Monthly Archives: July 2013

Appeals Division: Your Best Friend At The IRS (Possibly)

Last week we negotiated a client’s back taxes into an IRS status referred to as Currently Not Collectible (CNC).   The conversation went rather smoothly as we had all the necessary paperwork and we worked with a representative who was fairly amicable.   But what happens when your experience isn’t so pleasant or doesn’t go in your favor?  Fortunately for many people with a tax debt, the IRS has an administrative Appeals Division (Appeals) to which most collections actions taken by the agency can be appealed.

Appeals is one of the IRS’ best kept secrets.   Why?  In our experience, Appeals personnel appear to be under less pressure to collect tax revenue than Revenue Officers.   This is likely due to different criteria for personnel reviews.  In addition, Appeals personnel are simply more pleasant to deal with in general, usually lacking the snappy attitude and air of arrogance that is unfortunately common amongst Revenue Officers.

So what is the primary purpose of Appeals?  Well, their functional mandate from on high is, effectively, to prevent cases from going to court (thus saving the government the expense of litigation).  This is done by offering a “fresh look” at situations that have already had some interaction with the IRS at another level.  Appeals, however, is still an administrative function and is not a court in any way itself.

Appeals works in a very formulaic manner, just like any other IRS division.  When you file any sort of IRS appeal, you’ll receive a letter notifying you that your case has been assigned to a Settlement Officer (SO).  Sometimes, this first letter will include your hearing date but sometimes it won’t.

The initial contact from appeals via mail will usually include a request for financial documentation, if this information wasn’t already in your file when it was passed to Appeals from Collections.  If your Appeal in any way mentions a “resolution alternative” (such as an Installment Agreement, CNC, or Offer in Compromise) then you will be requested to provide the financial documentation necessary to reach that resolution alternative.

Many different types of Collection actions taken against you can be appealed.  Aggressive collections actions such as bank account levies and wage garnishments are commonly appealed, but so are proposed garnishment actions, and even denials of payment plans.  If the IRS takes any adverse action against you, make sure to carefully review the notices they send you, which will always explain your appeals rights.  If you need assistance protecting your legal right to an appeal, such an action by the IRS, be sure to contact a tax professional experienced in representing taxpayers with such tax issues.

Until next time…

Reducing IRS Penalties

Often times when someone owes taxes that they haven’t paid for a few years, they are surprised when they find out how much the IRS says they owe.   This is because the IRS inevitably tacks on several of the dozens of penalties they are allowed to charge.   However it’s the late filing, the late payment and the penalty for not making Federal Tax Deposits (when combined) that can add a whopping 65% to your total IRS bill.  The good news is that if your tax debt is more than two years old, you’ve maxed out all these penalties.

The IRS does actually have a compassionate side, and it’s typically found in the penalty abatement process.  It’s also noteworthy that penalty abatement applications can also be appealed if initially denied.  Thus, you can always get a second set of eyeballs on the issue if it initially doesn’t go your way.  The thing to keep in mind is that the IRS has very strict guidelines for granting penalty abatements, and these guidelines are referred to as “reasonable cause criteria.”  It should be noted up front that “we didn’t have the money” is NOT a reasonable cause criteria.  Why is this? Here is the IRS’ logic: when you made the money you should have either paid the taxes at that time (e.g. payroll taxes for a business) or saved the money until it was due (e.g. individual taxpayer who gets a 1099 the next year).

For example, if you are self-employed and receive a check, then you HAD the money, you simply didn’t give the IRS their chunk of it.  Same goes with payroll taxes, particularly trust fund taxes (money you withhold from employee paychecks for income tax and Medicare/Social Security).   If you had the expectation to pay some amount of wage, then you theoretically HAD the money sitting somewhere to pay that person, and should have withheld it and turned it over to the IRS.  If you couldn’t cover the taxes, you shouldn’t have had the employee and should have laid people off or cut back their hours.

There are ways to argue around this, and we have done so very successfully, but there has to be some other circumstance involved.  For example, you had the money to pay the tax, but paying the tax instead of something else would have created an “undue hardship.”  Examples could include a large medical expense that unpaid would have left a condition untreated, or a court ordered payment that would have resulted in other legal consequences, or a bill such as a large automobile repair which would have left you unable to work and resulted in job loss.  These arguments are difficult to make and require significantly more work than standard reasonable cause criteria applications, but they CAN be won.

