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."

Renegotiate your IRS Payment Plan!

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

If you are one of the many people hurt by the impact of the Covid-19 virus and have an existing installment payment plan in place, now is the time to renegotiate. If you qualify for the streamlined plans, simply go online to your account using one of these links:

Revising this agreement does not require any additional information submittals if you still qualify under one of the streamlined plans.

If your situation is dire, then you need to contact the IRS and ask for Currently Not Collectable Status. This will require that you fill out a Form 433 regarding your assets and income. The Currently Not Collectable status results in the IRS suspending any collections actions for at least 18 months. Given their current back logs, those currently in this status will probably be given a pass for a much longer period.

Renegotiating now is a much better alternative to simply defaulting.

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.

 

Are You One of the 7M Non-Filers?

Are you among  an estimated 7 million ‘non-filers’ in the USA? If you are, I’ll share bad news and good news. But first let’s look at the term non-filer:

Definition of a Non-Filer

According to Farlex Financial Dictionary (2009, accessed June 21, 2020),

“A non-filer is a person or corporation who does not file a tax return by the required date. In general, a person who has filed taxes once must continue to do so for the rest of his/her life (or existence, if a corporation).”

Let’s break that down a bit:

  • You’re a non-filer if you didn’t file in 2018 but did in 2017
  • You’re still  OK if you haven’t filed for 2019; the filing date was moved to July 15 2020 due to coronavirus
  • You’re a non-filer if you haven’t filed federal taxes in ten years (or 2-9 years for that matter) but did for some prior year(s), as required.
  • You’re a non-filer if you’ve never ever filed taxes (and were not exempt from filing).

As you might imagine, the longer it’s been, the more complicated it can be to get caught up, and the heavier the potential consequences in terms of interest, fees and penalties (25% of the original amount owed). If you have not filed because you know you’ll have tax debt you can’t pay, avoiding these penalties is your top priority.

I can guess the question many want answered: “What’s  my chance of staying  a non-filer forever—of flying under the radar ’til the statute of limitations runs out and I’m home free?”

Here’s the reality check, some bad news followed by good news:

The Bad News About Being a Non-Filer

The bad news (it may be news to you) is that if you are owed a refund you must claim it timely (within 3 years) or lose it. Read more about this in my post about the non-filer who believes all is good as the IRS owes him.

The other bad news  for non-filers is that data being collected about us in this digital age is being  scrutinized by IRS like never before. At one time it was easier to ‘get lost in the crowd’ and not file federal tax returns. But the IRS now has programs to identify and collect from people who are not filing and should be. The IRS is using public and private databases such as driver license records. By cross-referencing databases they can determine who is likely to be earning money that would require them to file.

The Good News for Non-Filers

What many others want to know of course, “Is there a legal way out that won’t bankrupt me or put me in money misery for ever?”

The first piece of good news for non-filers is that regardless of how many years have passed since you filed, to ‘catch up’ you only need to file the last six years. This fact could positively influence your timing. The second piece of good news is that the IRS wants a fresh start with non-filer citizens. It wants to kiss and make up, and get paid something. The steps to get square with the IRS are not complex, but choosing the best option for  your financial situation can be. You might also need help devising and carrying out a strategy to pay the least amount. That’s where I come in as your tax advisor and representative. If you’re a non-filer and have decided to explore getting square, I recommend you take me up on a free, confidential phone consult.

I’m CPA Jim Payne, your tax advisor and representative. I look after your interests. I look forward to serving you, saving you money, and releasing you from much of the stress and anxiety of dealing with the IRS or State of Florida tax authorities. Please text or call me at 352-317-5692 or email me for your free phone consult.

What’s ‘Adequate Proof’ to the IRS?

How should you substantiate your expenses for IRS purposes? The technical answer is – it depends on the type of expenditure and upon the IRS auditor’s evaluation of the situation.

Internal Revenue Code Sections, such as 274(d), specify the requirements to have records, but they do not explain what is adequate. IRS Regulations do provide more detail, but it still comes down to the auditor’s judgment about what is adequate.

Here is a summary of what you should have as the minimums:

  • Auto expenses – Keep a log of daily travel if the vehicle can be used for both personal and business. The lack of a log probably makes this the number- one most often adjusted item on tax returns.
  • Travel expenses – Meals and other expenses (excluding lodging) under $75 can be substantiated with a log or expense report. See Publication 463 for more information.
  • Depreciable Fixed Asset purchases – Keep the purchase documents for at least three years after the asset has been sold or abandoned.
  • Operating expenses – These are all the other ordinary and necessary expenses required to operate a business. The big problem in audits is all those expenses were paid with a credit card, such as supplies from Home Depot. The credit card statement just shows that you have bought something, not what that thing was or why it was necessary. Keeping the individual cash register receipts can help convince an auditor that these expenses were legitimate.

