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h&r block vs. turbotax

The start of a new year means it’s time to file your federal tax return. Many people stress about filing taxes, but there are a number of tax filing services to make the process easier. Two of the most well-known services are H&R Block and TurboTax. Each is known for offering a friendly user experience. In fact, they both provide information along the way so you understand what you’re doing and they offer affordable filing options. This makes them both viable tax filing options, though which is best for you will vary based on your needs. If you have questions about how to minimize your taxes, consider working with a financial advisor.

A Quick Look at H&R Block

H&R Block has provided consumer tax filing service since 1955. It’s become one of the most popular filing services since then, because it combines simple tools and helpful guidance. That’s useful whether you’ve never filed taxes or whether you’ve been filing for decades. Of course, tools and guidance come at a price. H&R Block currently offers four online filing options. You can see the choices and their prices and features below:

H&R Block Filing Options
Filing OptionCostsFeatures
H&R Block Free Online– Federal: Free
– State: Free
– Best for new filers or simple tax returns
– Supported forms include 1040 with some child tax credits
H&R Block Deluxe– Federal: $60
– State: $50
– Best for maximizing your deductions
– Includes all free features plus forms for homeowners
– Allows you to itemize
H&R Block Premium– Federal: $90
– State: $50
– Best for investors and rental property owners
– All previous features, plus accurate cost basis
– Includes Schedule C-EZ, Schedule D, Schedule E, Schedule K-1
H&R Block Self-Employed– Federal: $120
– State: $50
– Best for small business owners and the self-employed
– All previous features, plus Schedule C

The cheapest filing option is the free option. It lets you file your federal return and all state returns for free. The catch is that this options works for just basic returns. The major forms that it supports are the 1040, Schedule EIC for the earned income tax credit and Schedule 8812 for the Additional Child Tax Credit. You can also use this form with some other common tax forms: Form 1099 (B, DIV, INT and R), 1098 (E and T) and 1095 (A and B). Filing other forms will require you to upgrade to a paid plan.

Paid plans range from $60 to $120 for federal filing. All state filing costs $50 per state with the paid plans. When it comes to these paid plans, most filers can get away with the Deluxe option, which costs $60 and includes software for maximizing tax deductions. If you do freelance work or own a small business, you’ll likely need to upgrade to the Self-Employed plan, which costs $120 at a base level.

One standout feature for H&R Block is its physical locations. If you don’t want to file your return online, you can stop by one of its 10,000 tax offices in the U.S. The tax professionals there will be able to walk you through your filing.

Filing in person starts at $69 for federal returns. Alternatively, you can work with an H&R Block tax professional without visiting a store by paying for the online tax professional service, which allows you to upload your tax documents and then have a tax pro do the work for you. There’s also Tax Pro Review, a paid service where a tax professional will review your return for you before filing.

A Quick Look at TurboTax

TurboTax has been around since the mid-1980s. Part of its popularity is due to the fact that it’s owned by Intuit. Intuit also makes a software called Quickbooks, which millions of companies use to manage their accounting. But TurboTax is also popular because it offers a user-friendly design and straightforward step-by-step guidance.

Like H&R Block, TurboTax has a free filing option that allows you to file your federal return and one state return at no cost. However, the free option only supports simple returns with form 1040. If you want to itemize your deductions with Schedule A or if you need to use any other forms, you will need to upgrade to a paid plan.

There are three paid TurboTax plans that run from $60 to $120 for federal filing. State filing is always $50 per state with the paid plans. The free option includes one free state return. Here’s a breakdown of your options with TurboTax:

TurboTax Filing Options
Filing OptionCostsFeatures
TurboTax Free Edition– Federal: Free
– State: Free
– Best for simple returns using Form 1040
– Comes with easy import, error check, refund explanations, deductions for dependents
TurboTax Deluxe– Federal: $60
– State: $50
– Best for homeowners and for maximizing deductions
– Comes with all previous features, plus charitable donations calculator
TurboTax Premier– Federal: $90
– State: $50
– Best for investors and rental property owners
– Comes with all previous features
– Focuses on investment and rental property income, accurate stock reporting, refinancing deductions
TurboTax Self-Employed– Federal: $120
– State: $50
– Best for self-employed, independent contractors, freelancers, consultants and small business owners
– All previous features, plus access to self-employment tax experts, maximizing business deductions