The primary IRS penalty abatement reasonable cause criteria center on natural disasters, loss or destruction of vital business records, bad advice from the IRS or an accounting professional, criminal activity, medical issues, substance abuse problems, and other serious circumstances.  Thus, you are more likely to have your penalties abated if the circumstances fall into one of these areas:

  • Were any business records lost or destroyed?
  • Were there any circumstances that led to a substantial drop in collecting on accounts receivable?
  • Was there any transition in the business that lead to the failure to pay taxes?
  • Was there a death or serious illness that directly affected the business or personal wages?
  • Was there any embezzlement of funds, theft of valuable property, or identity theft?
  • Were there any alcohol or drug abuse issues that affected the business or wage earning capability?
  • Was there a natural disaster that impacted you or your business?
  • Did you rely on the advice of a CPA or IRS employee in making tax decisions?
  • Were there any circumstances that created substantial financial hardship, to the point where your business was close to going bankrupt?

The above questions cover all of the IRS reasonable cause criteria to one extent or another, so finding an answer to your personal or business situation that covers one or more of these questions is the key to a successful penalty abatement application.  If you are facing penalties related to back taxes and believe your situation falls into the above, give us a call at 773.239.8850 and we’d be happy to help you.

Until next time…

IRS Offer in Compromise Requirements

By now, you’ve undoubtedly heard the radio commercials: “Settle your tax debt for pennies on the dollar…”

What these ads are referencing is an IRS program called an Offer in Compromise or OIC.   This program does allow you to pay a reduced amount of money as full settlement of your entire tax liability, including penalties and interest.  However, it’s not as simple as the commercials make it sound.

Most of those commercials will make one think that you simply take your tax debt, multiply it by some percentage and then you just pay them that amount and walk away.  Unfortunately, that is not how it works.

Part of determining whether you are even eligible to apply for an OIC has to do with the formula used to decide how much you will need to pay.  The formula is somewhat complicated, but an overly simplified version of it looks something like this:

  • Add up the value of everything you own: House, cars, furniture, jewelry, undergarments, stocks, bonds, cash, retirement accounts, tools, goats, art….EVERYTHING.  Call this number “A” – it represents the value of your assets.
  • Subtract your allowable expenses (the IRS won’t let you claim all actual expenses) from your total income.  Call this number “B” – it represents yours remaining income (this is what the IRS calls it – not your disposable income, which is probably less).
  • Multiply “B” times either 12 or 24, depending on how long you’re going to take to pay off the Offer in Compromise.  Call this new number “C”.
  • A + C = Z, where Z is the amount of money you can settle your tax liability for.

Here’s the kicker: If “Z” is more than what you owe the IRS, then you’re not eligible for the program.  The result?  You’re probably going to end up paying monthly payments on an Installment Agreement.

In addition to this formula, there are some other conditions for OIC applicants:

  • You must file all missing tax returns.
  • You must keep your nose clean with the IRS for 5 full years, otherwise they will re-bill you for everything they forgave.
  • You must make the OIC payments on time.
  • You must pay an application fee, unless you meet the low income guidelines.
  • If you end up being owed a refund on next year’s tax return, the IRS is going to keep that refund money.

The real problem for most people with the Offer in Compromise application process has to do with the part where they multiply your remaining monthly income by 12 or 24.  If you have $1,000 per month left over, and are going to take a year to pay off the Offer in Compromise, then you multiply by 24 to get to $24,000.  Well, if you also have $20,000 equity in your home, and no other assets, then your Offer amount is $44,000.  If you owe the IRS $35,000, you’re not eligible for the Offer in Compromise program.

It’s worth noting that, in March 2012, the IRS changed some of the Offer in Compromise rules.  The single biggest thing they did was to REDUCE that multiplier — it used to be 48 or 60.  For taxpayers with no assets, this change effectively reduced the necessary offer amount by up to 75% — making potentially hundreds of thousands of people eligible for the program that didn’t used to be.

HOWEVER….the IRS can change this back at any time.  If you are even thinking about applying for an OIC do it now! Feel free to call our office at 773.239.8850 and we’d be happy to help you get started.

Do You REALLY Have What It Takes To Start A Business?

Get ready to eat a lot of this stuff!

Get ready to eat a lot of this stuff!

So there you are.  You’ve read all the articles, books and talked to tons of people about what it’s like to start a business.  Now you’re at the point where you’re actually ready to begin taking action on your dream .  If you’re like me, when you began this journey you probably thought “I know it will be hard, but will it really be as bad as all the stories I’ve heard?”   Today’s post will attempt to give you the “real” on what you are in store for.  I won’t sugar coat it, dilute it or spin it in any way.  So if you’re ready to take the ride of your life, strap yourself in!

The truth of the matter is that no matter how smart you are, the amount of preparation, the industry or the product, this process will push you into places you only dare dream about.  Some places are joyous in that they help you learn and further your development in ways you didn’t think were possible.  Other places are like that scary labyrinth of your dreams where demons roam and you pray that someone will save you.  With that being said, here are my 5 pearls of wisdom for taking this journey AND making it to the other side in one piece.

Develop a comprehensive plan.  The first step of any trip is to plan it out.  Going on a road trip?  Better consult a map so you at least have an idea of where you are going.  In the months leading up to us opening up our retail location, I was reading any and everything I could about what to expect.  One of my particular favorites was What No One Ever Tells You about Starting Your Own Business by Jan Norman.

