If your tax debt is the result of an IRS Audit, do not overlook the possibility of getting the IRS to reverse the audit assessment. The Audit Reconsideration as explained in Pub 3598 is a process to get some relief from audit results you do agree with or an assessment made by the IRS because you did not file a return.
You may request audit reconsideration if you:
- Did not appear for your audit
- Moved and did not receive correspondence from the IRS
- Have additional information to present that you did not provide during your original audit
- Disagree with the assessment from the audit
The IRS recommends you use form 12661 to explain your dispute. New information is the key to getting this process to work. It is critical that you provide all the documentation with the request. Requests without documentation enclosed will be denied out of hand. You can use this process as long as the assessment is outstanding.
Your reconsideration request will be accepted if you:
- submit information that has not been considered previously.
- filed a return after the IRS completed a return for you.
- believe the IRS made a computational or processing error in assessing your tax.
- The liability is unpaid, or credits are denied.
This is a relatively cheap process to get rid of an IRS debt if you have the grounds to pursue it.
The Treasury Inspector General released an audit report on the IRS electronic filing system. Some of the interesting facts in this report include:
- The IRS destroyed an estimated 30 million paper 1099 type forms because of their processing backlog. Good thing we went through all the trouble to file them.
- The percentage of business returns filed electronically is now up to 63 percent which is nowhere close to the 93% of the 1040s filed electronically.
- The cost to process returns electronically is pennies vs multiple dollars. In the case of 1040s, it is 36 cents compared to $15.21 for example.
The bottom line is that the IRS is going to require more and more electronic filing of business returns, especially payroll tax returns. This is a good and bad thing from my perspective. Processing returns electronically means that we get an almost immediate acknowledgment without the hassle of certified mail. Additionally, it significantly reduces the IRS keypunch error rates in inputting paper returns. On the bad side, the IRS’s attempts at preventing id theft continues to make it harder for taxpayers to file electronically.
The previous posts talked about the strategies of making an offer-in-compromise and payment agreements. These strategies work for people who can either fully or partially pay their IRS debt. But what about people whose financial picture is so bleak that they cannot make any payments? Are they doomed to forever harassment by government agents?
The answer is no, all is not lost. The government does not want to waste their resources chasing people who cannot pay when they have lots of cases for big bucks in inventory just waiting to get worked. The catch here is that you must prove to them that you are in the first group and not the second.
The way this works is that you must provide information about your equity in things you own and your cash flow. The IRS will review this information to verify that it is adequate and correct. The numbers are then plugged into a formula known as the “Reasonable Collection Potential”. If the result shows that you have no excess cash to contribute to the Treasury, the IRS changes your status to Currently Not Collectable and you get a pass from collection actions for approximately 2 years.
Besides getting the IRS off your back for 2 years or more, there is another huge benefit of proving your Currently Not Collectable status. The 10-year Statute of Limitations continues to run. Get across the 10-year line and the debt is no longer collectable by the IRS.
There are several strategies to consider when it comes to dealing with IRS debt. Making an online Payment Agreement to full-pay the debt over time is the easiest way to get the IRS off your back.
Online Payment Plan Basics
- Individuals, including sole practitioners and independent contractors, have two choices.
- Long-term payment plan – total tax, penalties, and interest is $50,000 or less.
- Short-term payment plan – total tax, penalties, and interest is $100,000 or less and can be paid in 180 days or less
- Business Payment Plan comes in only one flavor – the total liability must be $25,000 or less.
- The wonderful thing about these plans is that you do not have to submit financial information.
- Approval or disapproval will be almost instantaneous.
- Go to https://www.irs.gov/payments/online-payment-agreement-application
Paper Payment Plan Basics
- These plans are a lot harder. You must submit financial information about assets that you own and your cash flow so that the IRS can determine what they think your monthly payments should be.
- The IRS will suspend counting days on the 10-year Statute of Limitations while they consider the request. This process will probably add a minimum of six months to your time in purgatory.
- The IRS will reluctantly accept payment plan requests that are less than full-pay provided your financial information supports the lower payment.
The Good and Bad of Payment Plans
- IRS will suspend collection activities if the plan is approved.
- A majority of payment agreements end up in default. The more plans that you default, the harder it gets to make future deals. The golden rule here is to call them if you can’t make your payments. Do not wait for them to call you.
Payment Agreements are great if you can afford to make payments. My next post will be about what to do when you cannot afford to pay anything.
There are several strategies to consider when it comes to dealing with IRS debt. The Offer-in-Compromise is an option for taxpayers who are simply not in a financial position to pay their IRS debt in full. The IRS will accept less than full pay, but the process of getting that agreement is not easy. But, contrary to the ads on TV, most of the offers are rejected by the government. In fact, only 14,000 out of 45,000 offers were accepted in 2020 as per the IRS’s latest data book.
- You must be able to prove that your financial situation is such that you are not likely to be able to full-pay the debt.