As with H&R Block, TurboTax’s free option supports the 1040 with some child tax credits. The Deluxe option will be enough for most filers if they want a paid option, though. It costs $60, which is the same price as H&R Block’s Deluxe plan. You get slightly more features for that additional cost, however. Small business owners and self-employed individuals will need to upgrade to the Self-Employed option, which costs $120 for a federal return. TurboTax also frequently runs sales on its services and products during tax season.

TurboTax doesn’t have any physical locations like H&R Block, but it does provide access to tax experts like CPAs and EAs. It will cost extra for you to get access to an expert, but there are four plans available, corresponding to the four plans listed in the table above. For only expert advice, plans run from $80 to $200 for federal returns. But if you want full expert service, plans will cost you anywhere from $130 to $290 for federal returns. State filing still costs $50 per state with each of these versions.

H&R Block vs. TurboTax: Cost

h&r block vs. turbotax

Cost is always a consideration when you choose a tax filing service. H&R Block and TurboTax are the two most comprehensive online services available and likewise they are also some of the most expensive. However, while H&R Block was once cheaper than TurboTax, the companies are now nearly perfectly aligned when it comes to cost.

As mentioned, both services offer a free option, covering simple returns. You can also file some additional schedules and forms with this option. However, H&R Block does cover more forms and schedules with its free option. It also allows you to file multiple state returns for free. By contrast, the free plan from TurboTax includes only one free state return. This all gives H&R Block a slight advantage if you qualify for the free option.

It’s great if you can file your taxes for free, but the average filer will need to upgrade to another option. The Deluxe option is enough for many filers. Both Deluxe options include deduction-finding software, help with charitable donations and access to tax financial experts through online chat.

There are a couple of big differences between the options in the forms that they support. TurboTax’s Deluxe option supports Schedule SE, which allows you to file self-employment taxes. It also allows you to file Schedule C and Schedule C-EZ if you have business income to report but do not have any expenses to report.

If price is your primary concern, you may want to consider a cheaper service like TaxAct. TaxAct is well-known for being affordable but it doesn’t quite provide the same level of simplicity and educational material that these two services offer.

H&R Block vs. TurboTax: Comparing Free Options

TurboTax’s Deluxe option is the more comprehensive option for the average filer, but let’s briefly consider the free options again.

H&R Block and TurboTax both offer a free option for filers with simple returns. You can often use those options if you don’t own a home, you have no investment income other than simple dividends or interest and you don’t have rental properties or business expenses.

You cannot use either form if you itemize deductions. However, there are a few deductions available with the free plans. Notably, you can claim the EIC and Additional Child Tax Credit. H&R Block also includes Schedules 1 through 6, unlike TurboTax.

So if your finances are simple, the biggest consideration is exactly what forms you need to file, because H&R Block includes more forms and schedules with its free plan.

H&R Block vs. TurboTax: User Friendliness

Both of these services are known for their ease of use, but TurboTax is generally the more user-friendly of the two. This is generally true for both desktop and mobile users.

TurboTax’s interview-style approach will guide you through the filing process with simple and straightforward questions. There is minimal tax jargon. H&R Block is also user-friendly, but its questions and explanations are not always as clear as you would hope.

The filing process with TurboTax also includes encouraging phrases throughout. This isn’t a necessary feature, but taxes are stressful for many people. Seeing, “You can do this,” throughout the process may help to reduce some anxiety.

Another important consideration is how easy it is to upload documents. Both services do well on this front. H&R Block and TurboTax both let you upload your W-2 by taking a picture of it. Both services allow you to import your previous returns no matter which tax service you used (as long as you have a PDF version of the return). They also make it easy to fill out your state return after going through your federal return. Your information quickly transfers so you don’t waste time retyping everything.

