Category: IRS Processes

Statute Of Limitations: The IRS Is Wrong Many Times

When it comes to dealing with the IRS, many taxpayers feel a sense of dread—and for good reason. The IRS, while powerful, does not have a reputation for precision. In fact, the agency is often wrong, and taxpayers can be left sorting through the mess. One critical area where the IRS often stumbles is in applying the Statute of Limitations (SOL), the time limit for certain IRS actions, such as audits or collections. Understanding how the IRS frequently miscalculates the SOL could help you protect your rights and push back when they overstep.

What is the Statute of Limitations (SOL)?

The Statute of Limitations essentially places a deadline on how long the IRS can take certain actions:

  1. Audits – The IRS generally has three years from when you file your return to audit it. However, if you underreport your income by 25% or more, that window extends to six years. If you fail to file a return or commit fraud, there’s no limit—the IRS can audit anytime.
  2. Collections – For unpaid taxes, the IRS has 10 years from the date they assess the tax to collect it. After that, they are supposed to stop all collection efforts.

Sounds simple, right? Not so fast. The IRS often messes up when calculating these deadlines.

How Does the IRS Get the SOL Wrong?

One of the most common errors involves “tolling events,” which pause or extend the SOL. These events include filing for bankruptcy, submitting an Offer in Compromise (OIC), or requesting a Collection Due Process (CDP) hearing. Each of these can temporarily stop the clock, but the IRS can (and does) miscalculate how long the pause lasts, incorrectly extending the SOL.

Another frequent mistake happens when the IRS doesn’t correctly record when a return was filed or tax was assessed. This could lead to the IRS attempting to collect taxes or audit a return long after the deadline. For taxpayers, this can feel like being chased for a debt that should have been closed years ago.

What Can You Do When the IRS Makes Mistakes?

If you think the IRS is acting outside the SOL, you have options:

  • Request your account transcripts using IRS Form 4506-T. This will give you a breakdown of your tax history and show how the IRS calculates dates.
  • You can challenge the IRS’s actions by appealing or disputing their calculation. Working with the Taxpayer Advocate Service (TAS) can sometimes help resolve complex issues.
  • Know your rights – Familiarizing yourself with IRS procedures in the Internal Revenue Manual (IRM) can give you the upper hand when dealing with SOL miscalculations.

The IRS might not always be right, but it’s up to taxpayers to hold them accountable. Knowing the limits of what the IRS can do—and when they’ve gone too far—can save you from unnecessary headaches and stress.

Record Keeping 101: Essential Tips for Non-Filers

Keeping good financial records is important even if you haven’t filed taxes in a while. Non-filers still need to track income and expenses in case the IRS contacts them. This guide covers what records to keep, how long to keep them, and why it’s important.

Why Record-Keeping Matters

You might think you don’t need to keep records if you haven’t filed taxes. However, the IRS can pursue unfiled returns for up to six years (longer if fraud is involved). Organized records can help you file past-due returns, avoid penalties, and correct any mistakes the IRS may make in estimating your tax liability.

Accurate records are essential to qualify for IRS programs like Offer in Compromise (OIC) or Currently Not Collectible (CNC) status. These require proof of financial hardship, which you can’t show without the proper documents.

Record Keeping for Small Business Owners

Small business owners and self-employed individuals are likelier to fall behind on tax filings. Record keeping is even more important for these individuals, as their income and expenses are often complex.

If you’re a small business owner who hasn’t filed, be sure to keep:

  1. Income Records: Keep sales receipts, invoices, 1099 forms, and payment platform records (PayPal, Stripe, etc.).
  2. Expense Receipts: Save receipts for business expenses like office supplies, advertising, or vehicle costs.
  3. Business Bank Statements: Keep business bank and credit card statements to verify income and expenses.
  4. Payroll and Contractor Records: Maintain payroll records and Forms 1099 for contractors.
  5. Asset and Inventory Records: Track inventory and equipment depreciation for tax deductions.

How Long to Keep Records

The IRS recommends keeping records for at least three years after filing, but the clock doesn’t start until the return is filed for non-filers. To be safe, hold on to records for at least six years.

