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."

The Importance of Timely Communication with the IRS: Demonstrating Good Faith

When dealing with the IRS, timely communication is key. This is especially true when it comes to demonstrating good faith. No one likes being ignored, including the IRS. While the government’s response times can be glacially slow, they still appreciate and take note of taxpayers who communicate promptly and transparently.

1. Building Trust with the IRS

Demonstrating good faith is about building trust. When you respond promptly to IRS notices, inquiries, or requests for information, you show that you are serious about fulfilling your tax obligations. This proactive approach shows the IRS that you are willing to cooperate and not trying to evade your responsibilities. This can lead to more favorable treatment, as the IRS is more likely to work with you to resolve any issues.

2. Avoiding Aggressive Collection Actions

If the IRS doesn’t hear from you, they may assume you’re unwilling to pay your taxes. This can trigger aggressive collection actions like liens, levies, or wage garnishments. These actions can severely impact your financial stability and credit score. However, communicating with the IRS early and showing good faith can often prevent these actions. The IRS is more likely to grant additional time or negotiate a payment plan if they see that you are trying to resolve your tax issues.

3. Potential for Penalty Abatement

Another advantage of demonstrating good faith is the potential for penalty abatement. The IRS may waive penalties if you have a reasonable cause for not paying your taxes on time or filing late. This is more likely if you have a timely communication and cooperation history. Showing you’ve been responsive and proactive can strengthen your case when requesting penalty relief.

4. Facilitating Better Communication

Timely responses help facilitate better communication between you and the IRS. This can be especially important if your tax filings have misunderstandings or errors. By responding quickly, you can clarify discrepancies and ensure your records are accurate. This can prevent minor issues from escalating into more significant problems.

5. Enhancing Your Negotiating Position

You enhance your negotiating position with the IRS when you demonstrate good faith. If you need to negotiate an Installment Agreement or an Offer in Compromise, showing that you’ve been responsive and cooperative can work in your favor. The IRS is more likely to consider your proposal seriously if they see that you have a good faith communication track record.

In conclusion, demonstrating good faith through timely communication with the IRS is crucial in managing your tax affairs effectively. While it’s true that the government’s idea of a timely response can be slow, your proactive approach can make a significant difference. By staying responsive and transparent, you build trust, avoid aggressive collection actions, potentially qualify for penalty abatement, facilitate better communication, and enhance your negotiating position. So, if you receive any correspondence from the IRS, make it a priority to respond promptly – your financial health and peace of mind may depend on it.

Strategic Strategies to Dealing with IRS Debt Requires Strategic Timing

When facing potential tax issues with the IRS, developing your strategy as early as possible is crucial. Proactive planning can help you avoid the intense pressure from enforced collection actions, such as levies. But how much time is considered strategic timing? At least three months are needed to implement key strategies that can help manipulate the Reasonable Collection Potential (RCP) formula to your advantage. The IRS uses the RCP formula to determine how much they can reasonably expect to collect from you, considering your income, expenses, and assets. Here are some steps to take early on:

  1. Catching Up on Allowable Expenses

One essential strategy is ensuring you’re up-to-date on payments for allowable expenses like child support and student loans. These payments are considered necessary living expenses by the IRS and can reduce your disposable income, which in turn lowers your Reasonable Collection Potential (RCP). The IRS looks for a history of making these payments before including them in the RCP formula, which is why establishing a consistent payment record for at least three months is crucial.

  1. Replacing an Old Car

If you’re driving an old, unreliable car, consider replacing it with a new or more reliable vehicle. The IRS allows for a reasonable vehicle expense as part of necessary living costs. By purchasing a new car before engaging with the IRS, you can ensure that this significant expense is factored into your financial analysis. This step not only improves your daily life but also strategically reduces the amount the IRS considers available to pay off your tax debt.

  1. Signing Up for Life and Disability Insurance

These types of insurance are considered allowable expenses by the IRS and can also reduce your RCP. The IRS will look for at least three months of payments before it includes them in the formula.

  1. Maintaining Records and Documentation

To effectively present your case to the IRS, it’s essential to maintain thorough records and documentation of all allowable expenses. This includes keeping receipts, payment records, and contracts related to child support, vehicle purchases, and insurance policies. Early preparation of these documents will make it easier to substantiate your claims and negotiate with the IRS.

