Tax Debtor's Helper

Learn the Ropes to Minimize Penalties

The penalty for filing a return late is 5% per month of the total tax due with a maximum penalty of 25%!  Ouch!   It certainly pays to get your return in on time—especially if you owe a significant amount.  But, there are ways that smart practitioners who deal with IRS collections issues often work for their clients to minimize penalties.  One way is to file a timely extension (Form 4868).  An extension does not extend the due date for the payment of your tax—only the filing of the return.  Therefore failure to pay penalties will still apply to any tax due. 

One other important thing to remember is that a timely filed return is deemed filed when delivered to an authorized carrier, but a returned filed late is deemed filed when received by the IRS.  At 5% per month even days matter.  Our firm makes a practice of hand-delivering tax returns to a local IRS service center.  In addition to the signed return we always carry a copy of the return and request a date stamp on that copy from the IRS clerk who receives the return.  This proves the date of filing definitively for calculation of the penalty. 

Remember, willful failure to file a tax return is a misdemeanor per IRC Section 7203. In egregious cases, willful failure to file may be elevated to a felony under IRC 7201.  For more information look here.   The best advice is to file on time, but if you don’t—especially for a number of years—it may be best to consult a tax advocate.

Business Owners Cut your Tax Debt by Using Extension

Filing season is upon us and many taxpayers begin to look for deductions to eliminate tax liability.  Some fear owing taxes that they cannot pay.  For most deductions it is too late to do anything that will affect tax year 2007.  However, it is still possible to maximize your deduction for contributions to a qualified retirement plan such as a 401K.  If you own a business with such a plan and have not been able to maximize your contribution, you may consider filing form 4868, Application for Automatic Extension of Time to File Individual Income Tax Return.  By filing this form you do not extend the due date of any tax due, so you must pay any amount of estimated tax owed at the time of filing for the extension.  But, in addition to extending the due date for filing your return, you also extend the final date on which you may make contributions to a qualified plan for tax year 2007.  Remember you must own a business with such a plan for this to work.  If you do the contribution limits are quite substantial.

If you do, here is a well-known but great trick that I was reminded of in this month's edition of Tax Hotline.  Because you may make contributions to your plan all the way up to the last date of your extension even if you file your return before that date, it may behoove you to file well before your extension date if you are having trouble raising the money to maximize your contribution.  Simply, prepare your return to estimate your refund or amount of tax due then add your maximum contribution to your qualified plan to the tax return.  If after assuming your maximum contribution you would receive a refund sufficient to make the contribution, then file the return well before the extension deadline and use the refund to make the contribution to your qualified plan.  This trick only works in special circumstances.  I recommend consulting a tax professional before doing this.  If you have substantial tax debt a firm specializing in helping business owners with IRS collections matters is a more appropriate choice then a general tax preparer.

Closing Down a Failed or Failing Business

Often we are called on, when representing clients who owe payroll taxes, to dissolve a failed business.  It is surprising to me how many people own failed businesses and have never bothered to get competent counsel on closing them down properly.  This results in wasted deductions, high administrative burden on the business owner later, and sometimes IRS or state taxing authority collection actions on presumed ongoing payroll tax debt that is not actually there if the business is no longer an employer.  The biggest issues for our clients are often:

1. IRS and State often still believe the business has the payroll it had as of its last filed tax return.  Sometimes assessments are made in the absence of a return and collections activity may proceed.
2. Unused deductions—a business may fully deduct any unused start up costs on its final tax return that would normally need to be amortized if the business were still a going concern.
3. Short tax year often will permit the business to deduct a full years prepaid expense against only a partial year’s revenue.

If you have a business that has not been properly shut down contact a competent tax advisor as soon as possible.  With a firm like Effectur that specializes in IRS collections representation any payroll tax liability can be negotiated to a reasonable settlement.  Taking into account the IRS’ ability to assess the civil trust fund recovery penalty against the business owner personally for the trust fund portion of any unpaid payroll taxes it makes sense to seek competent tax help.

