When undergoing an audit by the IRS, it can be an extremely stressful experience. It is important that you have someone help you who is familiar with the process. Our staff is knowledgeable about how the IRS works and can advise and guide you through that difficult process.
There are many defenses to an audit, all of which require extensive tax and accounting knowledge. Primarily, you need someone on your side who understands what the IRS is saying and can advocate your position. This is done by reviewing your returns being audited and often redetermining your liability. Furthermore, as CPAs we can represent you before the IRS and handle matters on your behalf.
One of the most common problems taxpayers have with the IRS is past-due taxes. Regardless of the reason why a person did not pay taxes for any given year, the result is the same. The IRS will send out notices and begin collection procedures. These procedures can wreak havoc on a person's life and leave him or her with nowhere to go.
The first step to correcting the issue is getting compliant. This entails ensuring that the assessed amount of liability is correct and having the taxpayer make payments. Payments can be made in installments, or in some cases, can be an offer in compromise.
Even if the IRS has not yet detected a taxpayer's failure to file, it is important to become compliant. Our staff can prepare new or amended returns for the years in which there is an issue and help get delinquent taxpayers back on track.
Negotiating with the IRS is a tricky and difficult process. There are only certain situations in which the IRS will remove penalties and even fewer where the IRS will remove interest.
Knowing which penalties can be abated is important as the penalties can often be a large portion of the liability. Removing penalties can reduce the assessed liability significantly, but only if certain criteria are met. It is important that you discuss your situation with your CPA before you begin the negotiation process.
Redetermination of Tax
A Tax professional may be able to help with redetermining your tax. This is done by reviewing a return which has already been filed (or filed for you by the IRS), and finding deductions or other reductions in tax liability which the taxpayer may not have known of or simply left off.
There are Pros and Cons to this approach. You may pay less tax overall, Interest is recalculated and will be lower, and you may avoid penalties. However, the IRS may re-examine certain issues when the Tax Professional amends the return in order to lower the taxpayer’s liability, and you may end up with a greater tax liability in the end.
Still, do not be afraid to consider this option. Ending up with a larger liability is a rarity and typically results from the taxpayer trying to hide something from the Tax Professional. One of the most important considerations in resolving IRS problems is the client's honesty with his or her CPA.
IRS Liens, Levies & Garnishments
Liens, levies and garnishments are methods of IRS collection. A lien is a claim against property that the taxpayer owns. Most commonly, a lien is placed on the taxpayer's home; if the taxpayer sells the home, then the IRS collects its amount due from the sale proceeds. A lien is generally the first step and leads to a levy.
A levy is also called a seizure and is a process by which the IRS takes the taxpayer's property and sells it to a third party - usually at auction. This is different from a lien; with a lien, the IRS does not take the property but waits for the taxpayer to sell. Nevertheless, the result is the same as the IRS collects the sales proceeds in satisfaction of the liability.
A garnishment is also a seizure, but applies to a taxpayer's wages. The IRS sends information to the taxpayer's employer who in turn remits a percentage of the taxpayer's wages to the IRS as payment towards the tax liability.
These and other collection activities can often be stopped by negotiating with the IRS. It is important, though, that the person negotiating knows what the IRS already knows and what the IRS does not need to know. For these reasons it is important to have a knowledgeable person such as a CPA on your side.
Payroll Tax Liabilities
A primary are of concern for the IRS lately is collection of "trust fund taxes" such as withholdings by employers. Many well-meaning employers get behind on these taxes and the amounts multiply quickly. Because of the importance the IRS places on these taxes, the collection agents take a harsh stance and often use scare tactics in collection procedures.
However, there are many things employers can do to negotiate with the IRS. Most options available to individuals are also open to employers. Most commonly, an offer in compromise or an installment agreement can be negotiated. A redetermination of the liability, though, is not likely. Payroll taxes are not subject to the credits and deductions that can often lower individual tax liabilities.
As with individuals, it is important that employers have a knowledgeable representative negotiate terms on their behalf; and as CPAs our practitioners can represent clients before the IRS.
Offers in Compromise
An Offer in Compromise (OIC) is what most taxpayers think of (even they don’t know it) when someone mentions settling with the IRS. This is the program offered by the IRS where a taxpayer makes an offer to the IRS of less than what is owed. However, there are some things taxpayers should know.
An OIC is completed in a booklet provided by the IRS – Form 656 Booklet. This is lengthy and detailed. You must provide financial statements for your household. If you have a legitimate doubt as to your liability for part or all of the tax debt, then you must also complete Form 656-L.
