Tax Debtor's Helper

Santa audited by the IRS????

This is a great video of Santa being audited by the IRS after which enforced collection ensues.  This revenue officer is so typical of the revenue officers we deal with on collections matters.  Enjoy!

http://youtube.com/watch?v=k6-ijPi49R4

The Cost of Non-Compliance

If you are out of compliance with the IRS it may take one or both of two forms.

1. Failure to file tax returns
2. Failure to pay taxes when due

Each of these compliance problems has a high cost.  When you combine them, the cost can be astronomical.  Here are a few of the ways the failure to comply with tax code costs you money.

1. Penalties including failure to file and failure to pay penalties are assessed monthly and can total up to 5% per month combined on any unpaid balance
2. Substitute(s) for return (SFR) may be filed by the IRS on your behalf often resulting in tax assessments far greater than the actual amount you would owe with a correctly prepared tax return.
3. Statute of collections and other statutes do not begin to run until returns are filed and taxes assessed.  This may result in much longer collection statutes, i.e. giving the IRS a much longer collection period during which they may enforce collection and continue assessing those failure to file and failure to pay penalties.

Let’s just take a sample scenario.  A taxpayer who has not filed tax returns for the 5 years from 2001 to 2005 and has not made adequate estimated tax payments or withholdings begins to file tax returns in 2006 paying the current year’s taxes only.  During the 5 years when returns were not filed the tax payer accrued actual tax liability of $100,000.  In 2009 the IRS files and SFR assessing the taxpayer $50,000 for tax year 2001.  Later that year the IRS files an SFR for tax year 2002 assessing an additional $50,000.  The next year the IRS files SFRs for 2003, 2004 and 2005 assessing an additional $50,000 per year for the final 3 years for a total liability of $250,000.  The IRS retroactively applies failure to file and failure to pay penalties for each month since the returns were due raising the total liability toe $400,000.  The IRS now has 10 years from the date of each SFR to continue to accrue interest and penalties while enforcing collection.  Over the life of the statute of collections this taxpayer would end up paying of $1.5 Million in taxes interest and penalties. 

Of course trying to handle this problem yourself also has a high cost, but that is for another post.  The main thing you want to avoid is being sucked in by a firm promising to wipe out your tax debt by trying to sell you an offer in compromise without determining the best alternative to fit your situation.  I strongly suggest getting competent tax help from a highly qualified tax advocate.

IRS policy to get rid of Offer in Compromise?

Here is a great post that underscores what I have been saying in my last few posts about IRS and their unwillingness to resolve tax debt using the offer in compromise program:

http://irsmind.com/2007/11/17/irs-tax-debt-is-it-irs-policy-to-get-rid-of-offers-in-compromise/

IRS Mind is a 19 year veteran of the IRS and understands their culture well--especially as it pertains to collections issues.

Cutting your nose off to spite your face.

It never ceases to amaze me that the IRS refuses to make use of tools granted to it by Congress that will allow it to collect more tax from delinquent taxpayers.  The root of the problem is that the IRS culture views the delinquent taxpayer as a criminal and often refuses to work with taxpayers even when it would be in the government’s best interest.  The following excerpt from the 2006 National Taxpayer Advocate Report to Congress gives a prime example related to the relatively new Partial Pay Installment Agreement program (referred to below as PPIA):

The National Taxpayer Advocate is concerned that the IRS’s implementation of the

PPIA option may have overly restricted its use. Internal Revenue Manual (IRM) procedures

and IRS training material regarding the PPIA place a great deal of emphasis on

determining the taxpayer’s maximum ability to pay. For example, the training materials

specify that to qualify for a PPIA the “taxpayer must agree to pay the maximum monthly

payment” (emphasis in original).27 The IRS will consider only reasonable and necessary

living expenses, as defined by the IRS’s allowable living expense standards, in determining

a taxpayer’s potential to qualify for a PPIA, and will allow no transition period for

the taxpayer to retire expenses that the IRS finds excessive.28 The IRM also gives this

direction and states, “In most cases, taxpayers will be required to use equity in assets to

pay liabilities.”29

We acknowledge that IRM procedures go to some length to discuss situations in which

PPIAs “may be granted even if a taxpayer does not sell or cannot borrow against assets

with equity.”30 However, these procedures do not recognize or acknowledge that in

many of these cases, the taxpayers will have a very limited ability to access equity in

assets without creating an economic burden or hardship. Poor credit histories or a lack

of funds to service financial instruments such as home equity loans often restrict a delinquent

taxpayer’s ability to “cash in” on equity in assets. Moreover, legal restrictions

may bar the liquidation of assets. In these cases, it makes sense that the IRS enter into

agreements to collect at least those payments immediately available. Nevertheless, the

overall tone of the training and procedures used to implement the PPIA seem designed

to discourage its use as a viable collection alternative. In fact, the IRS approved only

11 ,18 6 PPIAs in FY 2005, representing approximately 0.5 percent of all IAs granted.31 It

is important to remember that the IRS specifically requested this authority. Yet to date, it does

not appear to be using this collection alternative to anywhere near the degree intended.