Conclusion

Good record-keeping is essential for non-filers, especially small business owners. Whether you need to file past-due returns or prove financial hardship, organized records will help you get back on track with the IRS. Take the time to sort through your receipts and statements now—it will save you stress later.

IRS Notice of Determination…Now What?

Receiving an IRS Notice of Determination can be intimidating, but don’t panic—it’s just a step in the IRS process that requires your attention. This notice typically means the IRS has decided on a tax matter you’ve been involved in, such as a request for an Offer in Compromise, a Collection Due Process (CDP) hearing, or another dispute resolution. Let’s walk through what it means and what steps you can take.

1. What is an IRS Notice of Determination?

An IRS Notice of Determination is a formal letter to inform you of the agency’s decision after reviewing a tax-related issue. It commonly follows an appeal or request for review, often related to collections, levies, or liens. In a Collection Due Process hearing, for example, the notice signifies the conclusion of your appeal. The IRS outlines whether they’ll continue with collection actions or if you have some relief, such as a new payment arrangement.

2. What’s in the Notice?

The Notice of Determination will summarize the IRS’s findings and explain their decision regarding your case. It will also include information about your rights and what steps you can take next, whether accepting their decision, appealing it further, or taking action to prevent enforcement measures like levies or liens.

3. What Are Your Next Steps?

Depending on your situation, you may have several options:

  • Accept the Determination: If you agree with the IRS’s findings, you can accept the outcome and follow any instructions. For example, if the IRS approves a payment plan, you would begin making those payments.
  • File a Petition in Tax Court: If you disagree with the IRS decision, you can petition the U.S. Tax Court. You have 30 days from the date of the notice to file, so time is of the essence. Tax Court offers an independent review of your case, possibly leading to a different outcome.
  • Negotiate or Take Action: Depending on your situation, you may want to negotiate further with the IRS or submit additional documentation to support your case. This could include applying for another IRS collection option, such as an Offer in Compromise, Installment Agreement, or Currently Not Collectible (CNC) status.

4. Why Timing Matters

Timing is critical when dealing with a Notice of Determination. The IRS gives you a limited window to respond—usually 30 days—to either comply with their decision or challenge it. Failing to act in time could result in enforced collection actions, like wage garnishments or bank levies.

Bottom Line

Getting an IRS Notice of Determination doesn’t have to be overwhelming. It’s a crucial step in the process, and knowing your options—whether to accept, appeal, or negotiate—can help you make the right move. Remember to act quickly and keep all communications with the IRS in writing to protect your rights.

Understanding the Different Types of Offer-in-Compromise: A Path to Tax Relief

An Offer-in-Compromise (OIC) can be a lifeline for taxpayers with overwhelming tax debt. It lets individuals settle their tax liabilities for less than what they owe, but only if they meet specific criteria. This isn’t a free pass. The IRS closely reviews each application, considering your ability to pay, income, expenses, and assets. There are three main types of OICs: Doubt as to Collectibility, Doubt as to Liability, and Effective Tax Administration. Each one applies to different situations. Knowing which one fits your case can help improve your chances of approval.

1. Doubt as to Collectibility (DATC)

This is the most common type of OIC. It applies when you can’t afford to pay the total tax debt. The IRS looks at your income, assets, and allowable expenses to see if you can’t pay the total amount. You must provide detailed financial documents like bank statements and pay stubs to qualify. If the IRS determines that you won’t be able to pay off the debt within the remaining collection period (usually ten years), they may accept your offer for a lower amount.

Given your current financial situation, your offer must be the most the IRS could reasonably expect to collect from you.

2. Doubt as to Liability (DATL)

This type of OIC applies when you disagree with the tax debt or believe it’s incorrect. You might submit a DATL offer if you think there was a mistake in the audit process or if you have new evidence that reduces your liability.

To succeed with this offer, you’ll need robust documentation showing why the IRS’s assessment is wrong or why the amount should be lower.

