Unfiled/Late Tax Returns
Many individuals and businesses that have multiple years of unfiled returns live in a daily state of anxiety that goes on for years. The thoughts of being prosecuted for failure to file, not having the money to pay the tax, and the IRS seizing property can paralyze a person into a state of inaction. A major concern for some taxpayer’s is that they don’t have all their records, such as W-2’s and 1099’s. Part of the service I provide is when I contact the IRS on your behalf, is obtaining your income information from the IRS to prepare your tax returns. For the majority of taxpayers that haven’t filed tax returns for many years, the IRS processes the matter as a civil matter and not a criminal matter. The taxpayer’s that are most likely to be prosecuted for failure to file are public officials and other high profile individuals, tax protestors, high income professionals, and taxpayer’s that are concealing income and assets from the IRS. For the average person that has multiple years of unfiled tax returns, the IRS is more interested in getting you back into the tax system to pay current and future taxes. Once all of a taxpayer’s tax returns are filed and it’s determined what is owed to the IRS, the next step is to look at what remedies are available to the taxpayer. The following are some of the remedies, I have obtained for taxpayers:
Suspend Collection Action
Circumstances beyond a taxpayer’s control such as a downturn in the economy, job loss, divorce, serious illness and other life events can prohibit a taxpayer’s ability to pay their taxes. Sometimes taxpayers are aware that these events are temporary and other times there is just no way to predict what the future holds. The law requires that a taxpayer’s necessary living expenses (food, shelter, medical, transportation, etc.) be met first before the payment of a past due tax liability. Once a taxpayer demonstrates to the IRS that they don’t have the cash flow to pay the back taxes in a monthly payment agreement presently, the IRS will temporarily suspend collection of their account. Once an account is temporarily suspended, you will not have to worry about your wages or bank account being levied, as the IRS puts a special code on your account to prohibit any enforced collection activity. It’s important to note that when a taxpayer files a new tax return that reports a certain dollar amount of income the account may be reviewed again by the IRS. The advantages of having your account classified as temporary suspended is that it allows the taxpayer to get their finances in order without worrying about IRS enforced collection. It affords the taxpayer time to prepare a strategic plan to resolve their matter. The statute of limitations continues to run (generally 10 years from the date of assessment). You may be a candidate for an offer in compromise.
If a taxpayer cannot pay their tax liability in full immediately upon assessment, the law allows taxpayers to pay their liability over time through an installment agreement providing that certain requirements are met. In general, the requirements to enter into an installment agreement with the IRS is that all late tax returns are filed and the taxpayer is paying currently accruing taxes through payroll withholdings or by making estimated tax payments if self-employed. Depending on the amount owed and the type of liability the taxpayer may qualify for one of the following type of Installment Agreements:
Guaranteed Installment Agreement
The IRS is required by law to accept requests for installment agreements from individuals providing the taxpayer:
- Owes less than $10,000 in tax.
- Has filed and paid their taxes on time for the last 5 years.
- Cannot pay the tax immediately.
- Agree to pay the liability in full within 3 years.
- Agree to file and pay on time future taxes.
- Have not had a previous installment with the last 5 years.
Streamlined Installment Agreement
If the amount owed is under $25,000 (including interest and penalties) and the taxpayer is an individual, corporation or is out of business but still owes payroll taxes, the IRS will allow the taxpayer to enter into an installment agreement without providing financial information. The monthly minimum payment is determined by dividing the total liability by 72 months.
If the amount owed is over $25,000 but less than $50,000 and the taxpayer is an individual or an out of business sole proprietorship, the IRS will allow the taxpayer to enter into an installment agreement without providing financial information. The monthly minimum payment is determined by dividing the total liability by 72 months.
Traditional Installment Agreement
If an individual or business taxpayer does not qualify for a streamlined installment agreement, that taxpayer is required to provide a complete financial package to the Internal Revenue Service. This financial package would include the completion of Form 433-A Collection Information Statement for Individuals or 433-B Collection Information Statement for Business with supporting documentation verifying income, expenses and assets. The IRS will determine if the taxpayer has sufficient assets to pay the liability first off. Then they will look to see if the taxpayer has the ability to pay the liability through a monthly installment agreement. It is important to note that caps (national and local standards) on taxpayer’s living expenses may be a factor. That is the taxpayer’s actual expenses may be higher than the IRS will allow due to the national and local caps placed on certain expenses which puts a strain on taxpayer’s finances. There are however, provisions and exceptions to the applications of these standards in the Internal Revenue Manual (IRS procedure manual) that can help mitigate a taxpayer’s financial strain.
In-Business Trust Fund Express
If a business owes payroll tax under $25,000 the IRS permits the taxpayer to pay this liability over a period of 24 months, without requiring financial statements providing the taxpayer is compliant with their tax filing and tax deposit requirements.
