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."

Why the IRS will not accept an Offer to Compromise your Tax Debt

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS.

The IRS accepts less than a third of the Offer-in-Compromises that it receives. This is according to its own Data Book. Since it is a costly process to make an offer, it would behoove people to understand why these offers fail.

1. You must be in “Compliance” – meaning all the tax returns due for the last 6 years must have been filed and your current year estimated taxes and withholding are up to date. Failure here makes your offer Dead on Arrival. The IRS does not want to make deals with people who are digging the hole deeper.
2. The financial information that you provide must show that you have an inability to pay the debt in full. The IRS uses a formula approach to its evaluation. They apply it to the financial information you supply regarding the stuff that you own and your expected future cash flow. Making an offer that is less than what the formula shows that you can pay is almost certainly going to be rejected.

Why is it that the IRS will not accept an offer when the financial information shows a taxpayer could full pay? After all, the commercials all talk about them accepting “pennies on the dollar” when you use their services. The answer is simple – Why should they?

The IRS has collection powers that far exceed those of private debt collectors.

They have the police powers behind them and the force of law that will make a debtor’s life considerably more miserable than dealing with harassing phone calls from some debt collector agency.
They can levy wages, bank accounts, and money due to you from third parties. They can get into IRAs and pensions which are off-limits to everybody else.
Finally, they have an organization behind them that is not motivated by a profit percentage of the amount collected. They can be patient and persistent over the 10-year period that is the normal statute of limitations for collections.

Avoiding these two major pitfalls is why you probably need professional help from someone who understands the process and most importantly how the financial analysis works.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

How often do “Innocent Spouse” Claims Work?

Joe and Sally file a joint income tax return. Unbeknownst to Sally, Joe has underreported his business income and now she is on the hook for the tax. The answer is to file an Innocent Spouse claim and sever the joint liability. Will it work?

The IRS accepts these claims less than 25% of the time. These claims usually get turned down because the innocent spouse, while not having direct knowledge, should have realized that the reported income was too low. Additionally, he or she benefited from the underpayment of the tax. If the country club dues were $30k and they live in a $500k house while sending their kids to a private school, the idea that the business only produces $50k of income should be obviously wrong to anybody.

The scenario that does get accepted are ones where one spouse not only underreports his or her income but keeps their lifestyle in line with the reported income. Let’s say Joe skims $200k from his business and then hides that money overseas. Sally would have no reason to suspect that the tax return was incorrect and she would have received no benefit from the tax evasion.

Interestingly, there is a situation that can improve Sally’s chance of winning this claim. Innocent Spouse claims require the IRS to notify the other spouse about the claim and the results. Many times, a non-innocent spouse will submit information to the IRS disputing the other spouse’s claim. Inevitably this spouse shows themselves to be such a dick that the innocent spouse claims have a better chance of being accepted because the IRS people develop sympathy for the innocent spouse.

What is “Innocent Spouse Relief”?

Innocent Spouse Relief is a claim requesting relief from the Joint and Several Liability that accompanies a joint tax return. There are three requirements for this claim to work:

There must be an understatement of the tax that can be attributed to erroneous items of the other spouse.
The innocent spouse did not know and had no reason to know about the erroneous items when he or she signed the return.
It would be inequitable to hold the innocent spouse liable because they did not receive any benefit from the understatement or they were abused.

If the Innocent Spouse Claim is upheld the tax liability is split up between the two parties, usually by calculating two married filing separately returns. The results then are used to allocate a portion of the joint liability to each.

The Innocent Spouse Claim is confused many times with the “Injured Spouse Claim” which is a whole different kettle of fish. An injured spouse is someone who filed joint and had their part of the refund allocated to their spouse’s debt in which they were not liable. Almost always this is the result of a marriage in which one spouse had previous debt.

The Innocent Spouse Claim should also not be confused with fraud. Forged signatures or returns signed under duress are not valid returns. These cases, particularly the ones with forged signatures, have a good chance of being referred for criminal prosecution.

Innocent Spouse Claims are filed using form 8857. The injured spouse must make the claim within 2 years from the start of “significant collection activities”. The date of a notice of intent to levy is the common starting date for filing these claims.

The IRS Statue of Limitations Date is Usually Wrong

The IRS has 10 years to collect on a tax debt. This time period starts on the date of assessment, that is the date they post it to their database. It would seem to be a simple manner to figure out when the 10 years is up, but this is taxes after all. The complexity comes from events that can put a hold on the statute days from running.

These holds are the result of events happening that prevent the IRS from taking collection actions such as seizing a tax debtor’s bank account. This is only fair since it is conceivable that people would take advantage of the IRS’s processes to constantly initiate requests for a payment plan with the sole intention of running the clock on the IRS.

