How To Deal With IRS Debt

So these little envelopes that read “Official Business – Penalty for Private Use, $300” kept showing up in your mailbox.  You kind of had an idea of what they were about since they said they were from the Department of The Treasury.  But you figured that if you ignored them they might go away.  Or maybe you just needed a little more time to save up some money so that you could settle your debts.  But time kept passing, you never settled up and the letters kept right on coming.  When you finally decided to open one of those envelopes, it said that the IRS was in the process of levying you.  Now what?

If you are faced with tax related debt, it’s important that you take the following steps as soon as you can:

Own the situation.  All difficult situations only get worse the longer that you prolong dealing with them.  Think about it, does that achy tooth get better by itself?  Will that funny noise your car is making just go away if you ignore it?  Do those termites in your house stop munching on everything if you just pretend they aren’t there?  The answer to all of the above is no.  The first step to dealing with tax debt is to own up to it and start the process of resolving it.

Assess the damage.  We recently were dealing with a client who hadn’t filed taxes for 6 years.   They didn’t want to deal with the situation because they figured they owed thousands of dollars.  Well, when we prepared their returns it turned out they only owed about two thousand dollars – initially.  Because they didn’t deal with it early on the IRS penalties and interest just about doubled the initial balance owed.  Thus, it’s important that you assess just how much is owed as soon as possible.  Our experience has been that the situation typically isn’t as bad as a taxpayer thinks.  Additionally, if you are willing to work with the IRS you will find that they’ll reciprocate.

Seek professional help if needed.  Some tax debts can be settled without too much professional assistance.  Did you know that if you owe $50,000 or less in combined individual income tax, penalties and interest you can apply online for an installment agreement?  Yup, no need to speak to anyone at the IRS or have a professional get involved.  Now that is, of course, if you can make the payments.  If you owe a lot, don’t have substantial assets or just can make any sort of “significant” payment, then maybe you should have a professional look at your situation.  They may be able to recommend options that can help you pay your debt AND not put yourself under financial stress while you do so.

Ensure that your professional is qualified.  There are lots of boiler room tax resolution firms out there that will promise you they can settle your debt for pennies on the dollar.  When reviewing any firm, make sure that they have the following:

  • Professional, and Useful Website
  • Successful Track Record
  • Friendly, Helpful Representatives
  • Easy-to-Understand Fee Structures
  • Free Analysis and No Guarantees

Figure out your options.  When it comes to tax resolution, many people hear the advertisements touting how they can settle for less than they owe (i.e. an offer in compromise).  While this is in fact true, this is not the case for 80% of taxpayers because they will not qualify for an OIC.  You have to remember that the IRS is the collections arm of the US Treasury and that they are not in the business of giving away free money.  With that said, tax resolution typically falls into the following categories:

  1. File unfiled tax returns
  2. Dispute the tax debt on technical grounds
  3. Request penalty abatement
  4. Request innocent spouse relief if the debt was the fault of your spouse or ex-spouse
  5. Pay the tax debt in full
  6. Request an installment agreement
  7. Put the debt into currently not collectible status
  8. Apply for an offer in compromise
  9. Await expiration of the collection statute expiration date

Move forward.  Once you outline your arrangement to resolve your tax debt, make sure that you have a plan in place so that you don’t create any new debt.  For example, if you receive most of your income via 1099, make sure that you make estimated payments though out the year.  Lastly, take a personal vow to never generate tax debt going forward.  While there are numerous people you can owe, the IRS is really the only entity that can make your financial existence almost unbearable if you let it get that bad.  Thus, let’s all try and stay on their good side shall we?

Until next time…

By |2013-04-28T23:01:06-06:00April 28, 2013|Categories: IRS Talk|Tags: , , , , , , , |Comments Off on How To Deal With IRS Debt

IRS Notices & How To Handle Them

So, you go to the mailbox and one of the letters has a return address that sends chills down your spine: IRS.  While your first instinct is to drop the letter on the ground and hightail it back into the house and hide under the bed, that’s probably not the best choice.  While most people don’t like being contacted by the IRS, many of their letters are no cause for panic because they are not audit related.  This post will help you determine what type of notice you received and the steps you should  take to begin clearing matters up.

