property such as a car or boat. You will receive a 30-day notice indicating that seizures will follow if you do not pay your outstanding taxes or contact the IRS to make payment arrangements. This authority also extends to property and money you own that’s being held by another party, such as the cash value accrued from a life insurance policy. The government sells its seized property at auction to recover some of the funds owed by delinquent taxpayers.

What to do if you have an IRS levy
Back taxes don’t just disappear if you ignore them long enough. Putting your head in the sand will cause the problem to get worse. The IRS knows if you’ve paid or not. They might even be willing to compromise.

If you have back tax debt, we highly recommend you reach out to our firm first, particularly if you owe more than $10k in federal or state taxes and can’t pay in full. Our clients never have to talk to the IRS, and tax resolution through our firm can save you money and time in the long run. You might also be eligible for other IRS relief programs or get your penalties reduced or removed. Reach out today for a consultation.

Charitable Donations: Recouping Tax Savings for Your Time and Services

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Donating to charities is a noble way to support causes that are close to your heart. But if your contributions begin and end with writing a check, you may be missing out on some satisfying volunteer opportunities — and a few tax deductions. IRS rules allow you a number of tax breaks for contributions other than cash that you can make to qualified organizations.

Going the extra mile…literally

Did you know that you can deduct the costs of going to and from a location where you volunteer your services? You can also deduct the costs of driving on behalf of the organization — for example, to pick up or deliver items. To compute your deduction for charitable driving, use the standard mileage rate of 14 cents per mile for 2020, per the IRS, or deduct the actual cost of your gas and oil. Either way, parking fees and tolls are also deductible.

Recouping your expenses

If you’re not reimbursed by the organization, the out-of-pocket expenses you pay in giving services may count as a charitable donation. While you can’t deduct your personal expenses, such as childcare costs accrued while volunteering, you can deduct the costs of buying and cleaning a uniform you’re required to wear while volunteering.

No time to volunteer?

Many charities accept non-cash donations. And giving investments that have increased in value can be a smart tax move. Instead of selling an investment and paying capital gains tax, donate it to a qualified organization. If you held the investment for more than one year, you can generally deduct its fair market value at the time of the donation. Remember, you’ll need a receipt from the organization to claim a tax deduction, and other records also may be required.

Contributions must be made to qualified organizations that meet IRS guidelines. Not sure? Let the NJ CPAs at Magone & Company help. Give us a call today at (973) 301-2300.

Do You Qualify for the Home Office Deduction?

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Aside from saving on time, gas and dry cleaning, working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

Does your home office fit the bill?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction — and avoid the tax filing mistakes that can land you in hot water — that part of your home must be one of the following:

  • Your principal place of business.This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.
  • A place where you meet clients, customers or patients.Your home office may qualify if you use it exclusively and regularly to meet with clients, customers or patients in the normal course of your trade or business. Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.
  • A separate, unattached structure used in connection with your trade or business.A shed or unattached garage might qualify for the home office deduction if it’s a place that you use regularly and exclusively in connection with your trade or business.
  • A place where you store inventory or product samples.You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Keep in mind, you must now file a Schedule C on Form 1040 to be eligible for the home office deduction.

Contact the experts

If you prefer not to keep track of your home office expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet. Call Magone & Company today at (973) 301-2300 to learn how we can help ensure that you’re not overpaying your taxes for your qualified home office.

Magone & Co Principal Guests on Popular Business Podcast

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Managing partner Nick Magone recently appeared on The Bold Sidebar podcast. Hosted by Jeff Horn of the Horn Law Group, a family law practice in Toms River, NJ, the show focuses on tips, and techniques for client service and retention.

Listen as Nick shares with Jeff his thoughts on the accounting profession, staying competitive in a changing world, and how not being afraid to say “Yes” led him to become fluent in Italian and launch a successful international tax practice.

