How Can I Avoid Penalties?

A lot of people assume that they will have no penalties if they file an extension. But did you know that an extension only protects against the failure to file penalty? If you owe tax, you will incur the failure to pay penalty for paying after April 15, regardless of whether you filed an extension or not.

A lot of people also assume they are free and clear of penalties if they file on time and pay on time. But did you know that you could incur the underpayment penalty if you did not pay enough taxes during the year?

There are three main kinds of penalties:

1) failure to file penalty – if you do not file an extension or the tax return by April 15

2) failure to pay penalty – if you owe tax and do not pay by April 15, regardless of whether you filed an extension or not

3) underpayment penalty – if you do not pay at least 100% of the prior year’s tax or at least 90% of the current year’s tax during the year

You can avoid all three kinds of penalties if you are receiving tax refunds on your tax returns.

Let’s discuss how we can help you manage your taxes and avoid penalties through W-2 payroll tax withholdings and estimated tax payments.

What Are the Tax Consequences of Bitcoins And Other Cryptocurrencies?

There is growing interest in bitcoins, ethereum, litecoins, and other cryptocurrencies. This is fueled by the dramatic increase in the value of bitcoins and other digital coins in the past few years. There are many stories of people who bought early on and are now millionaires, at least on paper.

This leads to a very important question. What are the tax consequences of buying and selling bitcoins and other digital currencies?

On March 25, 2014, the IRS ruled that bitcoin will be treated as property for tax purposes, not as currency. This means that when digital currencies, like bitcoin, are sold, taxpayers must report the sale on their income tax returns as a capital gain or as a capital loss, similar to when stocks are sold.

If there is a loss on the sale of digital currencies, then up to $3,000 loss can be reported each year, until the total loss is applied.

The reporting of capital gain or loss gets particularly tricky and complex for the sale of digital currencies, especially if a bitcoin or ether is used to buy other digital currencies, like Ripple or Dash. How should the cost basis be calculated when one digital currency is exchanged for another?

For those who have not reported the sale of cryptocurrencies in the past, they ought to amend their prior tax returns to report the sale of bitcoins and other digital currencies.

On November 29, 2017, the IRS won a court ruling against Coinbase, that one of the largest U.S.-based cryptocurrency trading platforms must submit to the IRS information on taxpayers who traded more than $20,000 on a yearly basis.

For these reasons, people who bought and sold bitcoins and other digital currencies should see a tax professional, like an Enrolled Agent, to consult on and to report properly the sale of cryptocurrencies.

One tax resource that may help you keep track of capital gains and losses of your cryptocurrency trades is  Click here to sign up and generate capital gains reports.

What Is An Enrolled Agent?

You might have heard of a CPA. But what is an Enrolled Agent?
I get this question many times.

The easiest way I can explain this is by starting out to say that a CPA (Certified Public Accountant) is state-specific, since he is licensed by a particular state board. But an EA (Enrolled Agent) is licensed by the US Treasury, so he is able to practice in all 50 states.

A CPA is trained more for performing audits and for examining the books of a public company. But an Enrolled Agent specializes in only tax issues. So if you want someone who spends the majority of his time dealing with the IRS, preparing tax returns, and dealing with tax notices, then an Enrolled Agent is for you.

An Enrolled Agent is able to represent clients before all levels of the IRS and state tax agencies. So if you have a tax issue, you can count on an Enrolled Agent to handle that issue for you at the highest level of the IRS.

As a member of the National Association of Enrolled Agents, I am required to take 90 hours of continuing education every three years, and I am held to the highest ethical requirements.

Here is a link to a good article on what an Enrolled Agent is from the National Association of Enrolled Agents.

Do-It-Yourself vs. Tax Professional

With TurboTax and other do-it-yourself tax software out there, the question to ask is… What are the advantages and disadvantages of seeking the help of a tax professional?

Let’s take a look at the advantages and disadvantages of a do-it-yourself tax software which you can use at home. It costs less, perhaps – unless you get hit with interest and penalties by the IRS and the state tax agencies because of mistakes and omissions. You might learn new tax laws and rules, but why spend your weekend researching arcane tax laws and IRS publications when you can be out with friends, having a brunch at a nice neighborhood café.

That’s where the benefits of using a tax professional come into play. A tax professional has already spent years learning and applying tax laws to help maximize the tax deductions and credits you can take. With the money you pay an Enrolled Agent, he is motivated to avoid costly mistakes and get you the best possible outcome on your tax returns.

So avoid spending your precious life on something you can pay someone who is more experienced and more motivated. Death and taxes are unavoidable, but why work yourself to death to work on taxing issues all by yourself? Get the help you need by contacting John Ro.