Author: Jim Payne

Jim Payne, a Florida Certified Public Accountant (CPA) since 1976, offers candid insights on getting square with the IRS — with the least pain, and at the lowest cost — with (or without) the help of a tax representative. Mr. Payne is a former IRS agent and expert in business profitability, IRS audits, IRS payroll tax, and IRS non-filer issues. As a Tax Representative, his goal is clear: " I will speak on your behalf to all IRS agents, so you never have to, and I'll guide you in executing a strategy to resolve your IRS problem so you can get back to enjoying life."

What to do if you can’t pay your payroll taxes?

The IRS really hates businesses that fail to pay their payroll taxes for good reason. The government ends up paying for these failures twice. First, they never get the money. Second, they end up having to credit the employees with the withholding and potentially pay refunds on the money they never received. The resulting IRS policy is to put you out of business as soon as possible to avoid the run-up of these tax debts.

What should you do if your cash flow just can’t hack it?

Step 1 is to stop digging the hole. Immediately, start paying your payroll taxes for each payroll at the same time you pay the employees. If your cash situation is so bad that paying your payroll taxes and employees is not feasible, start laying them off until you get it down to what you can pay. In my experience, the idea that your business is going to magically improve next week never happens.

Step 2, you need a new business plan yesterday. The planning process needs to consider all the standard cash flow options such as collecting on receivables, stringing out suppliers, and improving inventory turns. Cash flow is one thing, but profitability is the only thing that works in the long term. Unless you can find a clear path to profitability, the company is not going to survive. Recognize it. Close it. Go on to something new.

Step 3 is to minimize the impact on you the business owner. The IRS will eventually show up and assess a penalty on you personally for the monies withheld from the employees’ paychecks. You can minimize this impact by paying those trust funds personally and designating that payment to be applied to the “trust funds only”. This will reduce the unpaid trust funds portion that the IRS could eventually assess upon you. This only works if you make the payment voluntarily. The company cannot do this.

Conclusion

Unpaid payroll taxes are the worst tax debt you can have. The IRS will eventually shut you down, but they usually don’t show up until the debt is large. You then file for bankruptcy, but the IRS will assess the Trust Funds Penalty on you personally. Now you’re out of business and an employee again. But you owe $100k or more with the IRS threatening levies against your wages for the next 10 years. The time for action is now.

What are the most Common Problems that cause an Offer-in-Compromise to be Rejected?

If you owe the IRS money, you might be considering an Offer-in-Compromise (OIC) as a way to settle your tax debt for less than the full amount you owe. This is the so-called “pennies on the dollar” approach you hear in ads.

While an OIC can be an excellent way to resolve your tax debt, it’s essential to understand that the IRS does not accept every Offer-in-Compromise that is submitted. In fact, the IRS rejects the majority of OICs that are submitted.

The most common reasons for these rejections include:

1. Compliance Problem – All of the returns due for the last 6 years have not been filed or the current year’s estimated tax payments are not being made. This results in an immediate rejection of the offer.
2. Ability to Full-Pay – The IRS has a methodology for analyzing a taxpayer’s financial situation. If the offer amount is below what they determine the taxpayer could pay, they will reject the offer.
3. Dissipated Assets – The IRS finds that the taxpayer has sold assets to friends, relatives, or lenders sometime in the last 3 years. The IRS’s position is that the cash from these transactions should have been used to pay down the tax debt.

Nobody can guarantee that an OIC will be accepted. However, avoiding these 3 common problems should put you in the 95% chance of success range.

The COVID Policy of Streamlined Payment Plans for up to $250,000 is Permanent.

Darren Guillot, Deputy Commissioner, Collections and Operations Support announced on January 20^th that the trial policy of allowing installment plans without requiring financial information for tax debts up to $250,000 is now permanent.

Why is this a Big Deal?

