How to File Back Taxes

6In many cases, you will need to file back taxes before you can resolve other issues with the IRS. While nobody sets out to get behind on their taxes, this happens to millions of people every year. Although never fun, there are many things you can do to file back taxes with a high degree of success.

Here are several steps that you should consider following if you are ready to file back taxes:

  1. Gather all important documents for the year(s) that you did not file. This includes income verification, receipts, and anything else that you made need to successfully complete your return. If you do not have the proper income information you may need to request it from your employer or directly from the IRS.
  • You must find the tax form that was used for the year that you missed. All past forms can be found on the IRS website, or by contacting them on the phone. It is important that you file the right forms so that the IRS knows what year you missed.
  • Hire a professional. There is no rule saying that you have to do this, but there are definite benefits. For one, when you hire a professional you will be more confident in the steps that you are taking. Along with this, a professional can help you take advantage of as many deductions and credits as possible. And don’t forget that they can also assist in the payment of back taxes if any money is due. You may find that paying in full is not an option. With the help of a pro, you can decide on another method of payment.
  • Sign and date your return. Once you do this, you can send it off to your local IRS office. If you owe any money along with your return, be sure to send it at the same time. Of course, if you are applying for an installment agreement this may not suit you.
    • Tip: even if you cannot pay your liability you still need to file your back tax return.
  • How are you going to pay? This is something that you will think about during the steps above, but at some point you need to make a decision. If you do not pay in full, your best option is probably an installment agreement. This way you can pay smaller amounts every month until your debt is gone.

Some people think that filing back taxes is something that can wait – they are wrong. If you are in this situation, it is important to file as soon as possible. Remember, the IRS is going to catch on sooner rather than later. At that point, you will not have a choice because they will begin to pressure you. They can even file a substitute tax return on your behalf.

You should now have a better idea of what to expect if you need to file back taxes. What are you waiting on? The IRS wants your return!

What is Taxation

196A tax is a payment of money legally demanded by a government authority to meet public expenses.

Everyone knows that taxation is necessary in ? modern state: without it, it would not be possible to pay the soldiers and policemen who protect us; nor the workers in government offices who look after our health, our food, our water, and all the other things that we cannot do for ourselves, nor also the ministers and members of parliament who govern the country for us. By means of taxation we pay for things that we need just as much as we need somewhere to live and something to eat.

But though everyone knows that taxation is necessary, different people have different ideas about how taxation should be arranged. There are two main ways, by which taxes may be paid:

1)      each person have to ??? ? certain amount of money to the government each year;

2)      there is ? tax on things that people buy and sell.

In most countries, ? direct tax on persons, which is called income tax exists. It is arranged in such ? way, that the poorest people ??? nothing, and the percentage of tax grows greater as the taxpayer’s income grows.

But countries with direct taxation nearly always have indirect taxation, too. Many things imported into the country have to pay taxes or “duties”. Of course, it is the men and women who buy these imported things in the shops who really have to pay the duties, in the form of higher prices. In some countries, too, there is ? tax on things sold in the shops. If the most necessary things are taxed, ? lot of money is collected, but the poor people suffer most. If unnecessary things like jewels and fur coats are taxed less money is obtained, but the tax is fairer, as the rich pay it.

Probably, this last kind of indirect tax together with a direct tax on income which is low for the poor and high for the rich is the best arrangement.

The primary function of taxation is, of course, to raise revenue to finance government expenditure, but taxes can also have other purposes. Indirect excise duties, for example, can be designed to dissuade people from smoking, drinking alcohol, and so on. Governments can also encourage capital investment by permitting various methods of accelerated depreciation accounting that allow companies to deduct more of the cost of investments from their profits, and consequently reduce their tax bills.

There is always ? lot of debate as to the fairness of tax systems. Business profits, for example, are generally taxed twice: companies pay tax on their profits (corporation tax in Britain, income tax in the USA), and shareholders pay income tax on dividends. Income taxes in most countries are progressive, and are one of the ways in which governments can redistribute wealth. The problem with progressive taxes is that the marginal rate – the tax people pay on any additional income – is always high, which is generally ? disincentive to both working and investing. On the other hand, most sales taxes are slightly regressive, because poorer people need to spend ? larger proportion of their income on consumption than the rich.

In many countries taxes are quite fair and do not harm interests of the citizens. It may exist in countries, where the expenditures of the government are not very high and consequently it need not to collect high taxes or the government has other sources of income, such as profitable business activities. Or the police of the state is to give more freedom to business to make the economic situation better. But some governmnents have insufficient money to finance it’s expenditures and they increase tax rates as an alternative of borrowing money. Or they may limit unnecessary business activities. This of course decreases incentive to work, because profits become very small.amd many businessmen try to hide their incomes. There are lots of methods, both legal and illegal, to hide profits from taxation. For example, tax avoidance (reducing the amount of tax you pay to a legal minimum) or tax evasion (making false declaration to tax authorities).

