Category: Tax Problem Resolution

Free consultation for help with tax problems

  • Are Audit Rates Really Lower?

    Funding for enforcement by the IRS is 5% less than last year and audit rates have definitely declined. Total examinations, both field and correspondence have dropped more than 20% since 2010. Taxpayers in the higher brackets still encounter more audits but this rate has also decreased.

    But this does not tell the whole story. Many more taxpayers will be caught in computer mis-matches from information forms like W-2s and 1099s. If these are factored in, then about 1 in 25 returns has some question from the IRS.

    I always think it’s best to avoid any of these contacts from the IRS. Receiving a letter from the IRS is stressful and could lead to other issues. Be sure to account for all information returns; if you do not receive one that you should, inquire!

  • Coping with the Government Shutdown – Tax Problems Edition

    Solving tax problems for clients requires lots of interaction with the IRS. Generally, after meeting with a client, I file an authorization form so I can access their data online. Until last month, I filed those online, which presumably would have worked during the government shutdown. Now, we must fax them and wait 2-3 days for approval. Once I had accessed the taxpayer’s transcripts online, I usually call and speak to the IRS, asking for a collection hold, confirming details, and filing forms to resolve the issue.

    Essentially, the vital services we perform for taxpayers are on hold. It’s been tough for my clients so here’s what I’ve found out and experienced during the government shutdown.

    New Tax Liens and Levies
    Officially, new tax liens and levies are not being issued. However, some taxpayers have reported receiving Notices of Intent to Levy during the shutdown. According to reports, the notices will continue but the liens and levies are not being filed.

    Regardless, with most of the IRS not available, our options are limited. With my clients, I am preparing overdue returns and getting ready to contact the IRS once they’re open. Since authorizations to access client data are not being approved, it definitely limits our ability to complete tax returns and get an accurate overview of client accounts.

    Levies that were filed before the government shutdown are still a huge problem. Normally when a levy is filed, the bank freezes the money. Often, that’s when I get a call from a new client. We have 21 days to solve the tax problem and prevent the bank from sending the money seized to the IRS. We cannot do that, and it appears that banks are still required to forward the money to the IRS.

    Ongoing Tax Issues
    Basically, we’re in a holding pattern. Clients who are waiting for tax returns to be processed will have to wait longer, while interest and penalties accrue. Clients with garnishments are still having their wages reduced.

    Missed Deadlines
    Clients who are receiving automated notices with deadlines can miss those narrow windows if their response is not being processed. Will the IRS count the postmark date for these responses or will we have to file in Tax Court? It’s not clear at this point. The Tax Court is officially saying that petitions should still be filed to meet the 90-day deadline but will not be processed until the shutdown is over.

    Filing Tax Returns on Extension
    I would recommend filing taxes tomorrow electronically if possible. Paper returns take longer to process and the delays will increase this filing season once the IRS is back in business. For clients expecting a refund, they will not be issued until the government shutdown is over.

    Looking Ahead
    Once the IRS reopens, I expect increased delays while they process the backlog. If the government shutdown continues, preparing for next tax season could be very bumpy indeed.

  • Quicker and Better Levy Release News

    Under the new IRS Fresh Start Initiative, we have better options for getting a levy released faster for more taxpayers. If your tax debt is less than $50,000, the updated Streamlined Installment Agreement will release the levy and will also not include a lien. Plus, no financial documents need to be filed.  If your tax debt is more than $50,000, you can pay it down to qualify under this program.

    The new Streamlined Installment Agreement changed the qualifying tax debt limit from $25,000 to $50,000 for most taxpayers and the time period to pay from 60 months to 72 months. This is great news for our clients because it increases our options for releasing and avoiding a levy.

    IS THIS PROGRAM RIGHT FOR ME?

    We’ll analyze your situation to determine if this is your best option. Several factors go into our analysis:

    • We check to make sure the payments under the Streamlined Installment Agreement will be less than what you would pay under a standard installment agreement by providing financial information.
    • We pull the IRS records for the statutes of limitation on your tax debts.
    • We evaluate your qualifications under the new Offer in Compromise rules
    • We calculate your options under a Partial Payment Installment Agreement
    • We examine your situation for Innocent Spouse Claims

    All of these options can help release a levy and we’ll help you make the best choice in your situation.

