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Taxpayer Representation

The Simple Truth About IRS Offer in Compromise Fees

Most tax resolution companies give you a quote for services based primarily on three things:

  1. How much you owe the IRS
  2. What kind of taxes you owe
  3. How much the sales person thinks you can afford to pay THEM

Here’s a dirty little secret of the tax resolution industry that nobody else will tell you: The actual WORK required to resolve a case has very, very little to do with how much you owe or what kind of tax it is, and obviously nothing to do with how much of a fee you can pay for representation.

What makes a tax resolution case more complex has much, much more to do with other factors, such as:

  • the existence of other creditors
  • the status of your assets
  • whether or not there are existing levies or wage garnishments
  • how long you’ve been accruing a tax liability
  • your past efforts (or lack thereof) to resolve the issue
  • your ability to file missing returns quickly
  • whether or not your accounting is up to date
  • whether or not you are able to “stop the bleeding” and become current with present day filing and payment requirements (this is actually the single biggest factor)

Most companies have a minimum fee quote for doing an Offer in Compromise for you, and it’s generally higher than for doing a payment plan, because the OIC process takes 6 to 12 months from start to finish. Most reputable firms will charge you anywhere from $3500 to $5000 for doing a basic Offer in Compromise for you, and this may or may not include filing appeals and dealing with levies, and most definitely does not include filing any tax returns for you.

Here’s the thing, though: Filing an Offer in Compromise is actually pretty simple, and the size of your tax debt and the tax type does NOT make it any more difficult. It’s the same form, the same financial analysis, whether you owe $14,000 in personal income taxes or you owe $4.5 million in unpaid employment taxes. Big surprise: The detailed financial analysis required for the business with the payroll tax debt isn’t that much more involved than the smaller personal tax liability, assuming you have proper financial records for the business.

Instead of getting a fee quote based mainly on how much you owe and what a salesperson gets a “vibe” that you can afford to pay, make sure you get a firm fee quote from reputable firms, such as those that you’ll find in our directory.

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Taxpayer Representation

Common Sense Advice Regarding Offer In Compromise Scams

By now, everybody with a tax bill has heard the “pennies on the dollar” promises on radio and TV. Before handing over thousands of dollars to some Slick Rick salesman over the phone, here are some things you need to know about the Offer in Compromise program.

First and foremost: You probably don’t qualify. What’s that? How can I say that without even knowing you or your situation? Because the IRS statistics show that most people that apply don’t qualify, that’s why. In 2018, the most recent year for which data is available, the IRS outright rejected 59% of all Offer in Compromise applications that were submitted.

Secondly, the Attorneys General of several states, the Federal Trade Commission, and multiple class action lawsuits have been won over the common sales practice of promising tax relief, and not being able to deliver. More often than not, clients in those situations are sold an Offer in Compromise program for many thousands of dollars, and are then converted to an Installment Agreement (monthly payment plan to the IRS) with no refund of the price difference. This has been going on for years, and and many tax debt resolution companies have been sued for this and other egregious sales practices that are designed to do nothing but part you from your money.

There are probably tens of thousands of other OIC settlements sold by these companies every year that are never actually filed, so they don’t even go into that number that the IRS tracks.

If somebody is trying to tell you that you qualify for an Offer in Compromise without doing a thorough analysis of your financial situation, RUN! They will often say that you can settle your debt for some fraction of what you owe. That fraction is a totally made up number! The formula the IRS uses to determine your required Offer in Compromise amount has absolutely nothing to do with how much you owe — it’s entirely based on what you own and what you earn.

To determine whether you even qualify for an Offer in Compromise, you need to examine the value of your assets, including your retirement accounts, cash, equity in your home, your vehicles, the value of business equipment, etc. If all that stuff is worth more than what you owe the IRS, then you are most likely ineligible for an Offer in Compromise.

Also, take a look at your income and expenses. The IRS doesn’t allow all expenses in this calculation, so you have to do the math based on the IRS National Standards. Your income minus your allowable expenses is then multipled by a number of months, either 12 or 24, and then that amount is added to your assets. Again, if that number exceeds what you owe the IRS, you are not eligible for participation in the IRS Offer in Compromise program.

To help you determine eligibility for a reduced settlement with the IRS, use this Offer in Compromise Pre-Qualifier Tool directly on the IRS website.

Carefully consider all of these factors before giving anybody money to file an Offer in Compromise for you. There are reputable companies out there, but do your due diligence before spending that kind of money for help resolving your IRS tax debt. To get started, search our directory of carefully screen tax firms using the search bar at the top of this page.