While you will often find helpful employees at the IRS, the internal procedures and training IRS employees receive coupled with the prevailing culture within the Service make it absolutely necessary that a delinquent taxpayer seek tax help from a good taxpayer representative if the tax debt is of any significance or if there is a matter of any complexity at issue.  If you are in doubt as to whether you need a tax attorney (attorney in fact not necessariy an attorney at law) then read this prior post.

Can you teach an old IRS dog new tricks?

In her most recent report to congress the national taxpayer advocate correctly observes:

By accepting an offer to compromise a tax debt, the IRS collects money it would not otherwise collect and turns a noncompliant taxpayer into a compliant one by requiring the taxpayer, as a condition of the offer agreement, to timely file returns and timely pay taxes for the following five years. In short, accepting a reasonable offer is a good deal for both the taxpayer and the government.

Nina we love you for speaking the truth!  She goes on to shine a light on the IRS’ systematic denial of access to the Offer in Compromise to the most needy and financially distressed taxpayers through overly rigid return of offers in compromise without considering them on the merits and through the use of the partial payment requirement under which the IRS now requires a 20% down payment with the submission of an offer.  The advocate recommends to congress that legislation should be passed repealing the 20% partial payment requirement or that legislation should be amended as follows:

1. Provide taxpayers with the right to appeal to the IRS Appeals function the IRS’s

decision to return an OIC before or after accepting it for processing. The IRS

could use the existing Collection Appeals Process, which allows it to review

appeals in just 5 days.11

2. Provide an exception to the partial payment requirement for taxpayers who do

not have immediate access to current income and liquid assets that could be

used to fund an offer without incurring significant costs (e.g., taxable income

or penalties resulting from the withdrawal of assets from a qualified retirement

plan). For those taxpayers who have immediate access to such funds, the partial

payment requirement should be 20 percent (for lump-sum offers) of any current

income and liquid assets that could be disposed of immediately without significant

cost.

3. Apply the low income exception in cases where payment of the combined OIC

user fee and partial payment (or borrowing for such payments) would cause an

economic hardship.

Although we agree with Nina wholeheartedly we believe that these changes would not be sufficient to teach an old dog new tricks.  Nothing short of a mandated number of accepted offers will overcome the IRS cultural bias against accepting valid offers in compromise that would benefit both taxpayer and the government.

We can only hope that some legislators are listening to Nina as she continues to decry the hidden agenda of the Internal Revenue Service that results in less tax compliance and less tax collected.  Please write to your member of congress and make them aware of the IRS abuses that are resulting in a higher tax gap lower compliance rates and inequities perpetrated on the most financially burdened taxpayers!  Tell them to mandate acceptance rates and other standards for the IRS to adhere to when reviewing offers in compromise instead of increasing taxes on all taxpayers to subsidize the growing tax gap.

If you are considering submission of an Offer in Compromise get professional representation from a competent and reputable tax advocate who is up to date on the current IRS climate for Offer in Compromise acceptance.

 

Alternatives for having a tax lien released

This is a good short post on options for removing a tax lien from public record and a good tax debt settlement blog in general. 

Will the IRS accept an offer in compromise these days?

In her most recent report to Congress, the national taxpayer advocate, Nina Olson issued a scathing invective against the IRS with regard to the difference between its publicly stated policy of viewing the Offer in Compromise program as a viable collections alternative and its internal procedures which in effect deny access to many who should qualify to have an offer in compromise accepted.  It is the consensus of the tax practitioner community that the IRS has a hidden agenda regarding its Offer in Compromise policy.

Want proof? The number of accepted offers in compromise is down from 37,355 in 2001 to 11,399 in 2006 while the number of delinquent tax payers remains constant.  This in spite of the fact that the IRS’ own data show that in the vast majority of cases where offers are rejected the IRS ultimately collects far less than was offered in the first place.  The IRS’ own data also show that in the overwhelming majority of cases when offers are accepted, in addition to paying the offered amount, that the taxpayer becomes and stays compliant in the future. 

You would think this is what the IRS wants, but from what we experience in our practice the IRS hidden agenda seems centered on two ideas:

1.      That the offer in compromise program will jeopardize compliance (in other words people will not pay taxes in hopes of being able to do an offer in compromise)

2.      That the program will be abused

This mindset persists in the absence of any data to support either idea.  Is it really plausible that someone would not pay their taxes in hopes of one day possibly doing an offer in compromise?  Can the program really be abused given the new requirements of 20% down payments?  This is completely ludicrous, but the IRS seems determined to cut its own nose of to spite its face.