Once you’ve prepped your mind for what you are about to go through (i.e. a lot of sacrifice) then you need to run the numbers.  I suggest looking at what it will cost to get you started, what you anticipate generating/spending for the next 3-5 years and what you will need to meet your living needs.  It’s also a good idea to run a best, likely and worst case scenario.  I would also recommend cutting your worst case scenario in half when you are done.  Why?  Just so you can see how bad it may get if things really don’t go to plan.  Remember, you are trying to prepare for a fight that may just go a round or two longer than you want it to.

Have an extensive support system.  Starting a business is unlike anything you’ve probably trained for in the past.  It’s not like going to a new job and having to learn a new system, culture or people.  It’s more like being dropped off in another country and having no clue how anything works.  To that end, it’s a journey that most people can’t relate to and won’t be able to help you through.  So the first layer of this pearl is to find some mentors who’ve tread this path before you did.  They may be business owners or professionals (lawyers, accountants, consultants) who can relate to the journey AND give you actionable advice.

The second layer is to make sure you have a solid financial plan developed.  This includes anywhere between 6 months and 2 years of savings and a plan on how you will make it through the lean times in your personal financial world.  Personally, since our business is seasonal, I have a contract job (i.e. a short job that doesn’t extend past 6 months) that provides me with income in the off season.  50% of the startup battle is just surviving the lean years, but success can come if you can keep the business and your personal obligations afloat until you reach critical mass.

The last layer in this pearl is to treat your family right.  They can be the key for those of us who decide they want to start a company later in life once you have kids and the like.  So make sure you thank them often for their support, never take your work frustrations out on them and when you have some “free” time/money  make sure you give them a significant piece of it.

Prepare to make a LOT of sacrifices.  I often joke when people say “wow, you’re the CEO of your own company.”  I typically respond with “yeah, I’m the Chief Everything Officer!”  When you run a small business or a start up, you are responsible for practically everything.  It doesn’t happen without you and YOU are responsible for making everything happen (even if you have a team).  As a consequence, plan to spend a lot of time making those things happen.

In addition to sacrificing your time, plan to pull those purse strings tight for a while.  This will be especially uncomfortable for those who left a “cushy corporate job” prior to going it alone.  I can’t tell you how many things that I use to do without thinking that I now only contemplate every blue moon.  Want to go out for lunch?  Yeah, better be a special occasion like the day after tax season or the start of contract work.  Other than that, I’ve kind of gotten use to the taste of those Raman Noodles in the picture above!

The last thing that will probably need some adjustment will be your hobbies.  I use to hit the weight room, go swimming, race my bike, ride my motorcycle, etc.  Well, let’s just say that I cut back most of my hobbies to those that don’t take too much time or money.

Be flexible but ensure you are committed.  Nothing that you do when you start a business goes according to plan.  Thus the key to success lies in being flexible but at the same time committed to the long haul.  You can make adjustments to the direction you are headed, but you shouldn’t go in a different direction UNLESS your initial concept was just way off.  Now what do I mean when I say committed?  I mean you have to want this 100%, with every fiber of your being, more than you love life itself.  This is a very long, dark and lonely path and the light at the end of it can sometimes seem as if it is getting dimmer versus brighter.  But your commitment to making it happen (even in the darkest hours) is often what can get you to the next critical occurrence of your journey.  So in short, if you aren’t willing to go “all in” so to speak, sit on the sidelines.

Constantly evaluate and course correct.  One of the things I see new entrepreneurs struggle with is making adjustments when faced with challenges.  In sailing, when your destination and the wind are both head on, you have to use a technique called tacking to make it to your ultimate location.  In short, tacking is a series of zig-zag movements that continue to catch the wind while moving your forward.  For a business person, this often means paying attention to the numbers, tracking what is working and then adjusting what isn’t.   Corrections ensure that you give your customers what they need and that you do what you need to so that your business survives.

Even though we started this company back in 2005, taking the step to head it up full time back in 2012 was like going back to square one.  In addition to that, opening our first retail location was a scary endeavor.  But I am here to tell you, if you can commit to doing the above, the trip is well worth the agony and preparation.  While starting your business is often nerve racking and challenging, it is also highly rewarding.  At the end of the day, I know that my efforts really impacted someone’s life.  At closing time I can stand on the street, look at our office, and take satisfaction knowing that I am creating something that will hopefully be around in the future (just like these guys).

1st Walgreens Drug Store

1st Walgreens Drug Store

I can’t say that I felt the above on a daily basis when I was working in corporate.  However now I can’t envision living my life in any other way.  So if you are just starting the action phase of your journey know this; it’s rough out here, but you can make it.  Just take your time, prepare as outlined above and make sure you have a little faith.

Until next time…