IRS Drops Interest Rates

One bit of good news about a slowing economy is that the Fed’s lowering of interest rates may result in savings for our clients as the index on which the interest rate that the IRS can charge may continue to go down.  As of January 1, 2008, with the exception of certain large corporate underpayments, the IRS may charge a rate of 7% interest.  This is a full percentage point lower than last year’s rate.   This is especially good news if you owe the IRS a large amount of money.  The bad news is that they only have to pay this amount on overpaid balances also.

A good tax representative will look closely at the cost over time of owing the IRS and will seek constantly to minimize the amount of interest and penalties paid over the life of an agreement in addition to seeking abatement penalties and reduction of tax.

IRS “knowingly signed” Rule for Innocent Spouse does not hold up in Court.

In our practice we represent a fair number of people who qualify for innocent spouse relief.  The kiss of death in many cases is that the spouse seeking relief may have signed the tax return for the year in question knowing that tax was due, which in the IRS’ eyes makes that spouse liable for the entire amount due on the return plus any statutory additions (interest and penalties).  We call this the “knowingly signed” problem, and it is one more example of how the IRS interprets congress’ instructions in ways that are unfair to a large number of people.  Essentially the IRS holds a taxpayer responsible for any tax return that they sign no matter who else signs it or who prepares it.

Well, chalk one up for the little guy in the case of David Bruce Billings, TC Memo 2007-234.  Mr. Billings’ spouse stole $40,000 from her employer that Mr. Billings was not aware of.  Mr Billings’ spouse under advise of counsel sought to declare the income by amending their previously filed joint return for that year to minimize penalties.  Since the IRS does not allow amending a return from married jointly filing status to married separate, Mr. Billings signed the amended return to minimize penalties.  Of course the IRS ruled that since he signed the return knowing the tax was due that he was fully liable.  The tax court ruled that Mr. Billings should be granted innocent spouse relief because the IRS rule did not operate equitably in this case.  These facts may sound like a narrow ruling, but the rule often operates this way for spouses who have signed amended returns.  If you have questions about innocent spouse relief, call a professional tax advocate who can advise you of your options.

Veteran Beats IRS in Court

I love the “Personal Winners” section of Tax Hotline magazine.  It highlights individuals who have beaten the IRS.  The case of Robert Vercher,

WD LA., No.

1:05-cv01951 makes me especially happy because Mr. Vercher is a veteran.  Veterans have certain special rights in IRS collections matters, and our firm loves to help those who have sacrificed for our country.   He applied for tax-free disability benefits and received them retroactively.  He wasn’t entitled to receive these benefits and his retirement (which is taxable) for the same period, so the VA withheld an amount to repay his gross retirement pay rather than the after tax amount.  This, ruled the court, resulted in an overpayment of tax that should be refunded.  I don’t know whether Mr. Vercher attempted to resolve this within the confines of the administrative appeals process of the IRS, but we would love to have loved to have helped him.  Our firm specializes in helping individuals and business with IRS collections matters and other intractible tax problems and can often save clients large amounts of money while avoiding costly litigation.

Tax Protestor Wins but still Loses

I don’t recommend being a tax protester  It doesn’t pay and you make a terrible client for anyone who tries to represent you before the IRS.   What’s more, even when you win you lose.  In the case of Edward W. Clough TC Memo 2007-106, illustrates the point.  The taxpayer in this case was a four year non-filer.  The IRS completed substitute for returns (SFR) for all four years and move to levy his assets.  The taxpayer made frivolous appeal arguments and lost his appeal, but in tax court his attorney correctly pointed out that the IRS could not prove that he had ever been sent the statutory notice of deficiency (CP2000) which is a legal pre-requisite to IRS collection activity on an SFR. The tax court ruled that the IRS could not collect the tax for that one year but assessed a $6,000 penalty against the taxpayer for his frivolous tax protestor arguments.  I read about this case in a publication that I receive regularly called Tax Hotline, but our firm finds these collection due process issues for taxpayers on a regular basis.  The difference is we are able to resolve these issues through the IRS appeals process, not with frivolous tax protestor arguments, but professionally as an effective tax advocate without the expense of costly litigation.

Will Congress Ever Listen to Nina?

