Is the IRS holding you back from simple daily activities?
I can’t tell you how many clients come into our office with overwhelming anxiety caused by Tax related issues. The primary issues taxpayers have included; ignoring taxes that are due from prior years, and not having filed tax returns from prior years, maybe even both. Sometimes, a spouse assumes their significant other took care of the financial responsibility of filing their joint tax return and making any necessary payments, but found out nothing was ever followed through on. If you fall into one of these categories, you are not alone and all you need to do is just keep reading on.
Before we start, you need to know this: The IRS will never:
1) Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill
2) Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe
3) Require you to use a specific payment method for your taxes, such as a prepaid debit card
4) Ask for credit or debit card numbers over the phone
5) Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying
If anyone calls you, or had called you threatening you with this a payment request over the phone, it is a scam and you need to just hang up the phone. Never give your credit card information over the phone, even if they know your social security # or personal information. Sometimes they sound very convincing and sometimes they sound like they are calling from a 3rd world country. At the end of the day, it is a scam.
Essential and Simple steps to overcome your IRS fears
I have clients cry to me, embarrassed to tell me their entire story, ashamed at themselves for letting the problem go for so long, even clients that refuse to open up their mail. Other clients go to extremes by gifting away assets, putting assets in their sibling’s names, and refuse to operate with a checking account, in fear that the IRS will take away their money and their assets. Do any of these characteristics sound like you?
First and foremost, No matter how bad your anxiety is, or how ashamed, scared, or embarrassed you are, there will always be someone worse off than you. The unknowing of what your true tax liability is, and not knowing what has to be done to get back into compliance with the IRS adds unnecessary stress. The reality is, your fear that is holding you back from dealing with the IRS, is far worse than your tax problem. Of course, In addition to your added stress, is the monetary issue of accumulated interest and penalties which continue to grow until the tax liability is satisfied.
Below are some of the reasons I see tax liabilities due from taxpayers:
- Distributions of 401k’s or IRA’s when the taxpayer is under 59 ½.
- Self-employed income without paying estimated taxes
- Taxpayer has large deductions and cannot provide support
- Cancellation of debt
- Unemployment income not reported
- Change in Filing status, change in dependents
- Sale of an investment or property with large gains
Here are some of the main reasons I see audits happen:
- Income reported does not match the IRS records
- Income or deductions are out of the limits of the IRS’s DIF system. (Discriminate Function System (DIF) - a statistical analysis that assigns number values to various items on the return and produces a score for each return.)
- Schedule A deductions are unusually high based on reported income.
- Educational credits or deductions disallowed
- Schedule C deductions unusually high or inconsistent year over year
Do you really know you owe a ton of money? Or, are you just assuming the worst?
For individuals that have not filed tax returns over the past years I see a lot of fear from clients that simply assume they will owe a ton of money, which is why they hesitated to file their tax returns in the first place. There were many times the taxpayer was surprised to find out the amount of taxes due were not even that much, if any, at all. Other results included a combination of scenarios where in some tax years, money was owed, but on other tax years, money was refundable due to different tax law changes, or changes in the taxpayer’s source of income or life events for that year.
My point is, if you have tax returns that need to be filed because you’re just worried about having a large tax liability, find out first what the real issue is. It is the same scenario when my car stopped shifting gears. I was worried about having to pick out a new car and having another car payment, as I assumed the transmission ceased. I knew nothing about cars and still don’t. I’m, not a mechanic, but the worst-case scenario started running wild in my head, so I finally had my car towed to the shop. It ended up being a worn-out hose that simply disconnected. I had built up stress thinking about a $4,000 transmission, when my bill was $150, for no reason at all.
