IRS Payment Plans, Tax Liens, Tax Transcripts and More: Navigating the Tax Relief Maze.
IRS tax relief includes more than just resolving back taxes. It includes filing missing returns, reconstructing accounting records, interpreting the statute of limitations, analyzing arcane IRS transcripts and the pain and embarrassment of dealing with the IRS. Which way should you turn when dealing with the government on these difficult matters?
Millions of taxpayers every year deal with the Collection Division of the IRS due to unpaid taxes or missing tax returns. Thousands of these taxpayers are in Atlanta, Georgia, where our office is located. Dealing with the IRS is an experience that few people understand due the maze of rules by which the IRS operates. Nevertheless, with some guidance the experience of dealing with the IRS Collection Division can become less frustrating, less confusing and less painful. That is the purpose of this article.
Unfiled Tax Returns
The IRS is looking for unfiled tax returns. This is one of the primary policy objectives of the IRS. They use the many technological tools at their disposal to identify and pursue individuals or businesses with unfiled returns.
Once the IRS identifies a non-filer, they will send a series of letters or notices to request that a return be prepared and filed. If a taxpayer fails to cooperate, the IRS will prepare its own “Substitute for Return.” The Substitute for Return is almost always a bad deal for the taxpayer, as it does not include the deductions and favorable filing status to which a taxpayer is often entitled.
A Substitute for Return may be corrected by filing an actual return.
IRS Letters or Notices
The IRS Collection Division communicates with taxpayers by letters or notices. They do not call. If you receive a call from someone claiming to be from the IRS, it is probably a scam.
Letters from the IRS attempting to collect a back tax bill arrive in a predictable fashion. Each successive letter in the series is increasingly more threatening. The taxpayer is expected to promptly respond to these letters, all of which provide a response date.
Responses to IRS letters or notices should always be sent by certified mail, return receipt requested. This provides proof of mailing.
IRS collections notices are sent as follows, each about a month apart:
- CP-14 – Billing notice. If the tax is paid, including interest and penalties, the matter is resolved.
- CP-501 – First invoice for taxes due.
- CP-503 – Reminder invoice.
- CP-504 – Warning of intent to levy. Levy actions include wage garnishments and the seizure of bank accounts, certain retirement accounts, business receivables and other assets.
- CP-90, Letter 11 or Letter 1058 – Final Notice of Intent to Levy. Final warning that levy action will begin after 30 days.
Notice of Federal Tax Lien is yet another letter sent by the IRS. It is triggered by back taxes greater than $10,000. Fortunately, federal tax liens are no longer reported on credit reports, which somewhat softens the impact of the lien.
Going to Appeals
Taking a case to Collection Appeals is a very effective way to get your case heard and your matter efficiently resolved.
Requesting an Appeals hearing will stop IRS levy actions if the request is made within 30 days of the Final Notice of Intent to Levy. A timely filed hearing request also ensures the taxpayer’s right to go to Tax Court if the taxpayer is unable to work out an arrangement with Appeals. An Appeals hearing request also allows the taxpayer additional time to prepare missing returns and develop a proposal to resolve the tax debt.
It is possible for a taxpayer to get to Appeals even if the 30-day deadline is missed. However, late requests to go to Appeals do not stop IRS collection activity and do not give the taxpayer the right to go to Tax Court.
IRS Transcripts and Options When Dealing with the IRS
The IRS provides a number of options to resolve a tax debt. Each has different benefits. And each has its own set of very specific requirements.
Tax relief options include:
- Offer-in-Compromise – the taxpayer settles their tax debt for less than the full amount of the tax. The amount of the settlement depends upon IRS financial guidelines and the financial circumstances of the taxpayer.
- Installment Agreement (or payment plan) – The tax is paid over a period of years.
- Currently not Collectible – Collections are temporarily put on hold due to the taxpayer’s financial situation. This stops levies and garnishments until their finances improve. The tax will go away if the 10-year statute of limitations expires while the taxpayer is not collectible.
- Bankruptcy – the court option that can wipe away certain tax debts. The involvement of an attorney is required for bankruptcy.
Selecting the best tax relief option for the taxpayer requires a careful analysis of IRS transcripts, along with calculations based on the financial analysis rules that govern IRS collections. This is best left to an experienced CPA or trained tax accountant.
Our accounting firm has significant experience analyzing IRS transcripts to determine the Collection Statute Expiration Date, or CSED. This is a critical factor when determining the best tax relief program for a taxpayer’s needs.
The Statute of Limitations
The statute of limitations gives the IRS 10 years from the date of assessment to collect a tax debt. After 10 years, the tax debt goes away.
The amount of time remaining on the Statute is a critical factor in determining the best resolution option to resolve a tax debt.
It is important to note that a number of actions by a taxpayer will extend the statute, giving more time to the IRS to collect the tax. This includes filing an Offer-in-Compromise, requesting an Appeals hearing, requesting an installment agreement and filing for bankruptcy. Therefore, these actions should only be done when there is a strong likelihood of success.
Requirements to Make A Deal with the IRS
The IRS will only negotiate with taxpayers who are in “tax compliance.” This means that tax returns have been filed and current taxes paid.
The IRS requires the filing of the prior six years of returns for purposes of tax compliance. The filing of tax returns older than six years is not required for this purpose.
In the event that you cannot afford to pay your taxes, do not make the mistake of thinking that it would be better to not file at all. The IRS will not even begin to talk with you if your have unfiled returns.
The requirement for current tax payments includes withholding on wages, quarterly estimated tax payments for the self-employed and payroll taxes for business owners with employees. If you owe taxes for multiple years, it is best to pay your most recent tax bills first to demonstrate current tax compliance. Then go back and resolve the older years.
Georgia CPA Tax Tip: It is important to know that the IRS will void any existing installment agreement or offer-in-compromise if a taxpayer falls out of tax compliance by failing to file returns or make required tax payments.
Quarterly estimated taxes are frequently a stumbling block for business owners and independent contractors who are trying to negotiate a deal with the IRS.
Remember that estimated taxes are due on April 15, June 15, September 15 and January 15. This applies to anyone who is not on a payroll and is therefore not paying taxes through withholding. If estimated taxes are not paid on time, the IRS charges interest and penalties at the end of the year.
And, the IRS will not agree to negotiate if estimated taxes are not being paid on time.
The IRS is a enormous bureaucracy. There is no question that it can be frustrating to deal with. It has always been a headache to get someone from the IRS on the phone to provide help or useful information. This is even worse now during Covid.
Nevertheless, the IRS is a machine that generally works according to a very defined set of rules. To be successful in working with the IRS, you (or your advisor) have to know these rules. And you and your advisor must be responsive, timely and courteous when responding to IRS requests. This, and an extra dose of patience, will help you to successfully navigate the IRS maze.
Massey and Company CPA is a boutique accounting firm serving the needs of small businesses, business owners and individual taxpayers. Our services include tax preparation, tax planning, taxpayer representation, IRS audits, monthly bookkeeping and accounting. We are located in the Sandy Springs / Buckhead area of Atlanta.
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