In an earlier post we discussed National Taxpayer Advocate, Nina E. Olson’s 2006 report to Congress.  She has now delivered her 2007 report to Congress and is touting many of the same problems she underscored in her 2006 report.  Specifically with respect to the Offer in Compromise program she recognizes what so many professional tax advocates are seeing, “The IRS’ Offer in Compromise Offer program is no longer being used to any significant extent as a viable collection alternative.”

She goes on to point out some telling statistics from the IRS’ own data.  “In fiscal year 2007, accepted Offers generated 17 cents for every $1 owed,” Olson said. “ By contrast, IRS research indicates the IRS has historically collected only 13 cents for every $1 owed on debts that are two years old and virtually nothing on debts that have been outstanding for three years or more.”

Without doubt, the majority of our clients who submit Offers in Compromise have tax debts in excess of 3 years old.

The Advocate’s Report highlighted some key recommendations:

-         Provide taxpayers with the right to appeal to the IRS Appeals function the IRS’ decision to return an Offer in Compromise before or after accepting it for processing.

- Give taxpayers credit for Tax Increase Prevention and Reconciliation Act (TIPRA) payments associated with prior Offers returned, rejected, or withdrawn within the preceding 24 month period on the basis that the new Offer should really be regarded as part of the same debt resolution process.

- Revise its Offer in Compromise outreach efforts to taxpayers and practitioners and to better assist them with the submission of “good” or reasonable and appropriate Offers and clearly state that Offer in Compromises are an acceptable collection alternative.

- Ensure that Offer in Compromise training is a mandatory topic in fiscal year 2008 for all Collection personnel responsible for taxpayer contact (e.g. Revenue Offers and Automated Collection System employees) to heighten employee awareness of Offer in Compromises being a “win-win” situation for taxpayers and the government, given the appropriate set of circumstances, and partner with Taxpayer Advocate Service to develop such training.

- Issue guidance that includes several realistic examples of Offer resubmissions that are not deemed solely to delay collection.

Will Congress listen to her and force the IRS to abandon its pigheadedness?  The outlook is not promising for immediate congressional action, but we can only hope.

IRS Funding Means Increased Enforcement

The President has signed the bill funding most federal agencies for the remainder of fiscal year '08. IRS receives $10.89 billion allocated as follows: 

·         Taxpayer services: $2.15 billion

·         Enforcement: $4.78 billion

·         Operations support: $3.68 billion

·         Business systems modernization: $267 million

The final budget is $295 million over FY07 and $203 million below Bush's request. Also included is a mandate for IRS to spend $7.35 million to hire full-time employees in ACS (Automated Collection System.) The emphasis on enforcement means the IRS will find delinquent tax payers and non-filers faster and become more demanding in the process.  IRS Levies will increase as well as the number for Federal Tax Liens.  It is unlikely however that there will be an increase in staffing in the centralized Offer in Compromise units.  If you have unfilled returns or unpaid taxes its always best to come to the IRS making an effort to resolve the situation before they come to you.  Find a competent and reputable tax advocate and settle the situation quickly.

The real work of an Offer in Compromise--thinking.

Many people will tell you (most often an IRS employee will tell you) you can do an Offer in Compromise yourself. All you have to do is fill out the forms and send it in. While filling out the typical IRS form can be a challenge in and of itself, this is largely true. There is no great mystery to filling in the blanks on a form 433a and form 656 and mailing it in with the required documentation. Anyone can do this and get an offer in comrpomise submitted—and summarily rejected. Most tax resolution firms are notorious for this.

The real work in an offer is in the analysis that goes into the decision of whether to submit an offer in the first place. There are many risks associated with the submission of an offer in compromise, including but not limited to the IRS keeping your 20% down payment and rejecting the offer and the tolling or extending of the statute of collections on your tax debt. A careful firm will consider all of your options and if appropriate submit a well-analyzed offer in compromise. How can you tell if you have found a careful firm? You should look for a firm that submits a low number of offers relative to their overall number of clients and has a high percentage of their offers accepted by the IRS. Don’t be fooled by firms that show you a “sampling” their results with a disclaimer that says your results may vary. Ask any firm to give you their records of all offers in compromise they have ever submitted and tell you the percentage of clients for whom they submit offers in compromise and the percentage of those offers that are accepted. Any firm that cannot do this is taking your money and rolling the dice.