Taxes are a complicated topic. We know we are required to pay them in order for the government to run many programs, but we often get confused on the various details on the many types of taxes. Plus, the tax rates can change from year to year, so it could be that what you owe changes even if your personal situation has not changed.
The complex structure of taxes and the various levels (federal, state, and local) means it is easy to understand why so many people get behind. Maybe it’s easier to just ignore them and hope the problem will go away, or maybe you’re so stuck you don’t know what step to take next.
At San Diego Bankruptcy Attorney, we are experts in taxes at the federal and State of California levels. We can help you understand your tax responsibility, whether you’re an individual or a large company. We offer professional guidance in dealing with more serious tax issues, such as owing back taxes or representing cases of tax fraud, tax evasion, etc. If you’re under tax audits with the Internal Revenue Service (IRS), it can be imperative to have a legal team who can prepare for this situation.
We compiled the information below as an overview for your responsibility when it comes to owing and paying taxes. This is not legal advice, as only an experienced professional legal team can offer legal counsel upon understanding your unique situation.
Who collects taxes?
In the United States, different levels of government can collect taxes. The most common collectors are the United States federal government, which is regulated by the Internal Revenue Service (IRS) as well as the State or States that you live, work, have property, or even conduct business in. Furthermore, some counties collect taxes.
For the purposes of this article, we will focus on federal taxes as well as taxes in the State of California.
In California, you may deal with the following agencies depending on the type of taxes you are filing and/or need assistance with:
- The Franchise Tax Board – which focuses mostly on California income taxes
- The Employment Development Department – which focuses primarily on payroll tax for the approximately 18 million employees in California. This organization is the largest tax department in the state, and as such also owns other tax areas as well.
- The Board of Equalization – which handles the collection of sales taxes.
Because the Employment Development Department and the Board of Equalization work with employers, you are unlikely to deal with them directly unless you own or help run a business that employees people in the State of California.
When are taxes collected?
Taxes are typically collected whenever you earn money or purchase or sell real estate.
Some taxes, such as sales taxes, are often collected at the time of sale.
Other taxes, such as income tax and personal property tax, are collected at a specific time of year (often with a springtime deadline of or close to April 15). These taxes require that you or a tax professional prepare them based on all action of the taxable year.
Types of federal taxes
The federal government is authorized by the U.S. Constitution to collect different types of taxes from residents and employees in the U.S. in order to provide services and benefits. There are different forms of taxation, governed by various laws and agencies, but the general gist if that you are taxed whenever you give or receive money or property.
Income tax
This is the most common type of tax. The government can collect taxes from any individual or business who earns money in the year. Earned money can come from a job, a business, or investments.
Employment taxes
The federal government taxes employees in order to collect money for necessary social welfare programs. Employment taxes can include money that will go to Medicare and Social Security. The employer also pays an equal amount, but this does not come out of your earnings.
Gift tax
When offering money or assets as a gift to another party, the government may collect taxes. This doesn’t apply to small gifts such as birthday or wedding presents, but for larger gifts perhaps to another person or a non-profit institution, for instance.
Estate tax
Federal estate tax is applicable for any gifts that occur at the time of a person’s death, such as money or other assets that a person may leave to heirs at the time of their passing. The amount that is subject to taxation is the value of the estate that is greater than the year’s exemption amount.
Types of California taxes
Personal income tax
The state collects income tax from employed residents between 1 percent and 13.3 percent based on your income for the year.
California collects personal income tax once per year. Year-round residents who are legally employed will likely complete Form 540 2EZ or Form 540 for the spring tax deadline of April 15. If you are a non-resident of California or only reside in the state part of the year, a 540NR Short Form or 540NR Long Form are more appropriate.
Sales tax
In California, sales tax combines state, county, and local sales taxes plus a use tax. The minimum combined sales tax is 7.25 percent, though it may be higher depending on the county and local area, and sometimes even the city, where you’re shopping.
For instance, in San Diego County, the sales and use tax on taxable items is 7.75 percent. Some cities are exceptions to this, as they issue additional taxes:
- Vista and El Cajon sales and use tax: 8.25%
- La Mesa sales and use tax: 8.5%
- National City: 8.75%
The sales and use tax in Imperial County is also 7.75 percent, with the exceptions of Calexico and El Centro, where the tax increases to 8.25 percent.
Personal property and real property taxes
California taxes all real property based on its fair market value. If you believe your home is exempt, the tax assessor’s office for the local count handles such situations.