  • Offer in Compromise IRS Tax Debt Program Updated

    If you owe tax debt that you are struggling with, take a look at the Offer in Compromise program. The IRS just released new guidelines that greatly reduce the amount that needs to be offered to settle your tax debt.

    An Offer in Compromise lets you settle with the IRS for a lower amount than what you owe. It is based on your current assets and income.

    Let’s go through an example to see if you might benefit. To start working with your own numbers, you can get a rough estimate using my Offer in Compromise Calculator.

    First, you need to gather your current assets. This will include all cash and investments on hand and the quick-sale value of the things you own.

    Next, we figure your disposable income. Add up your monthly income. Subtract your monthly living expenses.

    The IRS sets allowable limits for certain expenses, some of which are based on where you live and the number and ages of family members. Under the new guidelines, we can include credit card payments, bank fees, and some student loans. Also a percentage of back state and local taxes may be allowed. Previously, none of these expenses could be included in the Offer in Compromise calculations. By increasing the allowable monthly expenses, we decrease disposable income, thus decreasing your offer amount.

    Once we have your disposable income calculated according to the IRS regulations, we multiply it by 12 or 24 months depending on whether the offer amount will be paid within 5 months or within 6-24 months. This is a significant decrease. Previously, we had to multiply the income amount by 48 or 60 months.

    Let’s do some math and see how this might benefit you – If your disposable income came to $300/month, under the previous rules, the income portion of your offer would be $14,400 or $18,000. If your tax debt is less than this amount plus your assets, you would not qualify for an Offer in Compromise. If your tax debt was more than these amounts, you might qualify but would have to pay at least $14,400 to settle your debt.

    Under the new rules, in this same scenario, the income portion of your offer would be $3600 – $7200. That’s a big difference. This will make it much easier for struggling taxpayers to make an offer that they can afford and get out from under their tax debt.

    Try my updated Offer in Compromise Calculator to see if you qualify and what your settlement amount might be. Call me for a free consultation to discuss your options.

  • How an IRS Audit Starts

    An IRS Audit is a review of an individual’s or business’ accounts and financial information to ensure they are complying with tax laws and paying the correct amount of taxes. The IRS is focused on collection issues and selects tax returns for audit where they think they will be able to find additional taxes due. With preparation and advice, you can fight an IRS audit.

    IRS Letter 566
    Most taxpayers who are being audited by the IRS receive a letter. IRS Letter 566 is a notification of a correspondence audit. The letter will indicate what items on your tax return are being audited. Some common tax return items that might be included:

    • Adjustments to Income
    • Schedule A – Itemized Deductions
    • Unreimbursed Employee Expenses
    • Schedule C – Gross Receipts
    • Schedule C – Expenses
    • Tax Credits

    The IRS will also include Form 886-A which lists the documentation they are requesting. Since you have 30 days to respond to this IRS request, you should start gathering the paperwork listed on this form. Often, the IRS will ask you to fill out additional forms detailing your expenses or other accounting info.

    In a correspondence audit, the response to Form 886-A is your defense of your tax return. An experienced tax resolution specialist can help you present the best and most complete response to the IRS. The IRS will examine these documents carefully to find ways to disallow expenses and credits, while looking for extra income in order to assess additional taxes. Filing your response in the best possible way is a crucial first step in emerging from an audit with the least damage possible.

    Many taxpayers are not sure how to substantiate their tax return items or may be missing certain documents. It is prudent to speak to someone who can help you find the best strategy for presenting your case to the IRS based on what they have seen IRS auditors ask for in the past.

    IRS Letter 3572 and IRS Letter 2205
    Some taxpayers receive IRS Letter 3572 or IRS Letter 2205. The IRS is asking for a field audit. They are asking the taxpayer to bring documents and records to the IRS office for an examination there. Or they may ask to conduct the audit at your business. Be wary of this tactic. Consult with a professional before scheduling an IRS auditor appointment at your own premises. A tax problem specialist is familiar with the IRS audit techniques for your business and can advise you on strategy.

    While you may feel that your income tax return is accurate and that you are able to prove this to a trained IRS auditor, i do not recommend attending this meeting yourself. The auditor will ask you many questions and will try to expand the scope of the audit, given the chance. It is difficult to be objective when the IRS is examining your own taxes.