Bottom Line

h&r block vs. turbotax

So, who wins? Well, it depends what exactly you’re looking to do. H&R Block covers more filers with its free option. The two Deluxe options are the same in terms of price, but TurboTax’s Deluxe option supports more forms that self-employed, freelance and contract workers may need. Both services are user-friendly but TurboTax is slightly simpler with more straightforward language.

Beyond these factors, which tax filing service you choose may come down to personal preference. Some people prefer one over the other because they simply like the way it looks. They might also choose H&R Block so they can have the option of filing at a physical location.

Of course H&R Block and TurboTax are not the only two tax filing services. You may want to consider other options like TaxAct or TaxSlayer if you’re looking for a budget option. Credit Karma also allows you to file entirely for free.

Tips for Choosing a Tax-Filing Service

  • Tax season is a good time to take stock of your overall financial picture. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • TurboTax and H&R Block are two of the most well-known tax-filing services. There are other great services to consider, though, so make sure to shop around. Check out our list of the best tax filing software, as well as the best free online tax software.

Photo credit: ©iStock.com/AndreyPopov, ©iStock.com/Xesai, ©iStock.com/mediaphotos

Sours: https://smartasset.com/taxes/hr-block-vs-turbotax

5 Hidden Ways to Boost Your Tax Refund

Updated for Tax Year 2021 / October 17, 2021 11:02 AM


OVERVIEW

Here are five tried-and-true ways to reduce your tax liability at tax time. Pay no more than you owe, or even increase your tax refund.


For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.


 

boost tax refund


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While Americans may disagree on how the government spends their taxes, at tax time, many of us are looking for ways to pay no more than we owe — or even boost our tax refunds. These strategies go beyond the obvious to give you tried-and-true ways to reduce your tax liability.

1. Rethink your filing status

One of the first decisions you make when completing your tax return — choosing a filing status — can affect your refund's size, especially if you're married. While approximately 96% of married couples file jointly each year, a joint return is not always the most beneficial option.

  • Married Filing Separately status often requires more effort, but the time you invest can offer tax savings — under the right conditions. For example, if one spouse has a lot of medical expenses, such as COBRA payments resulting from a job loss, computing taxes individually might allow for a larger deduction.
  • The Child Tax Credit is available to separately filing spouses. For 2020, the credit is $2,000 per child under 17 years old in 2020, and it can now be claimed by a separate filer with less than $200,000 in adjusted gross income (it's $400,000 for joint filers).
  • For your 2021 tax return that you will prepare in 2022, the Child Tax Credit is expanded by the American Rescue Plan raising the per-child credit to $3,600 or $3,000 depending on the age of your child and includes 17 year-olds. The credit is also fully refundable for 2021. To get money into the hands of families faster, the IRS will be sending out advance payments of the 2021 Child Tax Credit beginning in July of 2021. For updates and more information, please visit our 2021 Child Tax Credit blog post.

Choosing to file separate returns can have its drawbacks, such as losing certain deductions available to joint filers. You'll need to weigh this carefully to maximize your refund potential. Also, both spouses must take either the standard deduction or itemize their deduction. You can’t mix-and-match between the two returns.

  • Calculating your taxes both ways will point you in the higher refund direction.
  • When you use TurboTax, we’ll do this calculation for you and recommend the best filing status.

Unmarried taxpayers who claim a qualifying dependent can often cut their tax bills by filing as Head of Household if they meet the requirements.

  • This filing status enjoys a higher standard deduction and more favorable tax brackets than filing as Single.
  • A qualifying dependent can be a child you supported financially and who lived with you for more than six months. Or, it can be an elderly parent you supported.

Many taxpayers who care for elderly parents don't realize they can claim Head of Household status. If you provide more than half your parent’s financial support — even if your parent doesn’t live with you — you can file as Head of Household.