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Tax Returns Taxpayer Representation

How to Choose a Tax Firm for Complex Needs

Choosing a tax professional isn’t an easy task anyway, but mix in the coronavirus tax extension deadline and current economic recession, and this process just got a whole lot more complicated. Keep reading for all you need to know about how to choose a tax firm for your complex accounting, tax planning, and taxpayer representation needs.

Do I even need an accountant or tax firm?

According to the Internal Revenue Service (IRS), every taxpayer is entitled to representation. The taxpayer may either represent themselves, or with proper written authorization, have someone else represent them. However, this representative can’t be just anyone. They must be a licensed attorney, Certified Public Accountant (CPA) or Enrolled Agent. Each individual may verify a representative’s eligibility.

Why would I want a representative?

You may want a representative (such an accountant or tax firm) to represent you for a number of reasons. These include a specific tax problem, a notice from the IRS or a tax audit. For most taxpayers, the chances of being audited are less than 1 percent. Those most likely to get audited are among those in the highest income brackets and those in the lowest. If this happens to you, your representative can help to interact with the IRS on your behalf as well as provide information and explanations. They can also enter into agreements with the IRS once you reach them. However, it is important to select your representative carefully because, in the eyes of the IRS, the representative is the person they are interacting with.

Taxpayers have a right to representation, and a qualified, knowledgeable, and experienced representative can ensure that you get the best outcome. If you’re unsure of the process, they help to streamline it and eliminate many of the pressures that come with it. To authorize a representative, you’ll sign a Form 2848, Power of Attorney and Declaration of Representative. This allows the IRS to recognize the representative in your case instead of you personally. 

Understanding professional roles  

Choosing a tax professional can be a difficult process, especially if you’re not sure what the difference between them are. Seeking the best person to prepare your tax return will ultimately land you in a different place than looking for someone to skillfully represent you in front of the IRS. Here’s what you need to know.

CPA: A CPA is a certified public accountant that must be licensed by the state. They earn this designation only after they have passed the Uniform CPA Exam that is comprised of four parts and administered by the State Board of Accountancy. They’re a trusted financial advisor for individuals, businesses, and organizations who help them reach their goals in a variety of ways. They may do bookkeeping, financial planning or prepare financial documents like tax returns and profit-and-loss statements.  

Enrolled Agent (EA). An EA is a tax professional licensed directly by the US Treasury Department. In order to become an EA, an applicant must successfully past a 3-part exam covering individual taxaxtion, business tax law, and IRS policy and procedure. In addition, they must have a clean criminal record, and complete a minimum of 72 hours of continuing education every three years. Just like attorneys and CPAs, an EA has unlimited representation rights in front of the IRS. But also like CPAs and attorneys, not all EAs are experienced in every aspect of taxpayer representation — each tax professional has their own areas of expertise and specialization. You will need to take this into account when choosing a tax firm.

Tax preparer: According to the IRS, anyone can be a paid tax return preparer as long as they have an IRS Preparer Tax Identification Number (PTIN). Tax return preparers will have differing levels of education and expertise. Thus, it’s wise to check their qualifications prior to hiring them. You can use our directory of carefully selected tax firms to help you. Beware that tax return preparer fraud is a common tax scam. You can lodge a complaint if you have been financially impacted by a tax return preparer’s misconduct or improper practices.

Tax representative: Not everyone can be a tax representative, unlike a tax preparer. These individuals must be a tax attorney, certified public accountant (CPA) or enrolled agent. Tax representatives are helpful when you’re corresponding with the IRS.

I’m good for 2019. How do I start tax planning?

If you’re squared away for 2019, you may already be looking forward. After all, tax planning can really benefit you in the long-term. Tax planning is the analysis and arrangement of a person’s financial situation in order to maximize tax breaks and minimize liabilities in a legal and efficient manner.

Step #1: Understand your tax bracket

Plan for the future by looking at where you’re at today. The United States operates within a progressive tax system which means that people with higher taxable incomes have higher tax rates (and vice versa for lower incomes). There are seven income tax brackets. You can view the 2019 versus 2020 tax brackets here to determine which one you’re in for planning purposes.

Note that your taxable income isn’t necessarily equal to your salary. You’ll need to subtract out any deductions to determine your taxable income. Once you’ve found that, don’t just multiply by the tax rate, the government divides your taxable income into chunks and then multiplies it by the corresponding rate.

Step #2: Differentiate between tax deductions and tax credits

This is a crucial step in tax planning because you can create strategies to help you reduce your tax bill. This is also where a tax expert can come into play because they are likely to know more about the available deductions and credits than you will.