Conclusion

Getting your strategy down early is crucial for negotiating the best deal possible with IRS Collections. Time is the magic ingredient that makes this happen. By proactively managing your allowable expenses, documenting necessary costs, and making strategic financial decisions at least three months ahead, you position yourself for a more favorable resolution. Don’t wait for the IRS to apply pressure—start your strategy planning today to take control of your tax situation.

Navigating the IRS Appeals Process

Dealing with the IRS can feel daunting, especially if you disagree with a decision or assessment they’ve made. Luckily, the IRS offers an Appeals process that lets you challenge decisions in an informal yet structured setting. Here’s a step-by-step guide to help you navigate the IRS Appeals process smoothly.

Know Your Appeal Rights

First, understand that you have the right to appeal most IRS decisions. This includes disagreements over tax assessments, penalties, and other IRS actions. Ensure your appeal is timely and based on a legitimate dispute over facts or the law’s application.

Review the Notice

When the IRS makes a decision you can appeal, they’ll send you a notice. This notice details the decision, the reasons behind it, and your right to appeal. Read this document carefully and note any deadlines. You typically have 30 days from the notice date to file an appeal.

Prepare Your Appeal

To start an appeal, write a protest that clearly states your intention to appeal, the specific items you disagree with, and the reasons for your disagreement. Be detailed, providing supporting documentation and referencing relevant tax laws or IRS procedures.

For smaller disputes (generally under $25,000), you can use a simpler, less formal written request. IRS Form 12203, “Request for Appeals Review,” is typically used for these cases.

Submit Your Appeal

Send your written protest or Form 12203 to the office that issued the decision. Ensure your appeal is postmarked by the deadline specified in your notice. Late appeals are generally not accepted, so timeliness is critical.

Attend the Appeals Conference

Once you file your appeal, an Appeals Officer will be assigned to your case. The Appeals Office operates independently of other IRS offices, ensuring a fair review. The Appeals Officer will contact you to schedule a conference, which can be in person, by phone, or through correspondence.

During the conference, be ready to discuss your case in detail. The goal is to reach a mutually acceptable resolution without going to court. Present your evidence clearly and professionally, and be open to negotiations and compromises.

Receive the Decision

After the conference, the Appeals Officer will review all information and make a determination. If you reach an agreement, the IRS will issue a closing agreement that outlines the terms. If no agreement is reached, you’ll receive a “Notice of Deficiency,” allowing you to take your case to the U.S. Tax Court.

Benefits of the Appeals Process

The Appeals process can save time, reduce costs, and offer a less formal avenue for resolving disputes compared to court litigation. It also provides a chance to have your case reviewed by an independent party, increasing the likelihood of a fair outcome.

Conclusion

Navigating the Appeals process can improve your chances of a successful appeal. Stay organized, be thorough in your documentation, and seek professional advice if needed. The goal is to resolve your tax issues fairly and efficiently, ensuring you can move forward with peace of mind.

Benefits of the Appeals Process

Navigating the Appeals process can save time, reduce costs, and offer a less formal avenue for resolving disputes than court litigation. It also provides a chance to have your case reviewed by an independent party, increasing the likelihood of a fair outcome.

Conclusion

While the IRS Appeals process can be complex, understanding your rights and following the proper steps can significantly improve your chances of a successful appeal. Stay organized, be thorough in your documentation, and don’t hesitate to seek professional advice if needed. Remember, the goal is to resolve your tax issues fairly and efficiently for the benefit of both sides.

But I Don’t Owe This! When to Use a “Doubt-as-to-Liability” Offer

Have you ever received a notice from the IRS claiming you owe taxes but are certain there’s been a mistake? Maybe you believe the IRS has assessed the wrong amount, or there’s an error in your tax return. In such situations, you might consider submitting a “Doubt-as-to-Liability” Offer in Compromise (OIC-DATL). Let’s dive into what this means and when it’s appropriate to use this option.

What is a Doubt-as-to-Liability Offer?

A Doubt-as-to-Liability Offer in Compromise is a proposal you can submit to the IRS when you genuinely believe you don’t owe the tax debt in question. This type of offer asserts that there is a legitimate dispute over the accuracy of the assessed tax liability. The goal is to settle your tax debt for less than the full amount based on evidence that demonstrates you are not responsible for the total liability.

