Category: Tax Debt Resolution

News and expert advice for tax debt resolution with less hassle at the lowest cost

Strategy 6 – Taxpayer Advocate Service

What do you do when you know the IRS is wrong and creating a financial hardship as a result? The cheapest answer is the Taxpayer Advocate Service also known as the TAS. You can file, an appropriately numbered form, Form 911 to explain the situation. A TAS representative will give you a call back within 48 hours to discuss your issues.

The TAS does require that you make every effort to resolve the situation before contacting them. This means you must have already done the following:

    1. Spoken with the Collection Division
    2. Spoken with the Group Manager
    3. Excised your appeals rights for a CDP or Equivalent Hearing
    4. Used the Collection Appeals Process

The best-case result from contacting the TAS is that they will cut through red tape and go straight to the right people. The worst-case result is that you will receive great advice on your options to proceed. This is an easy and worthwhile step when you can’t seem to get the IRS to recognize they are in error.

Strategy 5 – Innocent Spouse Claims

An Innocent Spouse Claim is worth considering in cases where the taxpayers jointly owe a lot of IRS debt. The downside is that the IRS does not generally approve these claims. Worse, most of the appeals to the courts have been IRS wins.

That said, it is still worth considering. Innocent spouse claims arise in cases where the tax understatement can be attributed to just one spouse. Additionally,  the other spouse must have no knowledge or benefit from that understatement. The strategic advantage is that you might get a better result on the Reasonable Collection Potential formula by removing the one spouse from the liability.

An Offer-in-Compromise will only work if the taxpayers can show that they do not have the financial means that will enable them to pay the debt in full. The IRS does not accept offers for less than full pay merely because someone throws a number at them. Instead, they do a financial analysis. The results are plugged into the Reasonable Collection Potential formula. Removing one of the spouses from the liability could change the formula results and make the other spouse eligible for an offer.

 

Strategy 4 – Audit Reconsideration

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.

Strategy 3 – Prove that you are Currently Not Collectable

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.

Strategy 1 – Make an Offer

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.

Offer-in-Compromise Basics:

    • 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.

IRS Gotchas – Foreign Bank Accounts

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. 

Strategies for Dealing with IRS Debt

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:

    1. Make an offer to the IRS to settle the debt for less than the total owed.
    2. Make a payment plan that the client can live with.
    3. Get the IRS to back off by showing that the client is simply not in a position to make payments.
    4. Attempt to get the original assessment modified because of errors.
    5. File an Innocent or Injured Spouse claim.
    6. 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.
    7. 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.

Statute of Limitations Exceptions for IRS Refunds

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.

Non-Filers and Refunds – You will be Sorry

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.

Are you required to Correct a Substitute for Return?

The taxpayer refuses to file a return. The IRS records of 1099s and W-2s show that the taxpayer probably owes taxes, so they file a return for the taxpayer. This is called a ‘Substitute for Return’ and it is a legitimate tax return for all legal purposes.

Eventually, as the pressure from the IRS grows, the taxpayer realizes that the easiest path in life is to get into compliance. They prepare the missing returns and discover that their calculations show a higher tax than the IRS’s assessment. Are they required to correct the IRS? If they fail to do so, are they open to a fraud charge?

The answer is NO! The IRS has made a legal assessment. If the lower amount is what the government wants to use, the taxpayer’s only legal requirement is to pay the tax assessed.  You are only in trouble if you provide false information to the government. The fact that 3rd parties did not report all of your income is not your problem.