2. Embrace tax deductions

Many deductions exist that you may not be aware of, and several of them are pretty commonly overlooked. The deductions you qualify for can make a significant difference on your tax refund. They include:

  • State sales tax – Using the IRS's calculator, you can determine how much of your state and local sales taxes you can deduct.
  • Reinvested dividends – This one technically isn't a deduction, but it can reduce your overall tax liability. When you automatically have dividends from mutual funds reinvested, include that in your cost basis. This way, when you sell shares, you might reduce your taxable capital gain.
  • Out-of-pocket charitable contributions – Big donations aren't the only way to get a write-off. Keep track of the qualified small expenses too, like ingredients for the yummy cake that you donated to the bake sale. You might find yourself surprised by how quickly a few charitable expenditures here and there can add up.
  • Student loan interest – Even if you didn't pay this yourself, you can take the deduction for it as long as you are the one who is obligated to pay. Under new guidelines, if someone else pays the loan, the IRS views it as if you were given the money and used it to pay the student loan. If you meet all of the requirements then you would be eligible for the deduction.
  • Child and dependent care – For 2020, up to $6,000 of qualifying expenses can be used for the Child and Dependent Care Credit.

For 2021, the American Rescue Plan brings significant changes to the amount and way that the child and dependent care tax credit can be claimed. The plan increases the amount of expense eligible for the credit, relaxes the credit reduction due to income levels, and also makes it fully refundable.  This means that, unlike other years, you can still get the credit even if you don’t owe taxes.

So, for tax year 2021 (the taxes you file in 2022):
  • The amount of qualifying expenses increases from $3,000 in 2020 to $8,000 for one qualifying person and from $6,000 in 2020 to $16,000 for two or more qualifying individuals
  • The percentage of qualifying expenses eligible for the credit increases from 35% to 50%
  • The beginning of the reduction of the credit is increased from $15,000 in 2020 to $125,000 of adjusted gross income (AGI).

Also for tax year 2021, the maximum amount that can be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits is increased from $5,000 to $10,500.

Although these new provisions only apply to tax year 2021 (the taxes you file in 2022), they can significantly improve your tax return’s bottom line if you’re a working parent responsible for the cost of the care for your dependents.

  • Earned Income Tax Credit, or EITC – This credit helps families with low and moderate income levels. It's meant to benefit working families with children. If you have three or more qualifying kids, the credit could be worth up to $6,728 for you for tax year 2021 ($6,660 in 2020) — and could net you a refund even if you don’t have any tax.
  • State income tax paid on last year’s return – If you paid money on your state income tax return last year, you can add that to any other state income tax, up to $10,000, and use it as an itemized deduction.
  • Certain jury duty fees – If your company paid you while on jury duty and your employer required you to hand over your jury duty pay from the court; you can claim the amount that you handed over as an adjustment to your income.
  • Medical miles - Subject to an overall AGI threshold for total medical expenses and worth 20 cents per mile in 2020 and 2021. The threshold is any qualifying unreimbursed medical expenses that exceed 7.5% of your AGI.
  • Charity miles - Fully deductible at 14 cents per mile in 2020 and 2021. So, if you drove 50 miles per week to volunteer for a charity, that’s an additional $364 deduction:
    • 52 weeks/year x 50 miles/week = 2,600 miles you drove in a year
    • 2,600 miles x $0.14/mile = $364

It’s important to keep good records for your deductions especially when you don’t receive some type of receipt as with some charitable contributions and charitable or medical miles. Nothing fancy is required — even a spiral notebook in your glove compartment is fine. Make sure to keep track of:

  • The date, miles and medical or charitable purpose of each trip
  • The market value of any in-kind donations, such as clothing and household goods
  • The dollars you spend in order to do charity work — for example, when you bake for a fundraiser the cost of your ingredients is deductible, but the value of the time you spent baking isn't

3. Maximize your IRA and HSA contributions

You have until the filing deadline (unless it's delayed due to a weekend or holiday) to open or contribute to a traditional IRA for the previous tax year.  That gives you the flexibility of claiming the credit on your return, filing early and using your refund to open the account.