The higher the tax rates, the more people are tempted to cheat, but there is ? substantial «black» or «underground» economy nearly everywhere. In Italy, for example, self-employed people – whose income is more difficult to control than that of company employees – account for morethan half of national income. Lots of people also have undeclared, part-time evening jobs (some people call this «moonlighting») with small and medium-sized family firms, on which no one pays any tax or national insurance. At the end of 1986, the Director of the Italian National Institute of Statistics calculated the size of the underground economy, and added 16.7% to Italy’s gross national product (GNP) figure, and then claimed that Italy had overtaken Britain to become the world’s fifth largest economy.

To reduce income tax liability, some employers give highly-paid employees lots of  «perks» (short for perquisites) instead of taxable money, such as company cars, free health insurance, and subsidized lunches. Legal ways of avoiding tax, such as these, are known as loopholes in tax laws. Life insurance policies, pension plans and other investments by which individuals can postpone the payment of tax, are known as tax shelters. Donations to charities can be subtracted from the income on which tax is calculated.

Companies have ? variety of ways of avoiding tax on profits. They can bring forward capital expenditure (on new factories, machines, and so on) so that at the end of the year all the profits have been used up; this is known as making ? tax loss. Multinational companies often set up their head offices in countries such as Liechtenstein, Monaco, the Cayman Islands, and the Bahamas, where taxes are low; such countries are known as tax havens. Criminal organizations, meanwhile, tend to pass money through ? series of companies in very complicated transactions in order to disguise its origin from tax inspectors – and the ??li??; this is known as laundering money.

Paying Your Taxes on Time

195Property Tax Sale

Any time property taxes are not paid to a taxing authority by the tax due date. The taxes become delinquent. Then that can create a lien superior over any other lien including the mortgage. A tax judgement/Lien can be placed on the property, and will remain until the delinquent taxes, interest, penalties, fees and costs are paid.

The lien allows the taxing agency to sell the property to pay the delinquent taxes that are owed. It the property is sold for delinquent taxes and the redemption period has expired, the property owner and other parties with an interest in the property will lose all rights to the property, and the title is transferred to the new purchaser free and clear of any liens.

A tax sales is the sale of property by a taxing authority through an officer of the courts acting on a judgement to satisfy the payment of delinquent taxes.

The tax office will send the delinquent property owner and the note holder notices of the delinquent and impending sale. However, if the assignments were not properly recorded or the servicer fails to act, the sales can be throw out.

Once all State and County law proceedings are followed and if the homeowner has not responded to the tax office, the tax office notifies all interested parties in the property, and a tax sale or tax auction date is set. The sale of the property for non-payment of taxes may be announced in the local newspaper, and/or notices are provides to the note holder. The term tax sale and tax auction are used interchangeably and have the same meaning, the terminology differs according to the county or state.

The tax sale auction typically occurs at the county court house, similar to a foreclosure sale. On the day of the sale, the person with the highest bid successfully is the winner. The bid amount is usually enough to pay off all unpaid taxes and other expenses, penalties, interest, fees and costs due to the listing. At that time, all rights of the initial homeowner cease to exist, except for the redemption rights. Right of redemption is the act of paying the delinquent taxes, plus penalties, interest, and fees, after the tax sale/auction has taken place, but before the property is officially transferred to the tax sale purchaser. So if the initial homeowner elect not to redeem the property, the tax sale purchaser would own the property free and clear after the redemption period expires, or has expired and the deed is recorded. Each state has their own redemption period once it has been acquired at a tax sale auction.

If the tax sale purchaser pays more than the delinquent taxes and cost of the tax sale , the excess if called: excess proceeds.

The new owner of a tax sale property does not assume the mortgage payments, but rather he mortgage is extinguished and the new purchaser may begin the eviction process.

If there are no interest in the property, or no one successfully bids on it, the parcel in question becomes the property of the municipality, township, village, or town. Often, they do with the property as they please. Usually, it is listed with a real estate company and an attempt is made to sell it at the market value. Most counties are no in the business to acquire properties; Instead they merely want to recover tax dollars owed. Even if that means selling acquired real estate.

Stamrecht BV Set-Up for a Severance Payment to Save Income Tax

195Setting up a stamrecht bv when you receive a severance payment in The Netherlands is meant to postpone and ultimately save income tax. Setting up a stamrecht bv can be complicated when you do not have the necessary knowledge of the pertinent tax and company law.

A stamrecht bv (“annuity company”) is a limited company (“besloten vennootschap” or “bv”) constituted according to Dutch law which has an annuity agreement with the former employee / owner. The company receives the severance payment and promises to make periodical payments in the future. Due to the progressive tax brackets, postponing income tax on a redundancy payment can lead to lower income tax when the severance payment is paid out at times when your income is lower. Since the cost of setting up a stamrecht-bv is fixed, it depends to a large extent on the amount of your severance payment if it is worthwhile to do so.