The requirement to provide financial information is no easy task. Most people need professional help with preparing Form 433. Answering a question wrong, such as do you or have had any cryptocurrency transactions, could get you a visit from the Criminal Investigations Division. The ability to simply go to the IRS website and start a payment plan without financial analysis is a big time and money saver for tax debtors.

What’s the Catch?

There are a few caveats:

This debit limit only applies to individuals and out-of-business sole proprietors.
This option goes away if your case has been assigned to a Revenue Officer. The old limits of $50,000 and $25,000 still apply if you are dealing with an RO.
Your payment amounts must be adequate to fully pay the debt before the Statute of Limitations runs.

Should you consider this without professional help?

Certainly, seems like a good idea to go give it a try. If the IRS calculator comes back with a monthly payment that you can’t live with, then go talk to someone. There are other options such as a Partial-Pay or an Offer-in-Compromise that will probably make more sense in these cases. Setting yourself up for a future default will make your problems worse

Are you Out-of-Luck when the IRS cannot be convinced that its Assessment is Incorrect?

It happens. The IRS audits you and makes an assessment that you know is wrong. Maybe you missed the audit appointment, and the auditor disallowed all your deductions. Or maybe the IRS has a 1099 or W-2 showing that you have unreported income and you have never heard of the issuer. If you just can’t get the IRS to listen to reason, one of your options is an Offer-in-Compromise based on Doubt-as-to-Liability.

What is an Offer-in-Compromise?

An Offer-in-Compromise is an agreement with the IRS to pay less than the full amount of the assessment. Usually, the basis for this offer is based on the inability to pay the amount before the Statute of Limitations runs. The IRS accepts these offers after doing a financial analysis and concluding that it’s their best option to collect.

The Offer-in-Compromise due to a doubt-as-to-liability is the less well-known sibling to the offer based on lack of potential to pay. Rather than submit financial information, you submit your evidence one last time as to why the assessment is in error. It gives the IRS the option of settling the issue without going through the expense of going to court and possibly losing.

What’s Different about DATL Offers?

There are two major differences. First, the offer can be very low. Second, you are not submitting information about your personal or business financial condition which is full of potential problems if there is an error on the form.

How Much Should You Offer?

This all comes down to how strong is your case. The more likely the IRS is to lose in court, the smaller your offer should be. The minimum I would suggest is $150 so that they can feel like the offer at least covers their processing costs. If it’s a 50-50 likely win for both parties, I would be inclined to make an initial offer between 30 and 50 percent. There will be an opportunity to negotiate the final amount.

Conclusion

All is not lost when it comes to assessments that you believe are in error. Try to use the regular appeals processes first. But if that does not work, then an Offer based on doubt-as-to-liability is well worth trying.

Avoiding the IRS Accuracy Penalty

The IRS accuracy penalty is a charge that the IRS imposes on taxpayers who file inaccurate tax returns. The penalty is equal to 20% of the amount of taxes that are owed as a result of the inaccuracies. This can be a hefty amount so it’s worth considering what you can do to minimize their potential.

What is the biggest cause of the IRS Accuracy Penalty?

The biggest cause of the accuracy penalty is underreported income. Computer software matches all the 1099s and W-2s reported by 3^rd parties to the tax returns and automatically generates a CP2000 Notices proposing changes for anything not on the return.

How can you avoid the IRS Accuracy Penalty?

The easiest and surest way to avoid matching problems is to file an extension and check your IRS transcripts when the income and wages are posted in early June.

If you need to file before June, it’s still a good practice to check the income and wage transcripts. Should you find a difference, immediately amend the original return with a 1040X. A timely correction makes it very hard for the IRS to claim you were negligent.

What about Information Return Errors?

The IRS process millions of information returns and a fair number of them are in error. In theory, it’s up to you to contact the 3^rd party issuer and ask them to correct their filing. Lots of luck with that approach. The fallback is to make sure that your return reflects the total income reported. Then deduct the error with a note on the return explaining the error.