  • Traditional IRA contributions can reduce your taxable income. You can take advantage of the maximum contribution and, if you're at least 50 years old, the catch-up provision can add to your IRA.
  • Although contributions to a Roth IRA don't give you a deduction, they still qualify for the valuable Saver's Credit if you meet income guidelines.
  • If you're self-employed, you have until October 15 to contribute to a certain self-employed retirement plans, provided that you timely file an extension. If you don't file for an extension, the regular filing deadline for that year is the deadline for most contributions.

Pre-tax contributions to a Health Savings Account (HSA) can also reduce your taxable income. You can make these up until the filing deadline as well. Certain requirements must be met in order to open and contribute to an HSA:

  • You must be enrolled in a health insurance plan that has high deductibles that meet or exceed the IRS’s required amounts.
  • That plan must also impose the maximum annual out-of-pocket cost ceilings that meet the IRS’s limitations.

You won’t be able to participate in an HSA if any of the following are true:

  • You have other “first-dollar” medical coverage
  • You enroll in Medicare
  • You are claimed as a dependent on another taxpayer’s return

Read this article to learn more about HSA requirements and how these accounts work.

4. Remember, timing can boost your tax refund

Taxpayers who watch the calendar improve their chances of getting a larger refund. Look for payments or contributions you can make before the end of the year that will reduce your taxable income. For example:

  • If you can, make January's mortgage payment before December 31 and get the added interest for your mortgage interest deduction.
  • Schedule health-related treatments and exams in the last quarter of the year to boost your medical expense deduction potential.
  • This could be the time to make some charitable contributions — but make sure it’s a qualified charity and be sure to keep track of your expenditures in your records.
  • If you’re self-employed, look at any purchases you’ll need to make that can qualify for deductions. Buy things like office equipment and software before the end of the year to help boost your refund.
  • If you are able to claim the home office deduction, you can even deduct the cost of painting your home office if you want to start the new year with a fresh new look in your workspace.

5. Become tax credit savvy

Man holding a stack of 100 dollar bills

Tax credits usually work better than deductions as refund boosters because they're a dollar-for-dollar reduction of your taxes. If you get a $100 credit, you get $100 off your taxes. Many Americans leave money on the table when it comes to claiming tax credits.

The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. For tax year 2020, the CAA allows taxpayers to use their 2019 earned income if it was higher than their 2020 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC). For 2021, taxpayers can use either their 2021 or 2019 income to maximize the credit.

If you're a college student or supporting a child in college, you may be eligible to claim valuable education credits.

  • The American Opportunity Credit is refundable up to $1,000. This means you could receive as much as $1,000, even if you don't have a tax bill. The total credit is $2,500 per student and applies only to funds paid towards the first four years of qualified undergraduate higher education expenses.
  • If you're in graduate school or beyond, you may be eligible for the Lifetime Learning Credit. You can claim 20% of your qualified costs up to $10,000, or a maximum of $2,000 per tax return, depending on your income.

Tax credits for energy-saving home improvements can also keep more money in your wallet throughout the year and at tax time.

  • The credit for 2020 through 2022 is up to 26% of the cost of certain qualified energy expenditures. The credit drops to 22% for 2023 and then goes away completely. That means if you installed solar panels at a cost of $20,000, your total credit is $5,200 in 2021 or $4,400 in 2023.
  • Any portion unused in 2021 carries over to 2022.
  • That carryover doesn’t apply to the credit for electric vehicles, but the IRS is still offering up to $7,500 per qualifying vehicle for 2021, subject to manufacturer sales limits. The credit begins to phase out once each manufacturer has sold more than 200,000 qualifying vehicles.

Remember, with TurboTax, we'll ask you simple questions about your life and help you fill out all the right tax forms. Whether you have a simple or complex tax situation, we've got you covered. Feel confident doing your own taxes.

All you need to know is yourself

Just answer simple questions about your life, and TurboTax Free Edition will take care of the rest.