What are the events that will prevent the IRS from taking collection actions?

Filing bankruptcy is a big one. The entire time that the bankruptcy estate is open plus the following 6 months is added to the Statute of Limitations date.
Requesting a payment plan is another. The number of days that the IRS is considering whether to accept or reject is added to the 10-year date. If they decide to reject, an additional 30 days is added.
Similarly, the days that an Offer-in-Compromise is under consideration places a hold Statute of Limitations from running.

Now we come to the problem.

The IRS is very poor in updating its database when an Offer-in-Compromise or Payment Plan request is either accepted or rejected. Instead of seeing statute of limitations dates calculated as maybe a 9-month extension, you find them to be years long. Whether this is by design or just typical bureaucracy inefficiency is hard to say with certainty. My guess is that they are aware that maybe half the dates are wrong, but this error works to their benefit and as result is not a high priority to fix.

Bottom line, if your strategy is to wait out the Statute of Limitations, you had better plan on doing some work to prove what that date should be.

The Long-Term Fix to not making your Payroll Tax Deposits

In 2020 I wrote a blog post about your options if your cash flow was not adequate to pay your payroll tax deposits. These options are bleak – cut your payroll, close altogether, or the head-in-the-sand approach of just hoping things will improve. I did leave out one major idea – fix your cash flow.

Identifying the Real Problem

Cash flow problems come from two sources. Either you are profitable, but the timing of inflows and outflows is off. Or you are not profitable enough. When it comes to timing problems, the answer is simple – speed up collections or defer payments (hopefully to someone besides the IRS). The lack of profits is a much bigger problem and must be solved or you will be out of business.

What Can Be The Fix?

Most small business owners do a good job at avoiding unnecessary expenses. This is because they are highly incentivized and deeply involved in operations. It’s not likely that they will find salvation by cutting costs. Most of us miss the single area of our business that can have a big and immediate impact on profits – our pricing. One study from some years back reported that the average small business spends approximately 8 hours per year working on its pricing policies. Yet, a small increase of just 1 or 2 percent can have an impact in the area of 8 to 10 percent on pretax profits.

There are multiple ideas on how to raise your prices without driving off your customers. Some of them include:

Offer new products or services to existing customers (the new and improved approach).
Bundle your existing products and services.
Switch the subscription model for services.
Allow your customers to design their bundle of services by providing a menu on your website.
Use psychology to make your price seem smaller.
Change your marketing message to emphasize the value of the product or service to the customer.

These are just a few pricing ideas. My pricing manual has over 25 different pricing models that are worth considering. The main point is that you have to do something, and pricing is your best bet at fixing your cash problems.

The IRS and Electronic Accounting Records

One of the concerns many taxpayers have in an IRS audit is the request to turn over the backup files for their electronic accounting software such as QuickBooks. You have no choice but to comply with this request. The IRS has the law behind them on this request. Here are a couple of pointers from the IRS Q&A on Electronic Accounting Software Records.

You must provide them with an exact copy of the original backup files. Making any changes will smack of fraud. If you have a representative licensed to practice before the IRS who participates in making and producing the modified file, they could be in violation of IRS rules as well.
Downloading all the transactions to Excel and turning them over to the IRS will not work. They want an exact copy of the files.
The IRS can also request the data for the month before the audit period and the month after the audit period. If they find this information inadequate, they can expand their request.
You cannot close the accounting periods before the backup if it will condense the data. They want to see all the transactions, not totals.

Compliance with an IRS Records Request

Now here is an interesting question when it comes to electronic accounting records. The IRS’s latest pronouncement regarding these records was written in 1998 before web-based software became available.

I am a software developer and can tell you that almost nobody does backups to some sort of floppy disk anymore at the client level. As a provider of web-based software, we do automatic backups of the databases daily, but this is not the same thing as backups of a PC-based accounting program. The database backups generally overwrite old backups with all the information from the current database. What’s more, the accounting programs are completely separate from the databases that hold each individual client’s data. The program files pulling the data from the database have undoubtedly been changed many times to improve the input and report screens. There is no way to get back to the previous version from some years back.

If summoned, a web-based software provider can produce a file, but we don’t have a way to guarantee that the database is exactly what it was at the end of the tax year and you can be certain that the program files are not the same. The result is that web-based accounting software files are not in compliance with IRS electronic records rules as they are written on the IRS Q&A.

Transcript Monitoring Can Save Your Golden Goose

You have made your business a success. So much so, that you have been able to hire people to take over the boring stuff, such as writing checks and processing payroll tax returns. What can go wrong with this scenario?