Conclusion

The accuracy penalty can be big bucks. Avoiding the penalty is far easier than dealing with them after the IRS finds unreported income and automatically assesses the penalty.

Common mistakes that will earn you an IRS Audit

The IRS tries to keep its processes for selecting returns for audit a secret. However, we do know some of the general steps. The majority are selected by computer-generated scores that are based on how different an individual return is from an average return. The higher the score, the more likely the return will be sent to an audit group for audit consideration. Stacks of these returns are assigned to individual auditors. These auditors will look over the returns and decide which they find to be audit worthy.

Here are some common mistakes that will make it more likely to pique that auditor’s interest:

Lots of rounded numbers. This is saying to the auditor that my bookkeeping is lacking and there are probably tax dollars to be found here.
Non-cash charitable contributions. The IRS knows that most people fail to get receipts, overvalue the junk they donate, and will not spend the money on a professional valuation when required.
Large amounts of business travel or auto expenses. This is almost an automatic adjustment in an audit. Most business owners will not keep the logs required to document the business purpose, dates, and amounts. Every new IRS auditor learns this within the first 10 audits they perform.
Hobby losses. How earners with losses from a farm, horse ranch, race car, etc. are likely to get an IRS call to schedule the audit date. Auditors know that the burden of proof to prove there is a real business purpose for these losses has shifted from the IRS to the taxpayer.
Unreported 1099s or W-2s. Not having enough compensation or gross receipts at least equal to the totals that 3rd parties have sent to the IRS is an almost guarantee that you will be spending some time with the audit division.

Most of these mistakes can be avoided. Simply don’t use rounded numbers or report a lot of non-cash charitable contributions without getting proper documentation. Keep the auto logs or be prepared to see at least 50% thrown out in an audit. If you are not sure what 1099s have been reported to the IRS, file an extension and check your IRS transcripts when the wage and income transcripts are usually updated in July of each year.

IRS Lien Basics

A lien is a legal claim or right against someone else’s property, usually for the payment of a debt. The IRS can place a lien on your property if you owe taxes and have failed to pay them. This can be a very stressful and difficult situation to deal with, but it is important to know your rights and options if you find yourself in this situation.

If your situation with the IRS has gotten to this stage, it’s time to contact a tax professional. They can help you to determine what your options are in dealing with the IRS to minimize their impact on your life.

When does the IRS File a Lien?

The IRS has the power to issue a lien when taxpayers fail to pay back taxes, which must be paid within 10 days of the IRS sending the taxpayer a final notice of intent to levy. If you fail to pay the taxes within 10 days, the lien will be automatically filed with the County Recorder’s office. The IRS may also issue a lien when a taxpayer fails to respond to an IRS request for information or fails to make an installment payment promised under a payment plan. A lien might also be issued if the taxpayer violates the terms of an offer in compromise or fails to provide information the IRS is requesting to verify a claim of innocent spouse relief.

After the IRS files a lien, what happens?

When the IRS files a lien, it will make a public record of the lien and its amount. This will be included on your credit report, which means that your credit score will be affected. The IRS will send you a letter, called a Notice of Federal Tax Lien, detailing how much is owed, when it is due, information about payment options, and how the lien affects your rights. The IRS may take other collection actions such as wage garnishment and seizing funds from your bank accounts.

While the IRS has the right to seize and sell your property, they only take that action in extreme cases. They do not want to have the cost of the seizure, securing, and finding a buyer for your stuff. Instead, they would rather wait and seize any proceeds should you sell your property.

How can I get rid of an IRS Lien?

The most effective way to get rid of an IRS lien is to pay the debt in full. Once the debt is paid, the IRS will remove the lien from the public record. You can also request a withdrawal of the lien in certain cases. This is when the lien is withdrawn, but the debt remains. Generally, your debt must be less than $25,000 or you have a good reason why it is in the government’s best interest to make the withdrawal.