  • Tax credits – a dollar-for-dollar reduction in your tax bill
  • Tax deductions – specific expenses that you’ve incurred that you’re able to subtract from your taxable income

Step #3: Plan for standard deductions versus itemizations

Another big impact on your tax bill is deciding whether to take the standard deduction or to itemize. When you take the standard deduction, it’s a flat-dollar, no-questions-asked tax deduction that Congress sets every year. This makes you preparation go a lot faster and a lot of taxpayers prefer it because it’s easier. However, you can also choose to itemize your tax return which means you add up all the individual deductions that you qualify for. People normally take this route if it will be more advantageous financially. Evaluating which direction to go can take some time and math!

Step #4: Learn about popular tax deduction and credits

Learning the most popular tax deductions can help you to save some cash. Make it part of your tax planning to learn about them. Your tax firm can help you with this.

Step #5: Know what records to keep

Keeping tax returns and documents is essential for your own records and if you’re ever audited. When you decide this, know that the IRS has three years to decide whether they want to audit your return, so don’t throw it out before that.

Step #6: Select a firm to help

Knowing what you do about the three roles above, look for a firm that has individuals focused on what you need the most help with. For the majority of individuals and businesses, this is likely to be a tax firm that can help with proactive planning while also serving a critical support role in other areas of your business or personal finances.

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Taxpayer Representation

5 Reasons to Hire a Professional Tax Firm to Represent You In Front of the IRS Collection Division

Over the years, there have occasionally been bursts of media attention placed on the “tax debt relief”. In past years, the FTC has taken down companies such as American Tax Relief, the California Attorney General came down hard on Roni Deutch, and the Texas Attorney General won a massive civil judgment against Tax Masters. In the wake of such regulatory actions, the American consumer is likely left with the impression that all tax attorneys and tax resolution firms are just as bad as used car salesman.

While it’s true that these companies, and numerous others, have created a bad name for the tax resolution industry as a whole, the fact of the matter is that these companies are the exception, not the rule. There are dozens of companies with horrible BBB records and numerous reports on Ripoff Report and other web sites. However, for every one of those bad apples, there are dozens of reputable, hard working firms that are just as big as the con artists, and for every one of those firms there are literally hundreds of independent practitioners out there, including tax attorneys, IRS licensed Enrolled Agents, and state licensed Certified Public Accountants. Any of these licensed professionals are allowed to represent  taxpayers in front of the IRS.

The FTC recently posted a consumer alert telling people to handle their IRS disputes themselves. As an Enrolled Agent myself, I’m obviously biased in opposition to the FTC’s statement, but there is also a logical side to it. Look at it this way: You have one Federal agency telling you NOT to exercise your right to representation in front of another Federal agency.

Here are five reasons you should use professional representation to resolve your IRS tax debt:

  1. First and foremost, you should hire professional representation when dealing with the IRS for the exact same reason that you would hire an attorney if you got a DUI: The professional knows the laws, knows how the system works, and deals with it every single day, you don’t. It’s the same reason you call a plumber when the pipes burst, or the fire department when the house catches fire. These professionals are experts at what they do, in the same way that you are an expert at what you do.
  2. In the same way that attorneys talk to attorneys on a slightly different level than the rest of us do, IRS collections agents, auditors, and other staff are financial and accounting people, and they will speak differently with another accounting professional than they do with you. This benefits you in a number of ways, including avoiding miscommunications and helping to cut off issues before they arise.
  3. Your tax professional is unique because they speak multiple languages: Tax law, accounting, negotiation, and probably a few others. These languages are important to speak when addressing the IRS. Again, it comes down to doing what you do best, and hiring out the rest.
  4. Your tax firm understands all your options and what to do in different circumstances, you don’t.
  5. A CPA, Enrolled Agent, or tax attorney is YOUR representative, and is looking out for YOUR best interests. The IRS agent on your case is not your friend, and is there looking out for the best interests of the government.

Keeping the above things in mind,  choose carefully when it comes to hiring a tax firm to represent you in any IRS matter. Exercise your right to representation, and don’t let the IRS bully you around just because you don’t know the laws and aren’t an accountant.

In my next post, I’ll discuss what you should look for when choosing a representative, and questions you should asking before sending any money.

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Taxpayer Representation

Bankruptcy vs IRS Offer in Compromise

If you have a large amount of other debt besides just tax debt, bankruptcy may be an option you end up considering. Is this the right thing to do when you have tax liabilities?

