What to do if you get a Letter from the IRS

Each year, the IRS mails millions of notices and letters to taxpayers for a variety of reasons. If you receive correspondence from the IRS here's what to do:

Don't panic. You can usually deal with a notice simply by responding to it. Do not ignore the letter!

Each notice has specific instructions on why they are writing and how to respond.  Read your notice carefully.

Your notice will likely be about changes they are proposing to your account, additional taxes you may owe, or an attempt to collect delinquent taxes.

If your notice says that the IRS is adjusting the information that you previously provided on a tax return, review the information and compare it with your original return for the year in question. If you agree with the notice, you usually don't need to reply unless it gives you other instructions or if you need to make a payment as a result of the correction.

If you don't agree with the notice, you need to respond. Write a letter that explains why you disagree and include information and documents to support your position. Mail your response along with a copy of the notice to the address on the contact stub. Allow at least 30 days for a response.

For most notices, there is no need to call or visit a walk-in center. If you have questions, call the phone number in the upper right-hand corner of the notice. Be sure to have a copy of your tax return and the notice with you when you call

Always keep copies of any notices you receive with your tax records.

Be alert for tax scams. The IRS sends letters and notices by mail and does NOT contact taxpayers by email or social media to ask for personal or financial information. If you owe tax, please call to find out what your options are.

Our CPA’s are highly experienced in responding to all varieties of IRS notices and would be happy to assist you with either understanding your notice, or  responding  to the notice on your behalf if you do not feel comfortable doing so yourself. Please contact our office today for assistance.

Do You Need to Make an Estimated Tax Payment?

If you are an employee, you probably have taxes withheld from your paycheck and never have to worry about making quarterly estimated tax payments. However, if you are self employed and don’t have any taxes withheld, or you don’t have enough tax withheld as an employee, you may need to make estimated tax payments throughout the year to avoid costly penalties.

You should pay estimated taxes if you expect to owe at least $1,000 in tax for the 2016 tax year, after subtracting your withholdings and refundable tax credits.  Even if you owe more than $1,000 when you file your 2016 tax return, you can keep yourself safe from penalties if your total withholdings and timely estimated tax payments equal at least 90% of your 2016 tax, or 100% of your 2015 tax (110% if your 2015 income exceeded $150,000).

You normally make estimated tax payments four times a year. The dates that apply to most people for 2016 are April 18, June 15 and Sept. 15. There is one last payment on Jan. 17, 2017. 

If you filed your 2015 tax return with AA Tax CPA and owe estimated tax payments, we included vouchers to mail to the IRS with payments throughout the year. Federal estimated tax payments can also be paid online at www.irs.gov/payments.

IRS Requirement to Take Compensation as an S Corp Owner

Why S Corp Owners Need To Be On Payroll

If you’re a business owner, it’s common to think you can pay yourself whatever you want, whenever you want. It’s your business after all, right?

The reality is not so simple if your business has elected S Corporation status with the IRS, and you perform services for your business. The IRS actually requires that active S Corporation owners take “reasonable compensation” and report their wages on a Form W-2 at year-end.

Why Does the IRS Care?

As an S Corp owner, you are not required to pay Social Security and Medicare taxes on your distributions.  But you are required to pay these taxes on a W-2 salary. The IRS wants to collect these taxes on your compensation.

Your services to your S Corp are done as an employee, for which you should be paid a wage. You may continue to take owner distributions as a result of profit generated by the company, but only after paying yourself a reasonable wage.

What Is Reasonable Compensation?

This is an important term to know. The IRS expects you to pay yourself a market value salary for your services.  Consider what you would pay someone else to do your job for you. This salary amount can be based on market data, industry norms, and your own experience. This remains a grey area, and AA Tax CPA can help you determine a reasonable salary.

What’s the Worst that Could Happen?

The biggest risk you can take as an S Corp owner-employee is to take no salary at all, especially while collecting tax-free owner distributions. This is a red flag for the IRS and increases your chance for an audit. If faced with an audit, the IRS can reclassify ALL of your distributions (and more) as wages, thus requiring more Social Security and Medicare taxes to be paid, not to mention steep penalties and interest. Therefore it’s best for you to be proactive and decide your own reasonable salary.

Need More Time to File Your Taxes?

The April 18 tax deadline is coming up. If you need more time to file your taxes, you can get a six-month extension from the IRS.

More time to file is not more time to pay. An extension to file will give you until Oct. 17 to file your taxes. It does not, however, give you more time to pay your taxes. Estimate and pay what you owe by April 18 to avoid a potential late filing penalty. You will be charged interest on any tax that you don’t pay on time. You may also owe a penalty if you pay your tax late. Interest is normally charged on any unpaid tax.

If you need an extension, but think you might owe tax for 2015, contact AA Tax CPA today for help!