How long does an IRS Lien stay in place?

IRS liens stay in place until the tax debt is paid in full or the statute of limitations expires. The statute of limitations is a time frame of 10 years from the date the taxes were assessed. This date will be extended if collection activities are suspended due to actions such as filing bankruptcy or requesting an Offer-in-Compromise.

To wrap things up

The initial impact from a federal tax lien is a hit on your credit report. Usually, nothing else happens until such time that you want to refinance or sell your home. The IRS will negotiate with you about subrogating their lien so that a refinance can happen provided you give them some or all of the cash proceeds. The IRS in almost all cases will grab your share of the proceeds from the sale of your home or another real estate.

IRS Levies and Social Security Benefits

The IRS can levy social security benefits. Even worse, that levy can continue even though the statute of limitations has expired. The question is how often does the IRS levy social security payments? And what can you do if it does?

The IRS annual statistics report does not drill down anywhere close to the level needed to answer the first question. But it does seem to be exceedingly rare and only applied to tax protestors. This is in alignment with IRM 5.11.6.2(1) “Use discretion in determining if retirement income should be levied“. And more specifically, IRM 5.11.6.2.1(4) “Use discretion in determining whether a levy on Social Security benefits is appropriate under the circumstances.”

However rare, what can you do about it? If the levy was correctly applied before the statute of limitations runs, then the levy will continue after the expiration. The authority for this is Treas. Reg. § 301.6343-1(b)(1)(B)(ii) which provides that “a levy reaches all property rights at the time the levy is made, including the right to receive payments at some point in the future, and will not be released under this condition unless the liability is satisfied.” This regulation leaves you with only one option, you must make a deal. Specifically, an Offer-In-Compromise proving that the seizure of your retirement income places you in the category of “Economic Hardship”.

Economic hardship cases are usually hard to get through at the collections level. Expect a trip to Appeals.

What Should You Do When the IRS Corrects Your Returns?

The CP11 letter arrives in the mail. You open it up and see the words “We made changes to your return because we believe there is a miscalculation. You owe money on your taxes as a result of these changes.” Yep, this is going to be a great day.

Usually, these notices are vague. They typically list various reasons which might be the cause of the change. Perhaps it’s an invalid social security number, or maybe it was a limit based on AGI. You get to take your best guess as to which of these reasons applies to you. This can lead some people to put off responding and that is a very big mistake.

CP11 notices are considered to be a “Math Error” procedure by the IRS and not an audit. This is an important distinction. In an audit, you have the opportunity to contest a tax assessment. A Math Error, on the other hand, will get you an immediate assessment if you do not contest it within the 60-day time period. This means IRS Collections will begin immediately.

You can contest the change by calling the IRS. Lots of luck with that approach given that you will be on hold for hours. The better way is to write up your response as to why the original return is correct and mail it certified to the IRS. Do not expect a quick response from the IRS. You will have plenty of time to gather documents to support your position.

For more information, here is a link to a Taxpayer Advocate Service blog

Burden of Proof

January is the month to receive IRS information forms such as W-2s and 1099s. Inevitably, some of these forms are going to wrong. Who has the burden of proof to correct these errors? The answer is that it’s you, the taxpayer. IRC 7491 does shift the burden to the IRS, but only if you are in court and have introduced “credible evidence” with respect to the issue. Bottom line, you can save yourself a lot of time and headaches by fixing the problem yourself before the IRS computer systems issue a letter.

This is a two-step process:

Contact the issuer and ask them to correct or amend the form. If the issuer will not fix their error or cannot be contacted, move on to step 2.
Gross up the income on your return to cover the error and take a deduction to offset it. Here is the critical part of this step – include a statement explaining the problem and deduction. Failure to explain and document this error could get you off on a very bad footing in an audit.

You could, of course, call the IRS and ask for their assistance with this problem. Lots of luck even getting them on the phone.