Tag: penalty

Did You Claim The Employee Retention Credit? You Might Receive A Letter From The IRS.

The Employee Retention Credit came about as a result of mandatory shutdowns during the Covid pandemic. It was a credit meant to help businesses who at the time had paid employees, but who were forced to shut down. The ERC covered the periods after March 19, 2020 and before January 1, 2022. For a complete eligibility list go here.  

In December of 2023 the IRS started looking into possible fraudulent claims of the credit. While businesses that claimed the credit without being eligible may face interest and penalty charges, the IRS acknowledges that many businesses claimed the credit as a consequence of “aggressive marketing” by promoters looking to benefit from businesses claiming the credit. As a result, the IRS is allowing businesses to withdraw from claiming the credit if they haven’t received payment or if they’ve received a check but haven’t cashed it yet. If this is your case, you can go here to start the withdrawal process. For those who have received payments, the IRS plans to release a voluntary disclosure program.

At the moment the IRS’s main concern is businesses who claimed the credit, but which did not exist during the eligibility periods, and those that did not have any paid employees. According to the IRS, the number of businesses set to receive disallowance letters is around 20,000.

If you were persuaded to claim the credit but aren’t sure if you were eligible to claim it, review the eligibility list. If you don’t qualify for the credit and haven’t received payment, or if you received a check but haven’t cashed it, consider starting the withdrawal process. The IRS assures claimants that the tax agency will act if the credit was never claimed.

What Happens When You Don’t File A Tax Return?

For many, filing a tax return is a requirement. It all boils down to a person’s filing status, age, and income.

So, what happens if you’re required to file but don’t?

If you’re due a refund you have three years to file in order to claim it. You’ll still be required to file your return; however, if you file after the three-year limit, you will no longer be eligible to receive that refund.

If you owe taxes and fail to file, the consequences can be more severe. The U.S. tax system is a pay-as-you-go system. We’re expected to pay our taxes as we earn our income, either through withholding or estimated payments. Every day we don’t file or pay our taxes past the tax deadline, penalties and interest accrue on that amount owed. We’re allowed to request an extension to file by October, but there is no extension for paying.

Section 6651(a)(1) of the Tax Code allows for a 5% “Failure to File Penalty” every month it isn’t filed. Section 6651(a)(2) allows for a “Failure to Pay Penalty” of .5% every month the tax isn’t paid. As of the 2nd Quarter of 2023, interest was kept at 7% for individuals (compounded daily).

It’s possible for the IRS to file a “substitute” return on your behalf. The IRS files such return using third-party reports such as W2s, 1099s, and any other tax documents submitted to them. You may lose out on credits and deductions if a substitute return is filed for you, potentially increasing your tax liability.

For those delaying filing a tax return because they owe, the IRS suggests filing anyway and requesting to be put on a payment plan. You can apply for a payment plan online or by calling the IRS at 800-829-1040.

Early Retirement Distribution Penalty- Explaining The Medical Exemption

A retirement distribution is considered early when it is distributed before the taxpayer turns 59 ½. In this case there is no 10% tax penalty attached to this distribution.

If a distribution is taken before turning 59 ½, not only is the amount taxable but there is an additional 10% tax penalty. The 10 percent penalty is calculated as 10 percent of the distribution. So, if you take out $5,000 from your 401K before turning 59 ½, you will have to include that amount to your other taxable income, as well as pay an additional $500 as penalty.

There is a list of exemptions that release taxpayers from that 10% penalty. One of those exemptions is the medical exemption, which is the subject of this post.

The 10% penalty is not imposed on taxpayers if early retirement distributions were used to pay for qualified medical expenses of the taxpayer, spouse, or dependent. Such medical expenses must not have been reimbursed at any point.

According to the Internal Revenue Code (72(t)2(B)), distributions must “not exceed the amount allowable as a deduction under section 213 to the employee for amounts paid during the taxable year for medical care (determined without regard to whether the employee itemizes deductions for such taxable year).”

Section 213 is the section that tells us that we can only itemize the medical expenses that exceed 7.5% of our adjusted gross income. For example, a taxpayer with an AGI of $45,000 can only itemize medical expenses in excess of $3,375.

As 72(t)2(B) states though, a taxpayer doesn’t have to itemize to qualify for the medical exemption to the early distribution penalty.

Using our previous example, let’s assume the taxpayer with an AGI of $45,000 had medical expenses of $7,000 (and did not itemize). According to section 213, she can only claim $3,625 in medical expenses ($7,000-$3,375).

In order to qualify for the medical exemption, her distribution must not have been more than $3,625.

As with any other claim on the 1040, burden of proof lies with the taxpayer. Records must be kept for every medical expense that qualifies you for the exemption.