Here is an example of an everyday turnaround scenario with a scared taxpayer and an IRS notice:
A taxpayer receives a CP2000 notice from the IRS. The notice states that a 1099-B from a Brokerage House was reported to the IRS, however, was not included on the return. The amount of the stocks sold were $25,000 and the taxpayer now owes $4,200 in taxes, interest, and penalties. The taxpayer sees this and goes into “scared mode.” The problem with this scenario is that the cost basis is not included on the CP2000 notice. Just because the taxpayer took out $25,000, does not mean that was their gain. If the cost basis was $30,000, the taxpayer lost $5,000, and should have shown a loss on their return. The $4,200 tax liability would not only disappear, but the taxpayer should be due more money back from the IRS.
Keep in mind, the IRS does not issue refunds after 3 years, so deferring the filings to long can backfire when you wait and lose the refund you could have collected to offset other tax liabilities.
For individuals that already filed tax returns and know what your tax liability is, the worst thing you can do, is just ignore the IRS. The IRS does not want your assets, they are not in the business to own homes and cars, and they just want to collect whatever is due to them. As a self-employed individual, I understand the frustration of having a client start to pay and then disappear when they run into a financial hardship. I have no problem working out a payment plan with a client, however, I do not appreciate someone ignoring me. This forces any business owner to step up their collection efforts, just like the IRS.
The IRS has different methods of issuing notices and many different form numbers. Most notices are computer generated, and released at specific time periods. These IRS notices are attention getters. They want your attention to call and come up with a plan to resolve any outstanding balance due. After ignoring the letters, collection efforts can start to garnish wages, levy state refunds, and file liens on your balances. There are many different notices, including:
Notice CP 2000 Notice of Proposed Adjustment for Underpayment/Overpayment
Letter 531 Notice of Deficiency: This letter advises a taxpayer of their last chance to appeal
CP 504 IRS Intent to Levy: This is a final notice of a balance that is due on the taxpayer’s account. And will inform the taxpayer that a levy will be issued against their state tax refund. It may also include details stating that IRS plans to search on other assets on which levies may be placed.
I understand, someone reading this may disagree with me about being proactive and contacting the IRS when they have been lucky enough to be under the radar, and why wake up the sleeping giant if notices haven’t been issued. However, I am seeing more and more people that would rather just have the peace of mind, take care of the issue, and simply bite the bullet.
Mistakes you don’t want to make- Watch out for Tax Relief Companies
I am sure by now you have seen advertisements on the television or heard radio ads from Tax relief companies explaining the new IRS Fresh Start Program and making it sound like you can settle pennies on the dollar with your tax liabilities. It sounds like all of your IRS problems will go away, sound too good to be true? All I will say, is that if you know the saying, it sounds too good to be true, well you know the rest…. With that statement, there are cases where taxpayers can save pennies on the dollars with an Offer In Compromise request, however, keep in mind you need to be well qualified for that program. I have seen more harm than good with companies explaining this great Service they can provide. These companies send in an offer request, however, when it gets rejected by the IRS, multiple problems start, such as: the Taxpayers statute of limitations stops running, the taxpayer is out money to the Tax relief Company (approx. 4k,) the taxpayer is back to step one, more frustrated, and out even more money.. The Offer in compromise is a great program, only if it is explained correctly to the taxpayer. When a frustrated taxpayer comes in and feels defeated, it is usually because they are not told what the IRS criteria is , in order to be approved, and assume the Tax Relief company will fight over and over for the taxpayer. Below is a quick excerpt from a Fox News article found online.
One of the most common tax relief scams are advertised on TV and radio and promise to reduce your tax liability to pay pennies on the dollar.
“In most of the cases, they ask the customer to pay a fee in advance; unfortunately all too frequently, they do nothing,” says Freedman, noting that one company was able to fraudulently collect tens of millions of dollars on behalf of tax payers without bringing any resolutions in just a few years.
According to the New Jersey Division of Consumer Affairs, these so-called tax-relief companies often charge high fees, potentially in the thousands. After getting the payment upfront, they will request the same documents over and over from the consumer and then conclude the consumer no longer qualifies or the IRS rejected their efforts if the company doesn’t disappear altogether.