When to Use a Doubt-as-to-Liability Offer

  1. Erroneous Assessment: If you have solid proof that the IRS has made an error in assessing your tax liability, such as misinterpreting your tax return or using incorrect data, a Doubt-as-to-Liability offer may be appropriate.
  2. Documentation Issues: Sometimes, the IRS may lack proper documentation or misplace your submitted information, leading to an incorrect tax bill. You may use this type of offer to resolve the issue if you provide the missing or corrected documents.
  3. Audit Mistakes: If your tax debt arose from an audit and you believe the auditor made mistakes in calculating your liability, presenting a Doubt-as-to-Liability offer with supporting evidence could help rectify the situation.
  4. Legal Disputes: When there’s a disagreement on the interpretation of tax laws or regulations that led to the assessment, and you have a strong legal argument, this type of offer can be your pathway to resolution.
  5. Incorrect Third-Party Reporting: If third parties, such as employers or financial institutions, have reported erroneous information to the IRS, leading to an inflated tax liability, you can use a Doubt-as-to-Liability offer to correct this.
  6. Errors in Tax Credits or Deductions: If there are mistakes in applying tax credits or deductions that have resulted in an erroneous tax liability, you can present a Doubt-as-to-Liability offer to resolve these discrepancies.

Final Thoughts

The key to a successful Doubt-as-to-Liability offer is thorough documentation and a clear, compelling argument substantiating your claim. By taking these steps, you can address and resolve disputes with the IRS, potentially saving yourself from paying a tax debt you don’t owe.

Understanding Florida’s Voluntary Disclosure Program: A Path to Tax Compliance

You know you have been skirting the sales tax laws forever. You’re at a point where this plan is riskier and dumber than ever. What can you do to get back in compliance before fate sets in? Like the IRS, the Florida DOR has a program to let back into their good graces.

Florida’s Voluntary Disclosure Program provides a proactive way for taxpayers to come forward and rectify their tax obligations with reduced penalties and potential relief from interest and criminal prosecution. The primary goal is to foster a cooperative environment where taxpayers can rectify their mistakes without fearing severe repercussions.

Who Can Benefit from the Program?

The program is available to businesses and individuals, whether registered with the DOR or not. One key eligibility requirement is that the taxpayer must not have been previously contacted by the Department of Revenue regarding the tax liability in question. This ensures that the program is genuinely voluntary and not a response to an audit or investigation.

How to Apply:
  1. Submit a Disclosure Request: You can submit this online through the Florida Department of Revenue’s website or by mailing a written request. The application should include comprehensive details about the tax liability, such as the type of tax, the period of delinquency, and the amount owed for the last three years from the date of the disclosure request.
  2. Provide Complete Information: Full disclosure is critical. The Department of Revenue requires accurate and complete information to assess your case and determine the terms of the disclosure.
  3. Await Response: After you submit your request, the Department will review it and provide terms that may include reduced penalties and interest. Compliance with these terms is essential to benefiting from the program.
Benefits of Participation:
  • Limited Lookback: DOR only looks at taxes for the 3 prior years.
  • Penalty Reduction: One of the program’s most attractive aspects is the potential reduction or waiver of penalties associated with unpaid taxes.
  • Interest Reduction: In certain cases, the interest on unpaid taxes can also be reduced.
  • Avoid Criminal Prosecution: Taxpayers who fully comply with the terms of the voluntary disclosure agreement are generally not subject to criminal prosecution for the disclosed tax liabilities.
Conclusion:

Want to sleep better at night? This is the first step. For More Information

What to Do If There Is a Substitute for Return: File It or Leave It?

You receive an IRS letter informing you they are proposing changes to your tax return. However, you never filed a tax return, so how can they correct it? The answer is that the IRS filed your return using Substitute for Return (SFR). An SFR is the IRS’s way of estimating your tax liability using the information they have on hand, such as W-2s, 1099s, and other income reports. While this might seem helpful, it most often results in a higher tax bill because the IRS doesn’t include deductions, credits, or exemptions you might be eligible for.

There are 3 possible outcomes from this process:
  1. The IRS is bang on right with its calculation of the tax.
  2. The IRS overstates the tax due.
  3. The IRS understates the tax due.
What should you do?

In the first case, they got it right.  You do not need to do anything other than pay the assessment.

Usually, though, they overstate the tax due. The answer here is simple: File your actual and correct return (not an amended return).

But what should you do if the IRS understates the balance due? My recommendation is usually to do nothing. After all, you did not file a false return, and it’s on the IRS to audit and correct the assessment.

