The 2020 tax filing season has ended. There were many more surprises and challenges.

This tax season, like the 2019 tax season, was very difficult because of all the recent changes from the Jobs Act of 2017 and all the recent Acts enacted by Congress and signed into law to combat the Covid-19 pandemic. Many taxpayers have not filed their tax return by the deadline.

Taxpayers should not let the Internal Revenue Service prepare a substitute return on their behalf. Taxpayers should then prepare their own return as they would normally do in case the IRS prepared a substitute return and sent them a notice of tax due. Many times, taxpayers claim that they are not required to file a return because they did not make enough money to file or they did not have a tax document at the time of filing. However, there are cases when an entity failed to send or send late a required tax form to the taxpayers. The same form is sent to the IRS and the social security administration. Taxpayers are liable and are required to report their income and request those forms when they did not receive them.

The status of limitation does not apply to substitute returns.

There has been a very long delay in processing some tax returns because the Internal Revenue Service has faced with many challenges during the pandemic. Taxpayers and tax practitioners faced their own challenges. They were waiting for guidance from the IRS. Some guidance, like the treatment of unemployment insurance, and the non repayment of the Advanced Premium Tax Credit for 2020 were published during the tax season.

  • The Service has to issue new forms to implement the changes resulting from the enactment of different acts of Congress to respond to the Covid-19 pandemic.
  • Some IRS employees are still working from home because of social distancing guidelines.
  • There are several tasks that cannot be accomplished from home.
  • The IRS is still processing returns for tax year 2019.
  • The processing of the stimulus payments rebates, the process established to combat identity theft, and the unemployment insurance have in large part contributed to the delay.
  • Papers returns and requests for additional documents have taken much longer to process. In many cases, forms or documents were not forwarded or sent to relevant department or were not forwarded prior to the deadline. Thus, taxpayers should mail forms or documents via certified mail.
  • Many taxpayers did not change their Form W-4 (Employee’s Withholding Allowance Certificate). In many cases, their tax withheld was not adequate. If the amount withheld from an employee’s paycheck is not at least 10 percent, in most circumstances, it is very likely that the employee could owe additional tax at filing.
  • Many taxpayers complained that their employers are liable for not withholding enough tax from their paycheck. The amount withheld from an employee’s paycheck is determined by the number of exemptions the taxpayer claimed on Form W-4.
  • Some taxpayers would attempt to remove a fraudulent schedule C or Schedule A from their return when the IRS requested a missing form before the service could complete the processing of the return. When a taxpayer receives a letter from the IRS, the taxpayer must respond to the request on the letter. Generally, when a form is missing, the letter would state to “send only the requested form or forms and do not amend the return”.
  • Some business owners did not have a proper accounting system for their business. The business will suffer and the owner could be in trouble with the IRS without a correct system to record a business income and expenses. Every business income and expenses must be documented.
  • Some taxpayers were not aware of some of their legal deductions and credits. Several of these credits and deductions derived from the different laws enacted by Congress to help taxpayers during the pandemic and some of them have been available since the enactment of the tax code.
  • As self-employed or a sole proprietorship you pay for self employment tax, which could be a considerable amount if the business is profitable. In that case, you should pay estimated tax quarterly. Claiming unproven expenses to lower your income does not help in the long term.
  • Many business owners did not know their business entity. A business owner must know the type of entity because the tax treatment is not universal or the same for all business entities. As an example, there are variations on how to keep records.
  • Some businesses have ordinary and necessary business expenses that their owners were not aware of. It is standard practice to seek advice from qualified tax professionals. Paying for tax advice is a business deduction.
  • Most tax collections activities were suspended or delayed due to the pandemic. It is very likely that collections activities will fully resume in the summer.
  • The Treasury announced on May 17, IR-2021-113, that families of 88 percent of children, approximately 39 million households, in the United States will automatically receive monthly payment of refundable child tax credit starting July 15, 2021.

Every individual must deal with the taxing authorities because we must pay taxes. Unfortunately, many individuals are paying attention only at tax filing season. In most cases, it is too late to take advantage of the tax laws and regulations.

Employees must ensure that enough tax is withheld from their salary if they do not want to owe taxes at tax filing time. Taxpayers should be aware that almost every financial transaction has some tax implication and to seek tax guidance. Financial advisers and insurance agents are generally not qualified to provide tax advice. In fact, there is a caveat or warning in almost every financial document that advises the clients to seek professional tax advice or let the clients know that they are not qualified to render tax advice when there could be some tax implications. Unfortunately, many taxpayers learned that lesson in a very hard way.

Business owners should ensure they keep accurate book for their business and to review it at least quarterly to know when to effectuate changes that could lower their tax liabilities and to pay estimated tax. A bank statement is not enough and not accurate. They should keep records of business income and expenses. Business transactions need to be recorded in your business ledger even when they will not have a tax implication.

Do you know that you could reduce your tax liability by proper tax planning strategies?

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