For Simple Tax Returns Only

Get more with these free tax calculators and
money-finding tools

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sours: https://turbotax.intuit.com/tax-tips/tax-refund/5-hidden-ways-to-boost-your-tax-refund/L0AZGnJuS
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You can check the status of your Form 1040-X, Amended U.S. Individual Income Tax Return using the Where's My Amended Return? online tool or by calling the toll-free telephone number 866-464-2050 three weeks after you file your amended return. Both tools are available in English and Spanish and track the status of amended returns for the current year and up to three prior years.

When using either tool, you must enter your taxpayer identification number, such as your social security number, along with your date of birth, and ZIP code to prove your identity. Once authenticated, you can view the status of your amended return across three processing stages -- Received, Adjusted, and Completed.

The online tool includes an illustrated graphic that visually communicates where your amended return resides within the processing stages. As a reminder, amended returns take up to 16 weeks to process. It can take up to three weeks from the date you mailed it to show up in our system. There’s no need to call the IRS during that three-week period unless the tool specifically tells you to do so. 

Please note: Due to COVID-19 processing delays, it’s taking us more than 20 weeks to process amended returns.

Sours: https://www.irs.gov/faqs/irs-procedures/amended-returns-form-1040x/amended-returns-form-1040x-3
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Selling on Etsy & Your Taxes

Updated for Tax Year 2021 / October 16, 2021 10:25 AM


OVERVIEW

Selling your kid's old bicycle is not likely to cause any tax consequences, but when you sell crafts, vintage or specialty items on websites like Etsy, you must report and pay taxes on your net income. You will also likely need to pay self-employment tax on your profits, and in some locations, you may also be responsible for charging and collecting sales tax.


Woman making jug on a pottery wheel

Paying federal and state income tax on Etsy income

If you sell items on Etsy, you must pay income tax on your income—usually, the total amount you earned by selling your products, less your business expenses. Etsy reports your gross income to the IRS on Form 1099-K, but even if you don't receive a 1099-K, you must report Etsy sales income on your tax return. If your state has income tax, you must pay state income taxes on the net income from your Etsy sales as well.

Deducting business losses from Etsy sales

If you sell on Etsy for profit as a business, you can deduct business expenses like:

  • Cost of materials
  • Advertising
  • Shipping

These can be deducted even if they exceed the money your business earned. If your business expenses are greater than your Etsy income, you'll have a business loss from your sales, which you can then deduct from any other income you have—even from another job or business. This deduction can reduce your taxable income.

Business expenses if your business is a hobby

If your Etsy selling is considered a hobby by the IRS then you cannot take business loss deductions to directly reduce your selling income. For tax years prior to 2018, you take them as an itemized deduction on Schedule A. For tax years beginning with 2018, you will not be able to reduce your hobby income by any expenses. Therefore, most taxpayers will try to avoid having their Etsy selling being classified as a hobby.

You are more likely to avoid hobby classification if you run the operation in a businesslike manner, depend on the income from the business, keep precise business records and show a profit in three out of five years.

Paying self-employment tax

If your total net income from Etsy sales is $400 or more, you must also pay self-employment tax on the income. Self-employment tax is comprised of Social Security and Medicare taxes — the percentage that would normally be withheld from your paychecks as an employee, plus the percentage your employer would have contributed.

When you're a self-employed individual and your income is less than $200,000 ($250,000 if filing jointly), you're responsible for paying both types of taxes yourself. As of 2021, this means a total of:

  • 12.4% of the first $142,800 you earn for Social Security tax
  • 2.9% of your total income for Medicare

If your income is greater than this amount, then you will likely be subject to an additional Medicare tax of 0.9%.

If your income is considered a hobby, then it will be subject to income taxes but not to self-employment taxes.

Charging, Collecting and Paying Sales Tax

Some state and local governments charge sales taxes—usually a percentage of the value of each sale. In many cases, it’s the responsibility of the online  seller to collect this tax from the buyer and send it on to the taxing authorities.

Sales tax laws are not the same in each jurisdiction, so make sure to research the rules in your area.