For some people, bankruptcy can be the right way to go. While bankruptcy will not erase most tax debt, the bankruptcy court determines what you pay each creditor, and may remove some of the penalties and interest, depending on the case.

The interest rate that the IRS charges, to be honest, isn’t that bad. The rate is adjusted several times per year, and it currently sits at 4%. What kills people are actually the penalties. It is not uncommon for tax debtors to max out all their penalties, which tacks on a whopping 45.5% to their principal, and THEN interest accrues on the whole thing.

To determine whether bankruptcy is the best route for you, you should consult with a bankruptcy attorney. If all you have is IRS debt, and don’t have significant other creditors and/or don’t want the bad credit associated with bankruptcy, but you cannot otherwise go on a monthly payment plan, then consider an Offer in Compromise with the IRS. It’s a good non-bankruptcy alternative for folks that might otherwise have no other choice but to file Chapter 7, but would only be filing chapter 7 because of their IRS debt.

If you do choose to file for bankruptcy, it’s important to have a contingency plan for those taxes that cannot be discharged. For example, Trust Fund Recovery Penalty assessments, property taxes, and sales taxes will not generally be flushed in a Chapter 7. So, if your tax liability consists of those tax types, you need to be looking at other options.

Personal income taxes (1040 taxes) can be discharged in bankruptcy if they meet certain criteria. In general, income taxes must be at least three years old to be discharged in bankruptcy, and the tax return on those tax debts must have been filed at least two years ago. So, if you haven’t filed the actual tax returns that will incur the tax debt you want to discharge in bankruptcy, you’re going to have to file the returns and then wait two years.

Filing bankruptcy is obviously not a decision to be taken lightly, and you must consider the tax debt implications of doing so. However, bankruptcy isn’t nearly as bad of a thing to go through as many people think it is (and I’m talking from experience, by the way). Consult with both your tax professional and your bankruptcy attorney regarding this important decision.

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Taxpayer Representation

8 Questions To Ask When Choosing An Accountant

The vast majority of small businesses could use the services of an accountant. The number of ways in which it is possible to introduce errors into your business through accounting practices is staggering. Your accounting includes issues related to payroll, monitoring profitability, inventory control, avoiding penalties and interest on taxes, and much, much more. It is wise to select a competent professional in this field to help you navigate the minefield of accounting pitfalls. Selecting such a professional can be difficult, especially since not all accountants are created equal.

Here are some questions to ask to help ensure that you are selecting the best accountant you can for your business.

1. Do they have any complaints with the Better Business Bureau?

When many individuals decide to take action and make a complaint against a firm, they often think first of the BBB. Check with your local division, or look them up online, and make sure that the company you are considering hiring has a good record with the BBB. If they have a Gold Star award from the BBB, then you’re on the right track to working with a company that is reputable and stands by their word. The BBB’s new letter grading system can also help you in selecting a good firm.

2. Have they ever been investigated by your state Attorney General’s office or state board of accountancy?

This is another place to do your own due diligence. Complaints with the state AG or Board of Accountancy is an automatic red flag and should be highly considered before selecting a firm.

3. What services do they provide, and what services do you need?

Think about exactly what you’re looking for in a service provider. Do you need full service accounting, outsourcing all functions to another person or firm? Or do you just need year-end tax preparation? Knowing the answer to what services you need will help you pick the best person to do what you need, and will affect your budget for getting it done. For example, if you just need tax preparation, then you might be better off with an experienced tax preparer instead of a CPA firm that mostly does auditing and general accounting. If you only need payroll services, then you might want to hire a payroll company rather than a bookkeeper that does payroll on the side. If you need the books updated weekly or monthly, most communities have competent, independent full charge bookkeepers that you can hire.

If you’re looking for somebody to come set up your books and show you how to use your accounting software, you may want to consider a general CPA or a competent bookkeeper. If you do all your own books using Peachtree, Quickbooks, MS Money, or another popular commercial software package, it can be very helpful to have somebody to call should something go wrong. The large commercial accounting software publishers all provide some sort of certified expert rating system for individuals that are experts on using their software. You may want to look for and consult with such a certified expert on your particular accounting software. For example, Intuit offers its Quickbooks Certified ProAdvisor program to consultants. Finding one of these certified individuals can really help you a lot if you’re doing the books yourself.

If your only interest is in tax compliance, look for a CPA that specializes in taxation, or an Enrolled Agent (EA). An EA is an individual licensed directly by the U.S. Treasury to handle tax matters, and this individual can represent you before the IRS just like a CPA or an attorney. By nature of the credential, EAs are dedicated tax professionals and are generally more competent in areas of tax issues than a general CPA, unlicensed tax preparer, or bookkeeper.