    IRS Letter 3572 and IRS Letter 2205 will ask you to call the IRS to schedule an appointment. Once you do, and every time you call the IRS, they will ask you additional questions to gather as much information as they can. Instead, you should call a tax problem specialist. Once you’ve signed a Power of Attorney, they can speak to the IRS on your behalf and meet with them to defend your tax return.

    A field audit is more serious than a correspondence audit. Both of these IRS audit letters indicate that an IRS employee has already researched your return. Generally, they provide just 10 days to respond so do not delay.

    IRS Audit Telephone Call
    The IRS may call you instead of sending a letter for an office audit. Be careful. Instead of scheduling an appointment, you should tell them that you will be contacting a representative to meet with the IRS. Write down the IRS auditor’s contact information and call a tax problem specialist for help. Once you have signed a Power of Attorney, they can call the IRS auditor and begin working on the best defense of your tax return.

    All taxpayers are entitled to representation and it can make a big difference in the outcome of an audit.

  • New Free Online Offer in Compromise Calculator

    We’re pleased to announce the release of a free online Offer in Compromise Calculator. While the calculations for an Offer in Compromise can be complex, this online version is a great starting point for taxpayers when deciding on a solution for their tax debt problems.

    The IRS has increased audits and other tax enforcement actions, and more taxpayers are finding themselves in a situation where they owe substantial tax debts. Penalties and interest continue accruing and many people find themselves in a difficult situation and needing guidance.

    TV commercials from dubious firms promise a magical “pennies on the dollar” solution to troubled taxpayers. Before speaking to a sales rep at one of these firms, they can get instant results about their potential eligibility for an Offer in Compromise.

    An Offer in Compromise is made to the IRS when a taxpayer owes more in taxes, penalties, and interest than they will be able to pay. They can offer to pay a portion of the debt and the remaining debt is forgiven. For many people in tax trouble, it is a life-saver.

    To see if they might qualify, users enter their assets, income, expenses, and tax debt into the free online Offer in Compromise Calculator. If the results show they would save on their tax debt by submitting an Offer in Compromise, they are encouraged to call me for a more detailed and accurate calculation in a free, no-obligation consultation.

  • Don’t go to your Income Tax Audit!

    Really. I don’t recommend it. When it is your tax return and your money at stake, emotions can run high, and it’s easy to make a mistake. The IRS agent will ask you questions that you may not want to answer or that you may wish later that you had answered differently.

    Send someone else instead – preferably a tax professional who has dealt with your situation before. With a properly executed Form 2848, an EA, CPA, or attorney can act on your behalf. The IRS agent will still ask me sometimes to bring the client to the examination appointment, but I cite IRC section 7521(c) and they usually let it go because even their internal manual agrees.

    Now if you are still planning on going to your own audit, please note that according to the Internal Revenue Code cited above, you can stop the interview at anytime because you wish to consult with an EA, CPA or attorney. A good tax professional can prevent costly mistakes at an audit and might even save you more than going it alone.

  • Has the IRS Contacted Your Business Associates?

    Has the IRS has contacted your business associates or other third parties? Normally, if you are subject to an audit, the IRS must contact you to let you know that they will be doing checking with others about you.  They must give you a list of who they contacted. See below for the IRS info about them contacting your bank, employers, employees, etc…

    The IRS must give you reasonable notice before contacting other persons about your tax matters. You must be given reasonable notice in advance that, in examining or collecting your tax liability, the IRS may contact third parties such as your neighbors, banks, employers, or employees. The IRS must also give you notice of specific contacts by providing you with a record of persons contacted on both a periodic basis and upon your request.   

    However, and this is a big one, they will not tell you about these third-party contacts if you are being investigated criminally. That would be really bad. You need the services of a good tax professional and an attorney. As an EA, I would work under the auspices of attorney-client privilege. Essentially, the attorney hires me to perform my services and this enables attorney-client privilege for my services.

    Hopefully, this is not the case for you. Another reason that the IRS would not notify you about third-party contacts is if they thought you would take actions that would make it difficult for them to collect any monies owed.  The IRS can also avoid notifying you if they have reason to believe that you would take action against anyone who provided information about you.