Another variant of a tax-relief scam involved getting an unsolicited letter in the mail or in your inbox claiming you qualify for a governmental plan to help settle your tax debt. You’ll think you are working with a government entity related to the IRS—but it’s really just a creative scammer.
Other Mistakes to avoid:
Do not contact the IRS on your own. Seek a qualified professional that not only prepares taxes, but has dealt with IRS representation.
Do you need a Tax Attorney?
A lot of individuals feel a tax attorney is the way to go. I disagree, as it is very expensive to hire a Tax attorney for an issue that may not be that big of a deal. Tax attorneys will come in handy from an appeal process that ends up in Tax court. However, a majority of IRS issues never end up in Tax court and there is no reason to spend unnecessary money now. The IRS will do whatever they can to prevent a case to get into tax court. I strongly recommend to always file a petition to tax court regardless of the situation. This allows a taxpayer to have the right to be heard in Tax court, if it ever gets there. You do not want to ignore your appeal process assuming everything will resolve in your favor. This is simply a backup plan for a worst case scenario decision by the IRS, which you may want to fight.
What are the True chances of an audit in 2017?
With Budget Cuts and the declining economy, the IRS has been underfunded in their requests for their internal programs and assistance. If you don’t believe me, simply call their taxpayer support lines and see how long it takes to get a representative pick up the phone. When representing taxpayers, we do not have a special line and have to wait on average 45 minutes to over an hour as well. Actually, I just lied, there is a special priority line newly established to represent taxpayers, however, every time I called, they had to transfer me to another department or special collections area, adding an additional 45 minutes of hold time. So with budget cuts and underfunding, do you think the IRS will reduce tax audits? In reality, the lower the amount of funds increase the risk of tax audits. Tax audits generates income and if the government will not grant the funds, collection efforts and audits will have to shift against the taxpayer. I will not be surprised if the shifting of audits are emphasized on the middle class, with large schedule A deductions, Schedule C filings, and self-employed business owners.
The problems with using Packaged Software packages
Using packaged software that you can purchase online or at Office Supply stores seems to be the “cheaper” way to go in preparing taxes. While it may seem cheaper, it takes on average 3-5 hours to prepare a basic return by going through the interview process. If you take into consideration your time, the money they now charge to e-file returns, and the biggest problem, of all- trying to interpret the question correctly, it may not always be the cheaper route. Saving $100 to an accountant that knows where more deductions may be taken, as well, as knowing where to better place deductions on your tax return, can give you a return on your $100 extra investment a savings on your tax return of hundreds to thousands of dollars. Audits are likely to trigger on not understanding the question. As an example, I have seen taxpayers answer yes to the question: “Do you have a home office,” however, just because they have an extra bedroom with a desk and a computer, doesn’t qualify, unless you own a business. There are many examples like this that can make or break a tax return.
How do we take care of clients with IRS issues?
The process is easy and painless. First, a Power of Attorney form is filed, so we can talk on the taxpayer’s behalf. There is no need for the taxpayer to talk to the IRS and we ask that the taxpayer does not contact the IRS because it just interferes with the process. Most taxpayers do not want to talk to the IRS, but some end up calling asking for a status, and we do not want extra notes or conversations on the taxpayers file.
We put a hold on the account. This will stop the IRS from any collection activities. This takes a lot of stress off the taxpayer so they do not have to worry about garnishments, levies, or liens.
We prepare and file any tax returns past due if necessary. The IRS has to have all returns filed and on their system in order to negotiate an agreement. This is the first step to getting back into compliance.
We collect IRS transcripts so we can review assessment dates, penalties, balances due, and create a full Taxpayer profile. We put multiple options together to discuss with the taxpayer before contacting the IRS.
Options include Installment agreements based on the taxpayer’s requests, not just what the IRS wants. Offer in compromises, Non-Collectable Statuses, and sometime NOTHING. That’s right, nothing! We let the time run out on the IRS and can have the balances removed along with the release of liens.