For setting up a stamrecht bv as a minimum you need the service of a public notary. The assistance of a specialised tax lawyer is recommended. Furthermore there is a large army of more and lesser competent advisors who offer an all-in service to set up a stamrecht bv. Apart from the set-up costs you will have annual expenses for the company register, bank expenses and expenses of an accountant if you cannot or do not want to do the administration of the company.

Now let’s have a closer look at when you would want to set up a stamrecht bv. First the tax savings. Let us assume that you receive a severance payment of 50,000 euro. At the current highest Dutch income tax bracket of 52% the tax saving of receiving periodical payments in times when your income is taxed at the second highest scale of 42% is 10% or 5,000 euro. This savings can be higher when your income at the time of receiving the payments is very low or when you emigrate to a country with a low income tax level.

In addition a stamrecht bv gives you more flexibility than other solutions. You decide where you invest your severance payment in, be it in savings, bonds, stocks, a loan or mortgage to yourself or using the money to set up your own business. And you also decide when you start paying out the annuity, when you stop them again or when you would want to change them.

There are a few upcoming changes in legislation which affect the stamrecht bv. First there is the abolishment of the background check of the owner and the approval from the ministry of justice on July 1, 2011 followed by the abolishment of the minimum capital requirement of 18.000 euro as per January 1, 2012. This will make the constitution of a company in general easier and less expensive (the charges of the ministry of finance are around 100 euro). Another change in legislation which is being discussed for years now but still highly uncertain is the introduction of a flat rate tax system. If this would result in a flat rate of about 35%, setting up a stamrecht bv would be highly attractive when the annuity payments would be received at the time this rate would be effective. On the other hand, the introduction of a flat rate system would probably the end of the stamrecht arrangement as there would be no need to defer taxes.

Now the cost side. The cost of an all-in service package for the set-up of a stamrecht bv ranges from under 1,000 euro to well over 3,000 euro. It will be clear that with the latter fee more than half of the tax savings will be wiped out immediately. So as a general rule a stamrecht bv only makes sense with severance payments of over 50,000 euros or higher when you take an expensive advisor.

Unfortunately the more expensive providers do not necessarily employ more competent advisors. They might just have a more luxurious office and spend a lot on marketing. Also take into account that with the crisis of 2008, this sector has been booming and providers multiplied in recent years.

As to the recurring, annual costs, reckon with at least 100 euro for bank and commercial register (the commercial register has a reduced rate for stamrecht companies) and an additional 400 euros if you want to outsource the administration. If you have a lot of activity in your company e.g. because of an active investment portfolio or entrepreneurial activities, the cost of administration can be considerably higher.

No Guarantees: Lower Taxes in Retirement?

194Many people assume that they will drop down at least a tax bracket once they retire. That assumption, similar to many assumptions about retirement, may not hold true when the actual event arrives. This article explores why it is not safe to assume that retirement tax rates will be lower than your current one.

First, several deductions that you have now will likely not be available once you retire. Consider your children. Will they be adults who have graduated from college when you stop working? If so, strike off education credits and dependent deductions you could normally take. Also, since you will no longer work, strike off your contributions to your retirement plan. Will your mortgage be fully paid when you retire? Strike off the deduction for that.

Here’s an additional consideration: retirees who primarily rely on Social Security for their income may be eligible to receive up to 50 percent of that income tax-free while those who have saved well for retirement will be taxed once they begin to take distributions. Our government may also decide that a tax increase is necessary as some future point. So, tax rates could actually increase.

If you have been responsible and have invested for retirement at a rate at which you feel comfortable, you would do well to examine how well your portfolio is sheltered from taxes. Some investments may shield your wealth better than others. Tax-deferred and tax-advantaged options should be considered.

Most people know about the tax-deferred options, including traditional IRAs and 401K plans. Such accounts allow investors to delay the payment of income taxes on the amount of the contributions made to- and generated in- them. However, taxes will be paid when withdrawals are made from these funds.

Tax-advantaged options, on the other hand, include Roth IRAs. No taxes are due upon withdrawal from these accounts if IRS procedures are followed correctly. Since taxes are not required for these withdrawals, it is possible to lower your retirement income taxes through proper usage of tax-advantaged accounts.

Given the advantages of tax-deferred and tax-advantaged retirement planning options, it might be wise to consider utilizing them both. Having both at your disposal in retirement gives you the flexibility to adjust your income source in the event of a tax increase or decrease. Your situation dictates whether utilizing both is advantageous.

The bottom line is that your marginal income tax rate in retirement may not fall as much as you think it will. You may be overlooking several exemptions and deductions that you will no longer receive when considering your retirement tax outlay. Careful planning can help you mitigate losing those deductions. Tax professionals and financial advisors can often help you steer clear of some of those tax issues.

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