Depending on your situation, you may qualify for state programs that assist homeowners and renters in delaying owed taxes or paying them indirectly.
Estate and inheritance taxes
California is one of 31 U.S. states that does not collect inheritance tax on individuals who inherit money, property, and/or other applicable assets. The state has further phased out estate tax, pursuant to changes of federal estate taxes.
Exceptions to paying taxes in California
Just like the IRS on the federal tax level, the State of California’s Franchise Tax Board offers several solutions if you are unable to file and pay and due taxes by April 15 of each year:
- Take advantage of an automatic extension. In California, taxpayers do not need to file for an extension. Instead, if you haven’t filed and paid by April 15, you are automatically granted a penalty-free extension until October 15. If you are able to file and pay by this date, you need take no further action.
- Seek out an Installment Agreement. If, upon preparing your taxes, you determine that you are unable to pay what you owe in full and at once, the state can offer an Installment Agreement for you to pay in smaller chunks over time. The Franchise Tax Board will consider an Installment Agreement, though interest and penalties may accrue on your unpaid tax debt until you are able to pay in full. There are certain stipulations, wherein any tax debt you owe is no more than $25,000 and you will be able to pay it off within five years. If you already have a pre-existing installment agreement, your rights to access a second one may be limited.
- Request an Offer in Compromise. This is allowed only in rare and extenuating circumstances. If you can show proof of any inability to pay state tax debt in the foreseeable future, perhaps because of a particular hardship or lack of income or assets, the Franchise Tax Board may suggest a lump sum amount that is less than your actual tax debt burden. In order to be considered, you must have previously filed all income tax returns as well as the application and required paperwork.
Owing back taxes in California
If you haven’t paid taxes in one or more previous years, you likely are past due and owe back taxes.
Back taxes are defined as any taxes that remain unpaid for the year they were due. You can accrue back taxes at any of the federal, state, or local levels and these back taxes are typically subject to regular interest and penalties. Each agency, including the IRS and the three California tax-collecting agencies, can collect on their own past-due monies, and the process for each agency varies significantly.
While each agency has their own protocol and timeline for collecting outstanding debts, in general, these agencies rely on three methods to collect unpaid taxes, including:
- A lien, which is a public notice to creditors that another party has a claim against your property until the time the debt is paid in full or as otherwise agreed upon.
- A levy, which allows a creditor the opportunity and authority to take and sell physical property in order to satisfy your debt.
- An offset, which is a way of deducting the debts you owe from any refund you may receive from another government agency.
People who owe back taxes often make a common mistake of simply ignoring them. However, filing back taxes at the federal or state level often is not as intimidating as it may seem. Tax and legal professionals can help you consider your options.
Interestingly, if you are seeking to pay taxes from many years ago, a statute of limitations may apply. For instance, in California, the state does not recognize a deadline for collecting taxes from people who do not file taxes. But, if you file your taxes within the filing deadlines (April 15 or the automatic extension of October 15) but do not pay them, the state may only have four years to collect on this owed tax. Further circumstances may extend any statute of limitations.
Tips and resources for filing taxes in California
Know that when it comes to filing taxes, you are legally obligated to do so and there may be penalties against you if you do not. Still, both federal and state entities seek to help individuals who are tardy or behind on paying taxes.
You do have many resources for filing taxes. Here are some tips:
- Talk with a professional. Regardless of whether you need assistance with state or federal tax or a specific and unique tax situation, a registered tax official or a Certified Personal Accountant (CPA) can help you navigate the complexities of tax law. You may have to pay for professional services, but the peace of mind a professional can bring – even if your personal income tax filings are straightforward – can easily be worth the cost.
- Know your rights. You may be entitled to automatic extensions or other exemptions that you’re not aware of. Get in touch with the California’s Taxpayers’ Rights Advocate’s Office. This independent review agency is available for any unresolved tax questions and problems. You can also ask general tax questions without penalty.
- Speak with a lawyer. If you’re concerned that you owe taxes or otherwise in arears with the IRS or the State of California, a lawyer will help you navigate the legal effects of taxes on your personal situation. Whereas a tax professional can help you file the right way, a lawyer who specializes in tax law can help you consider your options if legal action is or may be taken against you.
San Diego Bankruptcy Attorney can help you navigate the complicated rules that govern taxes and help you get back on track with any outstanding filings or payment. Our experienced team has helped many clients across the San Diego region. Simply call us today at 619-488-6168 to see how we can help you.