How to Keep Family Loans Strictly Business

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Obtaining the funds to start or expand a small business doesn’t always come easy. If your family member can’t secure a loan from a commercial lender, you may be willing to help out by lending them the money yourself — but should you? Before handing over the cash, here are some best practices to consider:

Have a written agreement

Start by putting the loan agreement in writing. This may seem like an unnecessary formality, but without a written loan document, the IRS could argue that the transaction was a gift instead of a loan, potentially creating gift tax issues. Written documentation is also important if the borrower fails to repay all or part of the loan. In that situation, you want to be able to show you’re entitled to write off the unpaid amount as a non-business debt.

Charge adequate interest

The second step is setting an interest rate. While there’s no rule against interest-free loans or loans that have below-market interest rates, in a family context they can lead to tax complications. If you don’t charge sufficient interest, the difference between the amount of interest you actually receive (if any) and the amount you should have received — referred to as “imputed” interest — is taxable to you.

You can avoid the imputed interest rules by charging interest at the appropriate “applicable federal rate” (AFR). The IRS publishes AFRs monthly for loans of different maturities. These rates have been relatively low recently, reflecting the current market interest rate environment. For example, in November 2019, the annual AFR (using a monthly compounding assumption) was:

  • 1.68% for a short-term loan (three or fewer years)
  • 1.59% for a mid-term loan (more than three but no more than nine years)
  • 1.94% for a long-term loan (more than nine years)

For a term loan, the rate can remain fixed for the life of the loan. For a demand loan (one that gives you the right to demand full repayment at any time), you have to charge a floating AFR to avoid imputed interest issues.

What are the exceptions?

When you lend a family member no more than $100,000, the amount that can be added to your taxable interest income under the below-market interest rate rules generally can’t exceed the borrower’s net investment income. Even better, you won’t have to report any imputed interest if the borrower’s net investment income amounts to $1,000 or less. You can also side-step imputed interest on small loans of no more than $10,000, provided the borrowed funds aren’t used to buy or carry income-producing assets.

For more insight on family loans, and whether they’re a good idea for you, contact the NJ CPAs at Magone and Company at (973) 301-2300.

Employee vs. Independent Contractor — Why Worker Classification Matters

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Should a worker be treated as an employee or an independent contractor? There are legal differences between the two — and major tax distinctions as well.

 For an employee, a business must generally withhold income and FICA (Social Security and Medicare) taxes from the employee’s pay and remit those taxes to the government. In contrast, a business is not required to withhold income or FICA taxes for an independent contractor. The contractor is fully liable for his or her own self-employment taxes, and FICA and federal unemployment taxes do not apply. Generally, if a business has made payments of $600 or more to an independent contractor, it must file an information return (Form 1099-MISC) with the IRS and send a corresponding statement to the independent contractor.

Determining who’s who

Is a worker an independent contractor or an employee? The IRS examines factors in three categories:

  • Behavioral control — the extent to which the business controls how the work is done, whether through instructions, training or otherwise
  • Financial control — the extent to which the worker has the ability to control the economic aspects of the job. Factors considered include the worker’s investment and whether he or she may realize a profit or loss
  • Type of relationship — whether the worker’s services are essential to the business, the expected length of the relationship, and whether the business provides the worker with employee-type benefits, such as insurance, vacation pay, sick pay, etc.

When the proper classification is unclear, the business or the worker may obtain an official IRS determination by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Consequences of misclassification

When an employer misclassifies an employee as an independent contractor, the IRS may impose penalties for failure to deduct and withhold income and/or FICA taxes. Penalties may be doubled if the employer also failed to file a Form 1099-MISC, though the lower penalty will apply if the failure was due to reasonable cause and not willful neglect.

Employers with misclassified workers may be able to correct their mistakes through the IRS’s Voluntary Classification Settlement Program (VCSP). For employers that meet the program’s eligibility requirements, the VCSP provides the following benefits:

  • Workers improperly classified as independent contractors are treated as employees going forward
  • The employer pays 10% of the most recent tax year’s employment tax liability for the identified workers, determined under reduced rates (but no interest or penalties)
  • The government agrees not to raise the issue of the workers’ classification for prior years in an employment tax audit

Your tax advisor can help you sort through the IRS rules and fulfill your tax reporting obligations. Have questions? Reach out to the tax experts at Magone & Company today at (973) 301-2300.