Partial Pay Installment Agreement
This installment agreement may have the effect of achieving an accepted offer in compromise informally. This is because the taxpayer will make monthly payments and before the liability is paid in full, the statute of limitations may expire rendering the tax liability no longer legally due and collectible by the IRS. In order to qualify for a partial pay installment agreement a complete collection information statement for Individuals or Collection Information for Business is required with supporting documentation verifying income, expenses and assets. The taxpayer’s equity in assets must be addressed and a determination must be made to what extent will the IRS require the taxpayer to use the equity in assets to resolve a portion of the liability. Once these agreement are made, the taxpayer’s ability to pay is reviewed every two years until the statute of limitations on collection expire.
Offer in Compromise
The government, like other creditors, encounter situations where an account receivable cannot be collected in full or there is a legitimate dispute as to what is owed. It is an accepted business practice to resolve these issues through negotiation and compromise.
An offer in compromise is an agreement between a taxpayer and the government settles a tax liability for payment of less than the full amount owed.
The IRS Policy Statement P-5-100 – The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or a protracted installment agreement.
The Commissioner of the Internal Revenue Service, is authorized to compromise a liability on any one of three grounds:
- Doubt as to Collectibility
- Doubt as Liability
- Effective Tax Administration
Doubt as to Collectibility Offer in Compromise
Are you Eligible? – Before your offer can be considered, you must
- File all tax returns you are legally required to file,
- Make all required estimated tax payments for the current year, and
- Make all required federal tax deposits for the current quarter if you are a business owner with employees.
Can You Pay in Full? – Generally, the IRS will not accept an offer, if you can pay your tax in full through an installment agreement or a lump sum.
Your Future Tax Refunds – The IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts the offer. For example, if your offer is accepted in 2015 and you file your 2015 Form 1040 on April 15, 2016 showing a refund, the IRS will apply your refund to your tax debt. The refund is not considered as a payment toward your offer.
Application Fee – Offers require a $186 application fee
Payment Options – You must select a payment option and include the payment with your offer. The amount of the initial payment and subsequent payments will depend on the total amount of your offer and which of the following payment options you chose:
Lump Sum Cash – This option requires 20% of the total amount to be paid with offer and the remaining balance paid in 5 or fewer payments within 5 months of the date your offer is accepted.
Periodic Payment – This option requires the first payment with the offer and the remaining balance paid within 6 to 24 months, in accordance with your proposed offer terms. Under this option, you must continue to make monthly payments while the IRS is evaluating your offer. Failure to make these payments will cause your offer to be returned. There is no appeal. Total payments must equal the total offer amount.
Exception – if you are an individual or are operating as a sole proprietorship and your household meets the Low Income Certification guidelines, you will not be required to send the initial payment or make monthly payments during the evaluation of your offer.
How Much Should I Offer – The minimum offer in compromise is calculated by valuing assets and determining monthly cash flow by applying the provisions in the Internal Revenue Manual. It is important to know that effective May 21, 2012, the IRS expanded its “Fresh Start” initiative by offering more flexible terms to its Offer in Compromise program. Some of these changes include:
- Revising the calculation for taxpayer’s future income
- Allowing taxpayers to repay their student loans
- Allowing taxpayers to pay state and local income taxes
- Expanding the allowable living expense category and amount
- Excluding the value of income producing assets
- New exemptions for vehicles and cash
- Reduction of dissipated assets look back
It is important to have a clear understanding of these provisions before any offer is made to the Internal Revenue Service. The substantial risk to a taxpayer not understanding these rules is that they may potentially offer more than they should. Part of the Free Consultation I provide is performing this calculation for potential offer in compromise candidates.
Doubt as to Liability Offer In Compromise
This type of offer in compromise is extremely rare and are investigated by the IRS Examination Division. The reason that these are so rare is the fact that the taxpayer has many opportunities to contest a tax liability through the examination process, conference with group manager, Appeals and US Tax Court. It is only worth mentioning to be aware that the provision does exist.
Effective Tax Administration Offer in Compromise
An effective tax administration offer is an offer in compromise that considers hardship, public policy and equity. The ETA offer allows for situations where tax liabilities should not be collected even though, the tax is legally owed and the taxpayer has the ability to pay in full. If the taxpayer can demonstrate that the collection of the tax liability in full would create an economic hardship, or demonstrate that there is a compelling public policy or equity issues in the case that would provide sufficient basis for compromise the IRS may accept this type of offer. Example: The taxpayer is retired and the only source of income is from an IRA account. The IRA account has sufficient funds to pay the liability in full. Liquidation of the account would leave the taxpayer without adequate means to provide for basic living expense. These types of offer are extremely rare, but the provisions do exist and the IRS has accepted some.
