How You Can Face IRS Tax Liability

Posted on 12. Sep, 2011 by in IRS

There is a saying that you don’t have to look for trouble because trouble always has a way of finding you, and that certainly can hold true when it comes to IRS tax liability.

Yes, you can be an honest and conscientious U.S. taxpayer and still find yourself in some trouble with the nation’s tax collector.

The Internal Revenue Code is a huge legal maze that, if you don’t abide by its dictates, can put you in a position where you are facing IRS tax liability.

This often occurs because of misunderstanding and confusion.

To get this point home, we can focus on the subject of capital gains and losses.

As described by the Internal Revenue Service, almost everything you own and use for personal or investment purposes is a capital asset. These assets can include a home, furniture, and stock and bonds held in a personal account (which is what people generally think of when talking about capital gains).

When a capital asset is sold, the difference between your purchase price and the amount you receive upon its sale is known as a capital gain or a capital loss.

What does this have to do with IRS tax liability? Plenty.

You must report all capital gains to IRS when you file your federal income tax return. You are allowed to deduct capital losses only on investment property, not on property held for personal use.

Capital gains and losses are classified as either long-term or short-term. As IRS explains: “If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.”

For 2010, most people face a maximum capital gains tax rate of 15%. Some special types of net capital gains can face rates of 25% and 28%.

Are you beginning to see the possible pitfalls that can lead to IRS tax liability?

If you wind up with capital losses, the amount can be deducted on your tax return, up to a limit of $3,000, or $1,500 if you are married filing separately.

Finally, if your net capital loss is more than the annual limit on deductions, the unused amount can be carried over for use in the next year.

This information seems straightforward enough but, unfortunately, taxpayers make mistakes in reporting capital gains and losses. The next thing they know is that the tax collector wants them to make due on their IRS tax liability.

If you face such a problem, the soundest advice is to consult with a certified public accountant (CPA) or a tax attorney.

By no means should you just try to sweep your IRS tax liability under the rug.

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