A few things to keep in mind when thinking about substantiation.

  • Your calendars from years past can help in proving auto and travel if you do not have a log.
  • There is the Cohen rule which comes out of case from 90 years ago that does give taxpayers a weak tool to claim expenses based on estimates. This rule does stand up in the courts — sometimes.
  • Your testimony also counts. After all, you’re the eyewitness. However, this only works if you have established credibility with the auditor by showing that all your other expenses were reasonable and adequately documented.

Understanding what is at risk can help to justify the pain of keeping all these records. If the IRS examines your return for any one year and discovers materials deficiencies, they will disallow at least part of these expenses. And, they will typically also audit all the other returns for which the statute of limitations has not run out. This means that the one-year tax adjustment is probably going to be times three as a minimum. Caveat Ductus!

3 Cases: IRS Agrees to Slash Tax Debts

Here are three  reasons why the IRS may accept your Offer-in-Compromise — your offer to pay less tax debt than you owe:

  1. Doubt as to Liability – this applies to taxpayers with good arguments that they do not owe the tax, either partly or completely.
  2. Doubt as to Collectability – taxpayers have neither income or assets to pay their tax debt.
  3. Hardship to Taxpayer – the taxpayer has the funds to pay the full debt but doing so will create an economic hardship. Think of an 80-year-old with a lumpsum payout from their retirement plan. The funds are needed to pay their living costs for the rest of their life.

Wow – sounds very reasonable. Why then is it that most (60%) Compromise Offers are rejected by the IRS? The answer to this boils down to two major categories:

  1. The taxpayer is not current on their tax return filings or has not made their current year estimated tax payments. The IRS will not even consider an Offer if this is the case. First is because the taxes must first be assessed before they can be compromised. Secondly, taxpayers who are not making their current year tax payments will be in default before the ink is dried.
  2. The second big reason for rejection is that the Offer is too small. The IRS looks at both the equity in the assets you own and your future cash flow. The result of this analysis is the Reasonable Collection Potential or RCP Offer less than this amount and the IRS is going to reason that it is not in the best interest of the government to compromise.

What should you do if you think you might be eligible? Figuring out the RCP amount is complex, so it is probably a good time to get professional help. Understanding how the RCP formula works will allow you to arrange your financial affairs in advance of the offer to minimize the offer amount without having it rejected.

Don’t Put Mom In a Payroll Tax Ditch!

The Scenario – You need to make payroll this week but don’t have the cash. So, you go to Mom for a loan. She wants to help, but has limits.  So, she writes you a check for the exact amount of the net payroll, and good record-keeper that she is,  writes in the memo, “Net payroll due June 19, 2020.”

NOT such a great idea!

IRC Section 3505 allows the IRS to collect unpaid payroll Trust Funds from third party lenders. This applies when lenders lend funds for payroll knowing that the employer could not or would not deposit the required federal payroll taxes.

Yes, taking a loan for the net amount of the payroll is reasonably good proof that the loan was only for payroll; it was unlikely that the corresponding payroll deposit would be made. The IRS uses this evidence to assess the unpaid taxes on Mom, who may no longer love you as much.

How do you avoid alienating Mom? Do what professional lenders do in such loan circumstances. First, they’d never make the loan for the exact amount of the net payroll. Second, the loan agreement would NOT specify that the money was to be spent on payroll. This is a reasonably easy way to avoiding putting Mom down a hole.

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

Smart Way to Pay Late Payroll Taxes

The Scenario – Your business has fallen behind on paying payroll taxes. You can borrow some money, but not enough to pay off the full past due amount. Now what?

The answer is that you want to minimize the impact of the IRS assessing a penalty on you personally for 100% of the unpaid Trust Funds. The way you do it is to make a voluntary payment with a check. On that check you want to write in the comments section “Trust Funds Only”.  Due to Revenue Procedure 2002-26, the IRS must comply with your request on how to apply the payment against your account.

Why is this good? Sooner or later the IRS is going to get around to collecting those payroll taxes. Their big tool in this process is to access a penalty on the “responsible parties” equal to 100% of the money withheld from employees’ paychecks for income, social security, and medicare taxes. If you make a payment for the business to cover part of the past due amount without any designations, the IRS will automatically apply it first to the unpaid employer taxes. This allows them to maximize the 100% penalty when it is assessed.

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 .

Can’t Pay Your Payroll Taxes?

Despite shrinking revenue, many businesses owners are choosing to keep valuable employees during the coronavirus shutdown.  And with cash in short supply, it’s tempting to ‘defer payroll tax deposits to the IRS.

I assure you,  going broke owing the IRS for payroll taxes is the worst mistake a business owner can make.