Don’t worry about knowing which tax forms to fill out when you are self-employed, TurboTax Self-Employed will ask you simple questions about you and your business and give you the business deductions you deserve based on your answers. TurboTax Self-Employed uncovers industry-specific deductions. Some you may not even be aware of.

Perfect for independent contractors and small businesses

Find more tax deductions so you can keep more of the money you earn with TurboTax Self-Employed.

Get more with these free tax calculators and
money-finding tools

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sours: https://turbotax.intuit.com/tax-tips/self-employment-taxes/selling-on-etsy-your-taxes/L27I196Wu

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Don’t Pay an IRS Penalty Without Looking Into Penalty Relief

The IRS doesn’t abate the vast majority of penalties. Why? Probably because people don’t know to ask for penalty relief – or it may seem lik­e it’s not worth the time or effort. Here’s why it is worth it.

The IRS uses penalties to encourage us to follow the rules and remain in compliance – and it uses them a lot. Each year, the IRS assesses tens of millions of penalties totaling billions of dollars. But the IRS also provides several options to get penalties removed, or abated, for people who qualify.

The most common IRS penalties are for not filing and not paying

There are almost 150 penalties in the Internal Revenue Code, but a few common penalties make up 74% of all penalties. The most common penalties are:

  • Failure to pay penalty – 56% of all penalties, imposed if you don’t pay taxes on time
  • Failure to file penalty – 14% of all penalties, imposed if you don’t file a return on time
  • Failure to deposit penalty – 4% of all penalties, imposed if a business doesn’t pay employment taxes on time, or pays them incorrectly

A frequently encountered nuisance penalty is the late-filing penalty for partnerships and S corporations. The estimated tax penalty is another common penalty that taxpayers often dispute by providing an exception when filing the tax return.

Reasons the IRS will remove penalties

You can request penalty abatement for the most common penalties using four reasons:

1. Statutory exception: proving a specific authoritative exclusion to the penalty

Statutory exceptions are uncommon and are easily explained to the IRS, mostly at tax filing. Examples include disaster relief or combat zone relief.

2. IRS error: documenting that the error was the result of reliance on IRS advice

This penalty relief argument is typically unsuccessful and isn’t used much. You must have documented erroneous advice from the IRS that you reasonably relied on, and the IRS doesn’t routinely put tax advice in writing. The Internal Revenue Manual states that the IRS also allows penalty relief based on erroneous oral advice, but in practice, this is rarely seen.

3. Reasonable cause: providing a valid reason that you couldn’t comply based on your facts and circumstances

More commonly, people try to argue that they relied on the erroneous guidance of their tax software or tax professional. This type of argument falls under reasonable cause.

To successfully present a reasonable cause argument for late filing and payment, you must demonstrate that you exercised ordinary business care and prudence but couldn’t comply. You must also demonstrate that your noncompliance was not due to willful neglect.

Most people haven’t traditionally been successful with reasonable cause arguments before the IRS, especially in court. In reality, most penalty abatement determinations never get to court. Most are administrative determinations made by the IRS.

To be successful in reasonable cause determinations, you’ll need to make sure that the IRS considers all your facts and circumstances. If you get a penalty abatement denial letter that doesn’t seem to address all the facts and arguments presented in your penalty abatement request, should request an appeal of the determination.

4. Administrative waiver: taking advantage of a provision that facilitates effective tax administration

The IRS can provide administrative relief from a penalty under certain conditions. The most widely available administrative waiver is first-time penalty abatement (FTA).

FTA can be used to abate the failure to file, failure to pay, and failure to deposit penalties for one tax period when you have a clean compliance history for the past three years. You can use FTA for penalties on Form 1040, Form 1120, and payroll and pass-through entities.

FTA is the easiest of all penalty relief options. You can request it by calling the toll-free number on your IRS notice, or your tax professional can call the dedicated tax pro hotline or compliance unit (if applicable) to request FTA for any penalty amount.

Learn more about how to handle IRS penalties, or get help from a trusted IRS expert.

Sours: https://www.hrblock.com/tax-center/irs/audits-and-tax-notices/penalty-abatement-realities-may-not-aware/
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