The first step in the process is to determine what type of notice you have received.  This IRS has over 76 different form letters that you can receive for various reasons.  Listed below are the four main categories that they fall into.

Automated Adjustment Notice.  These notices tend to start with a CP### and tend to contain the language “Summary of Proposed Changes.”  The good news is that this is a computer generated notice and its far more straightforward and easier to deal with than an audit.  About 3% of tax returns filed will produce an automated adjustment notice.  The notice you receive will be due to one of the following four reasons:

  • Error correction – the IRS believes it has found a math error or similar problem in the return
  • Penalty assessment – the IRS believes you did not meet a filing or tax payment deadline
  • Interest assessment – the IRS believes you did not pay a tax bill on time
  • Under reporting – your tax return doesn’t list all the income others have reported to the IRS via 1099 or W-2 forms.

Next Steps

  • Read the notice and determine what the IRS is asking you about
  • Call the IRS (800-829-1040 if the numbers isn’t on the notice) and ask the representative for an explanation of the automated adjustment
  • If you are prepared, state why you believe the notice is wrong or correct
  • If you don’t clear up the matter on the phone, ask the person to note on its record that you disagree with the notice (take down the date and time you called)
  • Draft and send in your response.  If you agree with the IRS/amount then sign the form and return it to the IRS along with payment.  If you disagree, draft a brief letter stating why and send it (along with a copy of the notice) back to the IRS

Correspondence Audit.  These notices tend to contain a check list of items, some of which may or may not be checked.  While the bad news is that this is in fact an audit, the good news is that of the three audit types, this one is typically the easiest to deal with.  Correspondence audits make up 75% of all IRS audits and do not require you to meet face-to-face with an IRS auditor.

Correspondence audits are used to verify straightforward matters.  For example, the IRS may request that you send in purchase and sale documentation to verify gains or losses on stock sales, or closing statements for real estate sales.  Typically resolution can be had by simply sending in the requested documents, but sometimes the IRS is proposing changes that you may disagree with.

Next Steps

  • Read the notice and determine what the IRS is asking you to do/provide
  • Make photocopies of the documents you gather and neatly organize them so they can easily be examined by the IRS (don’t send your originals)
  • Write a clear and concise cover letter to send with your items (send it to the IRS agent that send you the letter) that list all the documents you are providing
  • Send your items certified mail, return receipt requested, so you have a record of actually responding

Office Audit.  This letter will typically have the numbers 2202 located on it somewhere and may reference an appointment date/time.  Just as it sounds, an Office Audit takes place at an IRS office where you will meet face to face with an auditor.  According to IRS statistics, the average additional tax and penalties owed resulting from an office audit is about $6,000.  The notice you receive should list the specific issues on your tax return that the IRS wants to examine.

Next Steps

  • Call the IRS to schedule the audit or confirm the day and time that the IRS has proposed
  • Highlight or circle all the listed issues on the notice as you find them so you can ensure you gather all of the needed information
  • Review your records and find the documentation needed to justify each issue
  • Organize all relevant documentation into neat categories based on the items in question (only include documentation directly related to the item in question)
  • Make necessary copies to provide to the auditor during your meeting
  • Remain credible during your meeting.  If you lie to the auditor once, they may not believe anything else that you say
  • If further documentation is needed to prove your case and you have it, schedule a date/time to send it to the auditor

Field Audit.   This letter will typically have the numbers 3253 located on it somewhere and may reference an appointment date/time.  Field audits are the most serious of the three and the amount owed often runs into several thousands of dollars.  The subjects of these audits tend to be small business owners, self-employed taxpayers, owners of multiple rental real estate properties, earners of more than $100,000 and individuals with complex tax returns.

The steps to resolve a field audit are essentially the same as an Office Audit.  However, due to their nature and the rigor involved, it’s probably advisable that you secure someone to represent you.  This can be an Enrolled Agent (EA), Attorney or Certified Public Accountant (CPA).  Your agent will then help you gather the necessary information and can even speak to the IRS on your behalf if you prefer not to.  However, the real benefit of representation is that the person can address complex tax matters that you may not know the specifics of (especially if someone else prepared your return).

By |2012-10-10T12:59:26-06:00October 10, 2012|Categories: Tax Talk|Tags: , , |Comments Off on IRS Notices & How To Handle Them
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