The Statute of Limitations

The 10-year Statute of Limitations for collecting the tax due runs as of the assessment date, regardless of whether it is an SFR. There is a small downside. Since you never filed your return, the 3-year Statute of Limitations for auditing and assessing additional taxes never runs. Given the IRS audit rates, this would seem like a small risk.

Conclusion

It’s better to file your return timely and avoid the IRS using its Substitute for Return process. Dealing with the inevitable letters can be irritating, and you risk additional interest and penalties. However, correcting the IRS assessment can be easily done by simply filing the correct return.

Options for Challenging a Bad Tax Assessment

If you’re in collections and facing a tax assessment you believe is incorrect, all is not lost. The IRS provides several options to challenge the assessment and manage your tax debt. Here are five key avenues to explore:

  1. Audit Reconsideration

Audit reconsideration is an option if you disagree with the results of an IRS audit. This can be particularly useful if you didn’t attend the audit, didn’t present certain facts during the audit, or have new information that could change the outcome.

  • How to Apply:
    • Submit a written request to the IRS office that conducted the audit.
    • Provide new documentation or information that supports your position, such as receipts or bank statements.
  • Outcome:
    • The IRS will review your request and may adjust your tax liability if they agree with your new evidence.
  1. Doubt-as-to-Liability Offer

A Doubt-as-to-Liability Offer in Compromise allows you to settle your tax debt for less than the full amount if there is genuine doubt about the accuracy of the tax liability.

  • Eligibility:
    • You must have filed all required tax returns and cannot dispute a tax liability already finally determined by a court.
  • Outcome:
    • If accepted, you settle your tax debt for the agreed-upon amount.
  1. Collection Due Process (CDP) Hearing

If you receive a Notice of Federal Tax Lien or a Notice of Intent to Levy, you have the right to request a CDP hearing to dispute the collection action.

  • How to Request:
    • Submit Form 12153, Request for a Collection Due Process or Equivalent Hearing, within 30 days of the notice.
  • During the Hearing:
    • Present your case and any supporting documentation to an independent IRS Appeals Officer.
  • Outcome:
    • The Appeals Officer will review your case and make a determination, which could result in the removal of the lien or levy.
  1. Pay and Refund

If you disagree with the tax assessment but cannot resolve it through other means, you can pay the disputed amount and then file a claim for a refund.

  • How to Proceed:
    • Pay the full amount of the disputed tax.
    • File Form 1040X, Amended U.S. Individual Income Tax Return, or Form 843, Claim for Refund and Request for Abatement, to request a refund.
  • Outcome:
    • If the IRS denies your refund claim, you can file a lawsuit in a U.S. District Court or the U.S. Court of Federal Claims to seek a judicial review.
  1. Bankruptcy

In some cases, discharging tax debt through bankruptcy might be an option, although this is generally a last resort and has specific criteria.

  • Eligibility:
    • The tax debt must be at least three years old, and you must have filed the tax returns at least two years before filing for bankruptcy.
    • Other conditions, such as passing the “240-day rule,” also apply.
  • Outcome:
    • If successful, your tax debt may be discharged, relieving you of the obligation to pay it.

Conclusion

Challenging a bad tax assessment while in collections is possible through several IRS mechanisms, including audit reconsideration, Doubt-as-to-Liability offers, Collection Due Process hearings, the pay and refund method, and bankruptcy. Understanding these options and following the appropriate procedures can help you effectively manage and potentially reduce your tax debt.

Navigating IRS Payment Plans: Finding the Right Fit for Your Tax Situation

Dealing with tax debt can be a real headache, but guess what? The IRS would rather make a deal with you over the expense of sending Collections people to make threats. The IRS offers some pretty flexible payment plans to help you out. Let’s break down your options:

Short-Term Payment Plans

Who’s It For?
  • Perfect if you can knock out your tax debt in 180 days or less.
  • Available if you owe less than $100,000 in combined tax, penalties, and interest.
What’s the Deal?
  • There is no setup fee, but keep in mind that interest and penalties will still accrue until you pay in full.
How to Apply:
  • You can do it online, over the phone, by mail, or in person at an IRS office.

Long-Term Payment Plans (Installment Agreements)

Who’s It For?
  • If you need more than 180 days to clear your debt.
  • Available if you owe less than $50,000 in combined tax, penalties, and interest.
What’s the Deal?
  • Setup fee: $31 for online applications (direct debit), $149 for other methods, with discounts for low-income applicants.
  • Pay it off over up to 72 months.
How to Apply:
  • Same deal: online, by phone, mail, or in-person.
  • Pro tip: Go for direct debit to dodge extra fees and avoid missed payments.