The Scenario

The trusted accountant embezzles some money. Small amounts at first, but his or her perceived needs continue to grow so they continue the embezzlement game. To keep in the game, they need to provide reconciliations to show that all the money flowing through the bank accounts is accounted for. No problem. Let’s just continue to record payroll tax deposits in amounts equal to amounts stolen. But if we file the payroll tax returns, the IRS will start sending notices saying, “where is the cash?”. Problem solved, lets just not file the returns. After all, the IRS will take forever to follow up on the missing returns, especially if I mark the last one “final”.

The Result

The result is that the IRS eventually does follow up and the missing payroll deposits amount to the hundreds of thousands. The company will most likely not have the ability to recover and go out of business. The IRS will then access a penalty equal to 100% of the employee withholdings and social security taxes on the owner who is now back to being an employee of someone else.

The Solution

There is a new option in town to avoid this kind of disaster. Different tax representation firms use different names, but it essentially involves software regularly querying the IRS databases and reporting to their client business owners when the payroll tax returns have been filed and the amounts of payroll deposits actually paid. This allows the business owner to have a 3^rd party backdoor check on his trusted employees.

If you have any questions about how this service works, just give me a call at (352) 317-5692 or email jim@taxrepgainesville.com.

Have you heard about the Virtual Currency Trap?

The first question on the 2020 1040 was “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” A lot of people are tempted to answer No when they know they answer Yes. If, for no other reason, they consider this to be none of the government’s business. Particularly since virtual currency is thought to be a highly encrypted secret.

How the Trap Works

Here is the trap. The IRS has issued John Doe Summons for information about American investors to companies like Coinbase. These companies make it easy for non-tech people to invest and use virtual currencies. The IRS summons allowed them to get the names of people who have accounts with them. How well the IRS can track individual transactions is a question, but they certainly have enough information to catch a lot of people who answered the virtual question the wrong way.

This is a significant trap. The criminal division is actively looking through their records of Form 433s filed to find people who answered no of the form. Form 433 is used to report financial information for people looking for a payment plan, offer-in-compromise, or trying to get the IRS to give them some room before making payments. People who signed these forms with the wrong answer are setting themselves up for criminal prosecution for perjury.

How do you want to bet?

Here is one thought to keep in mind. Even if you think the IRS cannot get these records today, what about a year from now, or two, or three years? Fraud does not have a statute of limitations and I would certainly not like to bet against the government’s abilities to get hold of these records at some time in the future.

What should you do if you received an IRS Letter 11?

The IRS got back into the collections business on 6/15/21 with the release of over 5 million Letter 11s. This is the first significant collections activity in over a year due to the pandemic. Letter 11 is the formal announcement of the IRS’s intent to begin levy actions. This means they will start seizing the bank accounts, investment accounts, and some portion of the debtor’s wages.

The letter gives the taxpayer 30 days from the date of the letter to respond. There are three major options:

- Set up a payment plan,
- Making an offer-in-compromise, or
- Provide proof that they do not have the financial means to make any payments.

What should you do?

If you are a do-it-yourselfer type, then the best action is to go to the irs.gov website and signup for a payment plan. If you cannot qualify for the automatic plan or do not have the cash flow to handle the calculated payment, then bite the bullet and hire someone who has experience with IRS Collections. Proving you are uncollectable or making an Offer-In-Compromise is going to require a lot of financial analysis that is out of the skill range of most individuals.

What should you NOT do?

Ignore them. Nobody likes being ignored and the IRS is no exception. Also, they are not going to accidentally forget about you. Sooner or later, they will begin to seize your cash accounts. Letter 11 is the IRS’s way of suggesting that you come to the table and begin negotiating with them.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Latest IRS stats are released

The IRS issued its “Data Book” for FY 2019. This is an 80-page report on IRS activities for the 12 months ended 9/30/19. The most useful information that I can find in it is in regard to Offers-in-Compromise. Offers are where the IRS accepts less than the full amount owed and writes-off the balance. This is the fabled “pennies on the dollar” that you see on TV ads.

Only 33% of the 54,255 offers were accepted with an average offer amount of $16,177. They unfortunately do not report on the number we would really like to know – the average write-off amount. It would be very interesting to know if the write-offs average north of $200 thousand dollars. Well maybe that is not all that important. Given that the IRS has the best collection tools around, they are not likely to accept an offer unless they thought it was the best deal they could get. The reality is that Offers are not the cake walk that the TV commercials display.

It is no secret as to why 2/3 of the offers are rejected. Either the taxpayer is not in compliance with filing and paying their current year taxes or the offer amount was too low. The IRS uses a formula based on the taxpayer’s equity in assets they own plus their future projected cash flow. Failing to do this calculation in advance of filing the offer means the taxpayer is shooting in the dark.