It’s time for a new game plan! Companies that are unable to make their required payroll tax deposits —and are out of borrowing power —have these choices:

  1. Downsize the staff to a level you can afford. This may mean going back to the owner being the only employee. But drastically cutting your overhead will allow you to get by while exploring other avenues.
  2. Close altogether.
  3. Or, take the biggest risk of all – keep things as they are, and hope things get better.  This approach has led a lot of people to a decade of grief. They continue to pay payroll, but stop making their payroll deposits.

You might think that the payroll tax is a corporate liability and that you personally can walk away. Think again. The IRS can and will assess a penalty equal to the trust funds (taxes withheld from the employees) on anybody that they feel is responsible for not paying them. Every business owner with check-signing authority will most likely be considered a responsible person. Here is the disaster — you cannot get rid of this penalty by filing individual bankruptcy. The IRS is going to be after you for at least 10 years.

If your cash flow is not cutting it, options 1 and 2 are your best bet. Your life will probably recover in 2 to 5 years and you can mark it up to lessons learned. Failing at option 3 will greatly expand your suffering.

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 .

 

Payroll Protection Plan Has a Nasty Hook

The IRS has rained upon the PPP parade. The CARES Act sounded like a great thing to keep many small businesses in operations while everybody sheltered at home. Loans at 2.5 times monthly payroll have been issued at super low interest rates. One of the provisions under the Payroll Protection Program declared that amounts spent on payroll, rent, and utilities would be forgiven. What’s more, the amounts forgiven would not be considered to be taxable income, which is usually the case with forgiven loans.

Now IRS Notice 2020-32 has put the kabash on this part of the Act. While the forgiven amounts will not be income, the expenses used to qualify for that write-off are not going to be deductible. This does make a certain amount of sense since allowing the deductions for expenses paid by someone else would have been the equivalent of double dipping. However, you can bet that this is going to be an audit issue down the road for people whose accounting systems are not up to keeping costs separated.

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

IRS ‘Math Fix’ Goes Too Far

One of the current problems at the IRS as pointed out by Tax Advocate Service’s 2018 Annual Report to Congress was the blurring of the lines of when has a tax return been audited vs. a math error correction. This is an important distinction. An audit comes with the right for judicial review plus numerous notifications while a math correction is an automatic assessment that just happens with only one letter.

There are 17 types of errors that the IRS considers to be math errors. Some of them have nothing to do with math and are errors in reporting ID numbers such as claiming a dependent and mistyping their social security number. The result is the disallowance of deductions and credits without the taxpayer having access to the processes that an audit would have allowed. Worse, the return is still eligible for additional assessments giving the IRS a second bite at the apple.

Allowing the IRS the ability to correct an obvious math error is a benefit for both the government and the taxpayer. It’s an efficient fix. But they are taking it way too far when they start making adjustments because some ID number does not match. Disallowing deductions for a child because the social security numbers do not match is not a math error. Maybe the deductions should be disallowed, but shortchanging the taxpayer’s rights for judicial review is not the right approach.

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.

Three Ways to Deal with IRS Debt

You owe the IRS a lot of money. What can you do to get your life back on track? Basically, it comes down one of three options:

  • Convince the IRS that you are not in a position to pay
  • Make a deal to make monthly payments over a period of time
  • Make an Offer-in-Compromise in that the IRS will take some smaller amount and write off the debt balance.

Figuring out which of these three doors is the best option for you depends on your situation as defined by an IRS formula called the Reasonable Collection Potential or RCP. The RCP takes your monthly income and offsets that with “allowable” expenses to determine your disposable income (i.e., what you could pay the IRS monthly). This is the base line amount for negotiations with the IRS.

If your RCP is zero, then the IRS will check a box on your file as “Uncollectable” and go away for 18 to 24 months. They will revisit the case every couple of years until the Statute of Limitations expires at which time, they will write-off the balance.

If your RCP is a positive number, all is not lost. You can to some extent arrange your financial affairs so as to minimize the RCP calculation. Making these payments regularly usually means that the IRS will leave you alone until the Statute of Limitations date gets close. If a final check of your records does not show anything stupid like the purchase of Leer Jet, then they will likely write-off the balance.

Finally, there is the Offer-in-Compromise that is so famously shown on TV as “I only paid pennies on the dollar”. Frankly, that is hooey. Why would the organization with the most collection powers in the world just let someone go? The answer is that they don’t. Fully 80% of Offers are rejected by the IRS. The 20% that are accepted only happen because the taxpayer was able to demonstrate that this was the best deal that the IRS could expect to make.

There is a fourth option that makes sense in some cases – filing bankruptcy. The rules are a little complicated and you need to consider this with an experienced attorney who specializes in bankruptcy.

There are ways to navigate out of this mess. It takes a considerable amount of work to evaluate which is the best route to take.