What does this mean to you?  If you owe back taxes and are considering an offer in compromise you need tax advocacy that is in tune with the IRS and its internal culture that can evaluate the merits of your offer in light of the current offer in compromise climate.  You cannot rely on the IRS’ public statements and guidelines on submitting offers in compromise.  Most of all beware of firms that seem overly optimistic about your chances these days.

How to be an IRS target--part 1

The next few posts will be a series dedicated to the IRS’ new examination (audit) priorities.  The IRS recently conducted a national research program on taxpayer behavior and is now targeting its audits much more carefully.  The first and best way to be an IRS target is to be self-employed.

Why are self-employed people targets of IRS audits? Because it is estimated that self-employed people underpay their taxes by $68 Billion annually.  This is more than double the estimated underpayment of large corporations.  If you operate an unincorporated business and file a schedule C with your tax return, you dramatically increase your chances of being audited if:

1)      You report a net loss from operating your business, or

2)      You report a profit but have unusually large deductions for expense items

In the first situation, it is important to operate your business as a business in order to rebut the assertion that your activities amount to a mere hobby with no real profit motive.  Specifically, you should have a written business plan detailing your plans to make a profit in the business.  Keep good accounting records and ensure that you have all applicable licenses

In the second situation it is also important to keep good records to support the expenses that you report on a tax return—especially if those expenses seem out of line with national averages for your industry.  If you are unsure whether your expenses claimed will attract attention, one place to look is the government accountability office report on national averages for expenses claimed report GAO-04-304.

What do you do if like many self-employed individuals you have not kept good records?  What if you have not even filed tax returns for a number of years?  In this situation it is imperative that you get competent tax help.  It is critical that you determine the amount of your and have a tax advocate negotiate an agreement your IRS debt immediately before the IRS dragnet finds you.  With audits and other enforcement activity on the rise and self-employed individuals the highest priority target, it is only a matter of time before they catch up to you.

If the shoe fits . . .

Most firms that offer IRS help will sell you an offer in compromise on the basis of an initial consultation. If you call a firm and they propose an offer in compromise without asking you very detailed questions about your income, expenses, assets, future income potential and how you came to owe the tax hang up the phone immediately. The problem is that even firms that do thorough consultations base their recommendation on your answers to the consultation questions which are usually not as accurate as they need to be for such an endeavor, and, even if they are,  your situation may change after the initial consultation.

 

As a rule one should be very wary of contracting with a firm to submit an offer in compromise based on a single tax consultation even if it seems that you would qualify based on the consultant’s calculations. Let’s face it, your answers to the consultation questions will be rough estimates, and the calculations that the IRS examiner will do are very precise. A reputable tax advocate will need to do a great deal of analysis and verification before he is sure that a valid offer is being submitted. Firms that contract for Offer in Compromise without having done this deep analysis of your bank statements and proof of income and expenses may sell you an offer based on your estimates, and when they later find that you do not qualify will put the blame on you for your imprecise answers in the initial consultation. This means that you get no offer but you have spent a considerable amount of money which you will not likely be getting back.

 

Since there is no real way to know the outcome of an offer in compromise, it is best to contract with a firm that will evaluate you for all of your options and provide a solution to your tax problem that is a right fit for your situation. It is unwise to propose an offer in compromise at the outset based on your rough idea of your income, expenses and assets. Under the current rules very few people truly qualify for an offer in compromise, but there are many other ways to reduce the amount you owe and get payment terms you can afford. If you are sitting across the desk from someone who is telling you he can get you an offer in compromise based on what you have told him beware.

How long will it take for the IRS to find you?

In my line of work I see many people who have been out of compliance with the IRS for long stretches of time.  I regularly meet people who have not filed a tax return for 10 years and others who have owed back taxes for several years and have never been levied or had a federal tax lien filed (at least as far as they know).  They often ask me whether it is a good idea to file delinquent returns and “wake a sleeping giant.”

The answer is that it is never good to procrastinate where a tax problem is concerned.  The IRS has many tools of collection at its disposal including:

1)      Tax liens

2)      Levies

3)      Asset Seizures

When you owe a tax debt you become a TDA or tax payer delinquent account.  These accounts are prioritized according to their value to the IRS and the ease with which they can be pursued.  The IRS is always on the lookout for levy sources such as your employer or bank and as they find them (most often when a 1099 or W-2 is reported to them) they will start a letter cycle to you that ends in a levy being sent to the party holding your funds demanding that the funds be sent to the IRS.  How long this will take to happen is anyone’s guess and when you think about it the longer it takes the worse it is for you.  The longer it takes for IRS to find you the longer you have this cloud of fear and shame hanging over your head and the longer the interest and penalties continue to grow on your debt.  When the hammer does finally come down it is devastating.  This can all be avoided by calling a reputable tax professional for IRS help