Moreover, there are several factors that the IRS takes into consideration (which is never mentioned in the “penny-on-the-dollar” ads, and leads to misleading claims):
• Ability to pay
The IRS will not accept an offer if you can pay your tax debt in full via an installment agreement or a lump sum. The taxpayer must make an appropriate offer on what the IRS considers his “true ability to pay.” The IRS will “generally approve an offer in compromise when the amount offered represents the most [they] can expect to collect within a reasonable amount of time” and suggests exploring all other payment options first (such as loans or credit cards whose interest may be lower than the IRS penalties and interest).
How much does the taxpayer earn every month? Is there expendable income? Can this be used to pay off the debt with an installment agreement?
What are the taxpayer’s monthly expenses? Are they allowable expenses; because only certain expenses are allowed, and then only certain amounts of those expenses are allowed.
• Asset Equity
What is the fair market value of the taxpayer’s assets? This includes the taxpayer’s home and retirement accounts. Does the taxpayer owe anything on the assets? If the taxpayer has equity in the home, is it sufficient to pay the debt? Is it sufficient to pay more than is being offered? You may have to sell assets, including your home, to pay.
Moreover, there are certain requirements (which are also conveniently left out of advertisements):
• Must be current with all filings
• Must be current with all payments
• Must NOT be in open Bankruptcy proceedings
There are many other things that deceptive practitioners do not tell their potential clients. For instance, the majority of people DO NOT QUALIFY for OIC. Also, the IRS will examine ALL of your assets and all sources of income, IN DETAIL. The process may take as long as a year, and your offer may still be rejected after a year of waiting. Meanwhile, interest is accruing on both the tax owed and any penalties imposed during this time.
Also, The IRS may file a Notice of Federal Tax Lien during the offer investigation. The IRS may levy your assets up to the time that the IRS official signs and accepts your offer as pending.
An OIC is not Cheap. There is $150 application fee PLUS, an initial payment of 20% is required with submission of the offer when sending in your application (unless you qualify for “Low Income Certification”).
There are also some privacy concerns with submitting an OIC. The law requires the IRS to make certain information from accepted offers available for public inspection and review.
There are also some hidden traps for the future. If your offer is accepted, you must continue to file and pay your tax obligations that become due in the future. If you fail to file and pay any tax obligations that become due within the five years after your offer is accepted, your offer may be defaulted. If your offer is defaulted, all compromised tax debts, including penalties and interest, will be reinstated.
All this being said, an OIC can be a great tool if the taxpayer qualifies, and be of great benefit to the taxpayer who is struggling with previous IRS debt.
Recent developments in Offers-In-Compromise
There have been some recent developments in OICs which are designed to allow more taxpayers qualify.
• The IRS will now look at only 1 year (instead of 4) of future income for offers paid in 5 or fewer months:
§ 2 years (instead of 5) for offers paid in 6-24 months.
§ All OICs must be paid in full within 24 months of the date the offer is accepted.
• Minimum payments on student loans guaranteed by the federal government will be allowed for the TP’s post-high school education:
§ Proof of payment must be provided.
§ Educational Loans, even those from the federal government, were previously not allowed as monthly expenses.
• Monthly payments to state taxing authorities may be allowed in certain circumstances.
• The National Standard miscellaneous allowance has been expanded (increased):
§ Standard allowances incorporate average expenses for basic necessities for citizens in similar geographic areas.
§ These standards are used when evaluating installment agreements and offers-in-compromise.
§ Taxpayers can use the allowance to cover expenses such as credit card payments and bank fees and charges.
Another option for paying off tax debts is establishing an Installment Agreement (Agreement) with the IRS. Here, the full liability is used to determine monthly payments; this is NOT A SETTLEMENT.
Monthly minimum payments based on the taxpayer’s “Ability to Pay”, considering both the taxpayer’s Assets and Income.
Interest continues to accrue on the liability, penalties, and previously added interest. The amount owed often continues to grow, despite payments being made. Thus, it is wise to pay as much as possible each month to avoid the “Black Hole Effect” where everything earned is sucked into the payments which never seem to diminish because the taxpayer is only covering the accrued interest.
With an Agreement, the taxpayer will pay the installments until either the full liability is paid, or the time period of collections has tolled (10 years).
A final option, which was previously mentioned, is being placed on non-collectible status. This is a determination made by the IRS based on Income and Asset levels. The taxpayer does not have to pay (for now), and the IRS is required by law to cease all collection activities.
However, the Income and Asset levels are very low. The Taxpayer typically must show near-impoverishment levels. Also, the Statute of Limitations on collections (10 years) is interrupted – meaning the IRS’s overall time to collect is increased.
Finally, if circumstances change, the IRS may decide that the taxpayer no longer qualifies for Non-Collectible status, at which time the taxpayer must start making payments.
- Audit Representation
- Past-due Taxes
- Refund Suits
- Redetermination of Tax
- IRS Liens, Levies & Garnishments
- Penalty Abatements
- Payroll Tax Liabilities
- Offers in Compromise
- Installment Agreements
- Currently Not Collectible Status