We’re not in Kansas anymore… at least not if Kansas is a place where doing your taxes is as simple as typing your income on a dotted line and hitting “enter.”
As technological advances attempt to make our daily lives easier, they sadly make our taxes a bit harder (along with an ever-changing government body and their newest legislation). Globalization and the rise of the gig economy have made reporting income much more tricky.
And… this means more frequent clashes with the IRS.
If you’ve been reading any of my writings recently, you’ll recall that I’m covering the top ten most common taxpayer disputes with the IRS (and how to resolve them) in three parts. Consider this as part two of our three-part “series” on this topic, where we up the complexity level of each IRS conflict.
Here are a few of the more technical disputes related to reporting income that can trip up even the savviest of myLong Island clients.
- Dispute #4: Foreign Income Reporting
If you’ve worked abroad, invested in foreign markets, or had a little cash flow from overseas – a word of caution: foreign income reporting issues can hit like a missile strike. As in, you feel quite far away and safe from the IRS’s reach, and the next day you’re facing a 10K fine for failing to report your foreign financial assets.
As an example, if you’re a graphic designer freelancing for clients from Germany and Australia, every cent you earn from these international clients needs to be reported to the IRS. Yes, even if you yourself are an expat living in Germany, and the money never touches a U.S. bank account. Why? Because the IRS requires that all U.S. citizens report their worldwide income, no matter where it’s earned.
Besides income, any foreign assets worth 10K or more must be reported to the U.S. Treasury Department. Now, to make that a little easier to swallow, you can claim a few benefits from living abroad, specifically the foreign earned income exclusion and foreign tax credit, but obviously, you’ll only get them by filing a U.S. return.
But slipping past the IRS is NOT an option, even though you might feel quite under their radar in your little German cottage. With their global data-sharing agreements and advanced tracking systems, they WILL catch on.
- Dispute #5: Worker Classification
The lines between employee and independent contractor are blurring, leading to heated disputes between businesses and the IRS. If you’re an employer, misclassifying workers can have significant tax consequences for you (wage law violations, unpaid employment taxes, I-9 violations, etc).
The main difference between employee and contractor is based on controlling interests with the work being performed: type and amount of control.
- Behavioral Control – How much control does the company have over how the worker does his or her job? Does the worker have to follow certain procedures or practices?
- Financial Control – This is the level of control the business has over the worker’s expenses, supplies, or how they are paid.
- Type of Relationship – This relates to employee-type benefits such as insurance, vacation pay, or pension plans. Does the relationship between the worker and the company go beyond one project or specific role?
Continuing our graphic designer example, say you work for several clients on a contract basis. Your primary client could classify you as an independent contractor to avoid paying employment taxes. But, the IRS, after reviewing your work agreement and the nature of your relationship with the client, could determine that you are actually an employee, subjecting your client to back taxes and penalties.
- Dispute #6: Estimated Tax Payments
Self-employed individuals, such as sole proprietors or S-corp shareholders, often grapple with the complexities of estimated tax payments and reporting income. These quarterly payments can be a significant burden, and missing deadlines or underpaying can trigger hefty penalties. The estimated tax payments are typically due…
- April 15 (for income earned from January 1 to March 31)
- June 15 (for income earned from April 1 to May 31)
- September 15 (for income earned from June 1 to August 31)
- January 15 (of the following year for income earned from September 1 to December 31)
Penalties for underpayment can vary, but they are typically the amount underpaid plus quarterly interest ranging from 4 to 9 percent.
This puts a new level of importance on keeping thorough records, particularly if you are freelance or self-employed.
Perhaps none of this is news to you, and you’ve been making your estimated tax payments on time, and reporting your foreign income like you should. For you, let this simply be a reminder to double-check you’re reporting income correctly.
Or if you’re on the other end of the spectrum… You started a small Long Island business working with international clients not knowing the specifics for reporting income taxes when you got started and now you’re facing the repercussions.
If the latter is the case, I’m here to help you navigate your IRS problems and any disputes that ensue.
Helping to clear things up,
Frantz Pierre-Louis