3. Effective Tax Administration (ETA)

An Effective Tax Administration offer is used when paying the full tax would cause serious hardship. This type of offer is rare. It’s for people who can technically pay the debt, but doing so would leave them unable to meet basic living expenses. For example, an ETA offer might apply if you liquidated a brokerage or IRA account due to fraud and now face high taxes on top of the loss. Even though the debt is valid, the IRS may accept less if collecting the total amount would cause undue financial strain.

Conclusion

Choosing the right Offer-in-Compromise is crucial to improving your chances of acceptance. The OIC process offers a possible solution, whether you’re facing financial difficulties, disputing the tax, or dealing with hardship. Be sure to meet the eligibility requirements and provide the necessary documentation to back your case.

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.

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.

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.

When Will the IRS Army of Auditors Hit the Warpath?

The IRS received a significant funding increase through the Inflation Reduction Act of 2022. This led to speculation about a sudden surge in audit activities. Many wondered, “When will the IRS army of auditors hit the warpath?” However, the actual plan for deploying these resources suggests a more measured approach by the IRS.

The Funding Context

The IRS’s additional $80 billion plans extend beyond just increasing enforcement. This funding is also earmarked for upgrading technology and improving taxpayer services. The aim is to make the IRS more efficient and responsive rather than merely more aggressive.

Recruitment and Training

Integrating new auditors into the IRS is a structured process. It begins with the challenge of recruitment. Finding the right candidates is not quick or easy. Once hired, these new auditors go through extensive training. They must master the complexities of tax law, ethical auditing practices, and the use of sophisticated technological tools.

Phased Deployment

Auditors are not deployed abruptly. Recruits start their careers by handling simpler cases under the supervision of seasoned auditors. This integration ensures they are fully prepared before they tackle more complex audits.

Projected Timeline for Deployment

  • Year 1-2 (2022-2023): The focus is on recruitment and training.
  • Year 3 (2024): New auditors start with simpler audit cases.
  • Year 4-5 (2025-2026): They begin to handle more complex audits as their experience increases.
  • Year 6 and beyond (2027 onwards): Auditors are fully integrated and handle various audits.

Implications for Taxpayers

The gradual deployment of new auditors means there will be no immediate spike in audit activities. The IRS aims to improve the accuracy and efficiency of audits. Taxpayers can probably find better things to worry about rather than an oppressive audit increase.

Conclusion

The immediate “army of auditors” concept does not accurately reflect the IRS’s strategy or ability.  Improving audit processes takes time.  Personally, I would be happy if the IRS would just answer their phones

Understanding the IRS Fresh Start Program: Evolution and Current Misconceptions

As a CPA who handles IRS collection issues, it’s ironic and revealing when marketing firms call me, offering to “rescue” me from tax debts through the IRS Fresh Start Program. These unsolicited calls miss the mark and show a deep misunderstanding of my professional role and the program they tout.

This common confusion highlights a bigger problem: widespread misinformation about tax relief programs. Anyone with tax debts needs to understand the true nature and evolution of the Fresh Start Program.

The IRS Fresh Start Program: A Brief Overview

Introduced in 2011, the Fresh Start Program aimed to help taxpayers struggling financially by simplifying the process of paying back taxes and avoiding liens. Despite being advertised as ongoing, the program’s special initiatives have become standard IRS procedures. Here are the key changes:

  • Lien Thresholds: The program raised the liens automatically filed on tax debts from $5,000 to $10,000.
  • Installment Agreements: These agreements allowed more taxpayers to set up installment plans for debts up to $50,000 without detailed financial disclosure.
  • Offers in Compromise: The program introduced more flexible terms, enabling some taxpayers to settle their debts for less than the full amount owed.

Evolution of the Program

The Fresh Start Program started as a pilot project introducing more forgiving methods for managing tax debt. Its success resulted in these methods being permanently adopted into the IRS’s regular procedures. This transition from a temporary measure to standard practice often leads to misunderstandings due to the program’s initial marketing.

Misleading Advertisements

Today’s advertisements can mislead taxpayers by portraying the Fresh Start Program as either still running or as a special relief effort. In reality, the beneficial changes introduced are now just routine IRS procedures.

Understanding these details about the Fresh Start Program can help taxpayers manage their responsibilities more effectively and avoid confusion and scams.

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.