- All your tax returns due in the last 6 years must have been filed.
- Your estimated tax payments and withholding for the current year must be adequate to cover your current year’s tax liability. The IRS will not make an agreement if you are still digging the hole deeper.
- The offer amount must be adequate. The IRS uses a formula called the “Reasonable Collection Potential” to determine what they will accept.
- Your offer must include a payment equal to 20% of the offer amount if you are offering a lump sum payment agreement.
- Should the IRS reject your offer, the tax payments will not be returned.
- Should the IRS accept your offer, you must stay in compliance for a period of five years. Failure to do this, by say not filing on time or making estimated tax payments, results in the Offer being void. And, no, the IRS will not be returning any tax payments made.
- The 10-year Statute of Limitations is put on hold while the IRS is considering your offer.
The fact that most offers are rejected is undoubtedly the result of people making offers without understanding the process or the Reasonable Collection Potential formula. This is not helped by the TV ads promising ‘pennies on the dollar’ results without mentioning that you must prove your financial position.
There is a question on your tax return about foreign bank accounts that trips people up, particularly immigrants. While the question seems to be aimed at bank accounts, it’s much broader. It includes brokerage and other financial accounts. Having signature or other authority over these accounts if they exceed $10,000 at any time during the year requires you to file an FBAR report with the IRS electronically.
The gotcha’s come in the form of penalties. Making an inadvertent mistake such as not realizing that the balance of the accounts came to $10,001 for only a single day results in a $13,481 penalty. If the IRS considers the omission willful, the penalty zooms to the greater of $100,000 or 50% of the balance. These penalties will wipe out most of the accumulated wealth in these accounts.
The FBAR report for 2021 is due today, 4/18. The good news for some is that there is an automatic 6-month extension until 10/15/22 if you do not file on time. This is a truly automatic extension that does not require you to file a form.
For those that may want to answer the question on their tax return as ‘no’ on the theory that the government cannot get the information, remember this. Even if the government cannot get this information now, that could change in less than a year.
Step Number 1 for developing a strategy to deal with IRS debt is to do a financial analysis of the client to determine what your options are. This involves the client’s information on what they own and their future cash. The results are fed into the same formulas that the IRS uses to determine the ability to pay.
Step Number 2 is to consider which is the optimal strategy based on the ability to pay results. These strategies can be thought of as follows:
- Make an offer to the IRS to settle the debt for less than the total owed.
- Make a payment plan that the client can live with.
- Get the IRS to back off by showing that the client is simply not in a position to make payments.
- Attempt to get the original assessment modified because of errors.
- File an Innocent or Injured Spouse claim.
- If this is a problem of errors on the IRS side, file a Form 911 with the Taxpayer Advocate Service to push them to correct the records.
- If this is a business owner, develop a new business plan to improve profitability and cash flow to the client so that they can pay the debt.
Additionally, there is the possibility of filing bankruptcy and having some of the assessments washed out by the bankruptcy court. This requires an attorney that specializes in bankruptcy.
My next 7 posts will discuss each of these strategies in more detail.
I have been writing about the statute of limitations as they relate to non-filers. But there are other special circumstances in that Congress and the Courts have developed rules that affect the statute of limitations regarding refunds. Here are a few pointers to think about:
Missing the date for claiming a refund is a real bummer. If you are lucky, maybe one of these exceptions will save the day.
Previously I detailed that there was a statute of limitations on when you could file a claim for refund and get credit for any overpayments. That limit is 3 years from the due date or 2 years from the date of payment whichever is later. There are exceptions to this law and one of those is for medical reasons.
Sometimes it’s not laziness that produces a non-filer situation. Medical problems can also result in non-filer status. Congress carved out an exception for this in the tax code and the IRS issued Rev. Proc. 99-21 to cover this situation. The statute of limitations is suspended when the taxpayer is determined to have a mental or physical impairment that can be expected to result in their death or last for a period of at least 12 months.
There are two major requirements to use this exception:
- No person was authorized to act on behalf of the taxpayer, including their spouse, during the disability period, and
- There must be a written statement from a qualified physician as to the disability. This statement must be detailed and specifically state that the taxpayer was prevented from managing his or her affairs.
There are lots of ways to get the physician’s statement wrong, so pay attention to Rev. Proc. 99-21 if you are going to use this exception.
Lots of Non-Filers are not out to rip off the IRS. They figure they have a refund, so the due date is not important to them. After all, the penalties for late filing are all based on the amount owed to the IRS. Late filing turns into a habit and many times that delay turns into years.
Here is the catch. You only have three years from the due date of the return to file and claim your refund. Once the three years are up, too bad. I know of cases where this has happened to the tune of tens of thousands of dollars. Many times, somebody will have a big year and find out they owe, but it is too late to use the prior year’s refunds to offset that liability.
Unless your intention is to make a voluntary contribution to the US Treasury, file the return. The IRS does not have the power to fix this, once the three years are gone.