    Finally you can authorize the IRS to contact certain parties, but I would not do this without the advice of a tax professional. See the IRS language about these clauses from Pub 556

    This provision does not apply:

    • To any pending criminal investigation,
    • When providing notice would jeopardize collection of any tax liability,
    • Where providing notice may result in reprisal against any person, or
    • When you authorized the contact.

  • Why Am I Being Audited?

    Wondering how you got chosen to be audited by the IRS? There are several avenues that may lead to the dreaded IRS examination. If you omit income that was reported to the IRS, their computers will pop-up and send you a notice to correct the error. This may get your return pulled for a closer look. Be sure to include all 1099s, w-2s, etc. If the income listed on the form does not belong to you, contact a tax professional for help.

    Another way that computers help the IRS find potential audit targets is your DIF score. What’s that? It is a Discriminant
    Inventory Function System score. We don’t know how it is calculated but the IRS does! Tax returns are scored automatically and those that have a high score might be audited.

    The formula for a DIF score is a closely-guarded IRS secret but we can speculate that very high deductions for your income or similar anomalies could trigger an audit. However, if you have good records for unusual deductions — by all means, take the deductions. Most likely, the DIF score formula is a combination of several factors; we just don’t know.

    In order to calculate DIF scores, the IRS seems to do research. You may be selected for a personal or business income tax audit to help the IRS fine-tune its audit-selecting prowess.  Many audits under the National Research Program are very, very thorough. I sincerely hope this does not happen to you.

    Instead, may you be fortunate enough to win a big prize, like the first season of Survivor. The IRS might check on newsworthy winners to be sure they’ve paid taxes on their bounty.

    Finally, I truly hope that no one dislikes you enough to tattle to the IRS on you. If they report your alleged tax indiscretion on Form 211, the source can get a piece of any money recovered by the IRS from you. Depending on your tax bracket, this could be a powerful incentive, so choose your friends and associates wisely!

    Well, forewarned is forearmed. I hope these insights into the IRS audit factory are helpful or scary, or both! With good representation, many audits can be resolved with the least possible hassle. An excellent place to start if you are being audited is Pub 556 and the phone number of a good tax professional. As I always say – whatever you do, do not ignore an IRS notice!

  • Tax Savvy for Small Business Book Review

    Tax Savvy for Small Business BookTax Savvy for Small Business is a clear and handy guide to many aspects of small business taxation. If you own a business, I recommend you leaf through it and then sit down and read the sections relevant to your business. It is not a guide to doing your own business taxes; instead this book tells you about everything else you need to decide before your tax return is prepared.

    Let’s face it, most financial decisions in your business have tax consequences, If you can have those consequences in your mind when making day-today choices on spending, hiring, business structure, office space, etc, then you will be way ahead of the game come tax time. Your accountant will be happier and you will get much more out of the the time and money you spend there.

    If you’re just starting out or if your accountant never sat down and explained how and what to deduct, then read the “Basics” section first. Learn the ins-and-outs of deductions and depreciation. Buying things is essential for most businesses to run and whether you lease or buy, and when and where you take the deduction makes a difference to your bottom line. I cannot over-emphasize the importance of keeping good records; if you do not know what you spent, you cannot deduct it!

    The next most important thing to business taxes is the structure of your business. While most of us start out as a sole proprietor or a partnership, there are good reasons to move up the evolutionary ladder and get a bit more formal. Each form of business — sole prop, C corporations, S Corporations, partnerships, LLC, and personal service corporations — are examined along with the good and bad news about each one.

    One reason that small businesses are called the “poor man’s tax shelter” is fringe benefits. The benefits available to you will depend on the business structure that you choose, but they can be financially significant. Read up on them in this book and see if they make it worthwhile to set up a nice tax-advantaged retirement plan, dependent care plan or other snazzy tax deduction. Your favorite tax professional can help you with the nuts and bolts of these types of plans.

    Now business is not all deductions and conventions in Waikiki – sometimes you have to deal with the IRS. There are great tips in this book on how to handle these types of situations. I would never say meet the bogeyman by yourself – but reading this section will make you a more informed participant so you can help your tax pro do the best job for you.

    There are several other sections and chapters I haven’t even mentioned but I think that you can see for yourself that this is an excellent book for any business owner, especially as it has been updated in late 2010.