Penalties exist to encourage voluntary compliance with the law. For most taxpayers voluntary compliance consists of preparing an accurate return, filing it timely, and paying the tax due. Most penalties apply to behavior that fails to meet any or all of these obligations. In some cases the penalties assessed by the IRS can be substantial and may be well worth the effort to pursue penalty abatement providing the taxpayer meets the criteria for abatement. The most common criteria for penalty abatement is the standard of reasonable cause which is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligation but nevertheless failed to comply with those obligations. Factors that may establish reasonable cause are as follows:
- Death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family.
- Fire, casualty, natural disaster, or other disturbance.
- Unable to obtain records.
Levy on Wages, Salary, and Other Income Released
Unlike other levies, a levy on a taxpayer’s wages and salary has a continuous effect. It attaches to future payments, until the levy is released. The law provides an exemption from levy which means the taxpayer is allowed to keep a portion of their paycheck. For a taxpayer paid weekly, the exemption is calculated by adding their standard deduction and exemptions and dividing by 52. This calculation generally results in the IRS receiving most of the taxpayer’s paycheck and the taxpayer receiving very little. A continuous wage levy has to ability to create a substantial amount of financial damage to a taxpayer and their family in a short amount of time. In an effort to release the wage levy, an alternative solution must be presented to the IRS other than a permanent wage levy. These alternatives may be an installment agreement, offer in compromise or suspending collection of your account.
Levy on Bank Accounts Released
When the IRS serves a levy to a bank it only attaches to the funds that were in the account on that day. These levies are not continuous like a wage levy. The bank must wait 21 days after a levy is served before sending the funds to the IRS. If the balance in the account is significant, this 21 day holding period allows the taxpayer additional time to negotiate a release of levy from the IRS.
Response to threatening letters from the IRS – Notice of Intent to Levy
When a taxpayer receives a letter from the IRS that states, “Notice of Intent to Levy and Your Right to a Hearing”, this letter warrants a response. Under the law the IRS is required to send a taxpayer this letter before they can levy and seize property. If the taxpayer asserts their right to a hearing within 30 days from the date of this the letter, this action legally stops the IRS from levying and seizure property until the taxpayer has their hearing. Once a request for a hearing is filed, the case is transferred to the Office of Appeals which conducts an impartial hearing that allows the taxpayer to propose an alternative resolution other than the IRS levying and seizing property.
The IRS has the authority to examine the returns of individuals and businesses. Generally, its small businesses that seem to be examined the most. Typically, there is an initial meeting with the examiner who will ask a series of questions about the business and inspect some financial records. At the conclusion of the initial meeting, the examiner prepares a request for additional documents and plans a follow up meeting. There maybe a few of these follow up meetings before the examiner issues their report that may propose a no change, a refund or an additional amount due. Sometimes, taxpayers run into serious problems because there is shortcomings in their bookkeeping. This allows the IRS to use indirect methods for determining income which could result in the IRS calculating more income than the taxpayer actually earned. Unfortunately, the burden of proof that the examiner is incorrect is on the taxpayer. If a taxpayer does not agree with the IRS proposed assessment, they should not sign the closing agreement. By doing so, the taxpayer has waived their right to redetermination at the Office of Appeals or US Tax Court. If a taxpayer does not agree to the proposed assessment, the taxpayer should file a protest for a redetermination at the Office of Appeals.
The Appeals mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service. Appeals hears the following types of cases:
Examination – If a taxpayer’s tax returns have been examined by the IRS and the taxpayer files a protest, Appeals will hear the case, review the facts and documents and attempt to settle the case with the hazards of litigation in mind.
Threat by IRS – Notice of Intent to Levy – If a taxpayer receives a Notice of Intent to Levy and Your Right to a Hearing and the taxpayer files a Request for a Collection Due Process Hearing, Appeals will hear the taxpayer’s proposal for an alternative resolution other than the IRS levying and seizing the taxpayer’s property. Upon conclusion of the case Appeals prepares their ruling that may be the taxpayer has entered into an installment agreement or submitted an offer in compromise.
Offer in Compromise Rejection – If the IRS rejects a taxpayer’s offer in compromise and that taxpayer files a protest citing their disagreement with the IRS, Appeals will hear that case, review documents and make a determination if the IRS erred in the rejection of the taxpayer’s offer in compromise. In some cases, there is a disagreement between the IRS and the taxpayer regarding how the provisions of the Internal Revenue Manual were applied to the case. Then it is up to Appeals to make this determination. Once the hearing is concluded, Appeals prepares a Notice of Determination with their ruling.
Penalty Relief – If the IRS rejects the taxpayer’s request for penalty abatement and the taxpayer files a protest, Appeals will hear the case and make the determination if the taxpayer has meet the standards of reasonable cause based on the provisions of the Internal Revenue Manual and related court cases. Upon conclusion, Appeals prepares a Notice of Determination with their ruling.
Tax Preparation is available for
- Sole Proprietorships
- S Corporations