Streamlined Installment Agreements

Who’s It For?
  • Owe $50,000 or less and can pay off within 72 months.
What’s the Deal?
  • Same fees and process as long-term plans.
  • No need for a financial disclosure, so it’s less hassle.

Partial Payment Installment Agreements (PPIA)

Who’s It For?
  • Can’t pay your full tax debt within the usual 10-year limit.
What’s the Deal?
  • Payments are based on what you can afford after covering your necessary living expenses as determined by various rules.
  • Requires detailed financial info and regular reviews to adjust payments if your situation changes.
How to Apply:
  • Submit Form 9465 (Installment Agreement Request) with a financial statement (Form 433-F or Form 433-A).

Wrap-Up

Picking the right IRS payment plan can save you a lot of stress and hassle. Here’s some quick advice:

  • Don’t agree to a monthly payment that you can’t live with. Defaulting can make the IRS way harder to deal with.
  • If you’re looking at a long-term or partial payment plan, getting some professional help can make a big difference. Doing a financial analysis beforehand, using the IRS formula to figure out your reasonable living expenses, can help you organize your finances so you qualify for a lower monthly payment.

So there you have it! Knowing your options and picking the right plan can make dealing with the IRS much easier.

Common Business Mistakes in Dealing with the IRS

Dealing with the IRS can be intimidating and a real pain. However, avoiding the common mistakes can reduce your financial risks and heartburn. Here are some pitfalls to watch out for and tips on handling them effectively.

1. Ignoring IRS Notices

This is by far the biggest mistake you can make. Nobody likes to be ignored. This is particularly true of large government organizations that feel they are what keeps the Country going. IRS notices are not going to disappear if left unattended. Ignoring them can lead to more severe consequences, such as additional penalties, interest, or even enforcement actions like wage garnishments or bank levies. Dealing with the problem by reading and responding to IRS communications is always the best way.

2. Procrastinating on Filing and Payments

Delaying your tax filings and payments can lead to unnecessary penalties and interest. Even if you cannot pay your tax bill in full, filing your return on time is crucial to avoid the late filing penalty. The IRS has made it easy to set up payment plans. Use this option.

3. Misunderstanding Payment Options

If you owe more than you can pay, it’s important to understand your options rather than avoiding payment altogether. The IRS offers several solutions, including Installment Agreements and Offers in Compromise (OIC). Installment Agreements allow you to pay your debt over time, while an OIC lets you settle for less than the full amount owed if you meet specific criteria.

4. Not Addressing the Core Issue – Business Profitability

Low profitability is almost always why business owners fall behind in tax payments. Most of us tend to treat losses or break-even situations as a hopefully temporary thing. In the long run, the safer approach is treating it as if it were an existential risk to the business. Immediately focus on improving your business’s profitability by revising prices and cutting unnecessary expenses. If you can’t fix this problem, consider closing the business before the buildup of tax debt makes your future miserable.

Conclusion

Dealing with the IRS doesn’t have to be daunting if you avoid these common mistakes and take proactive steps. Responding promptly to notices, filing timely, understanding your payment options, and addressing your profitability issues timely will reduce your IRS interactions to nothing more than an irritation.

What to Do If Your Offer-in-Compromise (OIC) Is Rejected

The IRS rejects 60-70% of Offers in Compromise (OIC) submitted by taxpayers. Receiving a rejection for your OIC can be disheartening, but it’s not the end of the road. Here’s what to do next:

Understand the Reason for Rejection: Carefully review the rejection letter. Common reasons include discrepancies in your financial information or the IRS determining you can pay the full amount through a payment plan.

Consider Appealing: If you believe the rejection was unjustified, you can appeal within 30 days. Use Form 13711, Request for Appeal of Offer in Compromise, to start the process. Be ready to provide additional documentation. The IRS does not publish official statistics on OIC appeal success rates, but many tax professionals report high acceptance rates for well-prepared appeals.

Evaluate Alternative Options: If an appeal isn’t viable, explore other avenues. You might qualify for an Installment Agreement to pay off your debt in monthly installments. If you’re experiencing financial hardship, you could request Currently Not Collectible (CNC) status. This temporarily pauses collection efforts.

Remember, a rejected OIC doesn’t mean you’re out of options. By understanding the reasons, exploring alternatives, and seeking expert advice, you can find a viable solution to manage your tax debt.