Selecting the type of professional you need is a serious consideration in this process, and depends largely on what you plan on doing yourself, and what you expect to need help with.

4. Are they licensed in some way?

Credentials are not always the most important thing to consider, but they do reflect at least a minimum level of professional competency, in theory. If they are a CPA, they’ve passed a rigorous four part examination and have at least a bachelor’s degree in accounting and two years of professional experience, at a minimum. If they are an Enrolled Agent, they have passed a very rigorous three part exam covering individuals, businesses, and practices and ethics that is administered directly by the Internal Revenue Service.

The individual preparing your tax returns, doing your books, or processing your payroll doesn’t necessarily need credentials in order to do the tax and do it right, so experience is a critical piece of the puzzle you’ll want to inquire about.

Do keep in mind that if you’re audited by the IRS, only CPAs, EAs, or attorneys can represent you, unless you wish to represent yourself, which is not recommended.

5. How much experience do they have?

How many years have they been doing what they do? What type of companies do they generally work with, such as which industries and what size companies? Inquire as to how many of each of your type of entity they work with each year. If they’re experienced working with your type of legal entity, within your industry, or your size of company, they might be a good fit.

6. How do they charge, and how much?

Don’t be afraid to ask about the money. Some firms will charge by the hour, or on a piece rate for the type of work being done. Bookkeepers will usually charge an hourly rate, while tax preparers often charge a flat rate per form and schedule. If your tax return is pretty complex, expect to pay more, which could be a base rate plus an hourly rate for doing accounting work to generate the numbers needed for various line items on the return. If you’ll be seeking software assistance, find out what they will charge for this, usually at an hourly rate. It can’t hurt to know whether you’ll be over your head in terms of what you can reasonably afford for the services you are seeking.

A word of caution: Price should not be the ultimate determining factor when decided who to use and what services to do yourself. If you’re genuinely over your head when it comes to certain tasks, don’t be afraid to spend the money. There’s an old saying that goes like this, “Do what you do best, hire out the rest.” Accounting can be one of the most frustrating aspects of owning a business, and trying to do it all yourself can take time away from what you should be doing, which is running your business to the best of your ability to generate a profit.

7. Are you comfortable with the individual?

Even if you hire a large firm to do your accounting, there is still going to be an individual person that will be doing the work and with whom you will work with almost exclusively. You need to sit down with this person and make sure that you are comfortable working with them. If anything makes you uncomfortable in any way, you need to find somebody else. Think about it: This person is going to have access to an incredible amount of private financial information, so it has to be somebody you feel comfortable trusting.

8. Don’t be afraid to make a change.

Even after selecting somebody to work with, don’t be afraid to find somebody else if things aren’t working out. Your accounting is too important to the success of your business to leave it in the hands of an incompetent person or somebody you don’t completely trust. Problems with your current accountant could range from having just plain bad interpersonal chemistry to gross incompetence on their part, or perhaps you have the wrong specialist to meet your needs. Regardless, don’t hesitate to take your business elsewhere, since your accounting, bookkeeping, and taxes are simply that important to the life of your business.

Using the eight steps outlined in this article will give you a great start towards finding the accountant that is right for you. Identify the type of professional that can best provide the services you need, find a few local tax firms in our directory, then check them out and interview them personally. This process will ensure that you get the best accountant for your business needs.

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Taxpayer Representation

Penalty Abatement Statements – A Humorous Example

Taxpayers have the right to request relief from penalties assessed by the Internal Revenue Service. The IRS sets very specific criteria for the granting of penalty abatements. It can be very difficult to demonstrate that a taxpayer’s circumstances meet the criteria for penalty relief. Most of the time, we will request a written statement from the taxpayer explaining the circumstances that lead to the accrual of their tax liability, and then use that to create our own penalty abatement request that fits to one of the IRS criterion, cites case law, etc.

Most of the time, taxpayer’s have some reason for not paying their taxes that ties back to not having the money to do so. Lack of funds does not meet IRS reasonable cause criteria, but the circumstances behind the lack of funds sometimes can be reasonable cause.

Occasionally, the taxpayer’s explanation for failing to pay their taxes doesn’t leave us with a lot to work with. On rare occasions, we receive an explanation that is quite humorous.

This example is from a taxpayer that elected to continue NOT paying his taxes because it was financially convenient. With a struggling business, a divorce, and alimony and child support to pay, the taxpayer was experiencing financial hardship. He wrote:

I financed [business] shortfalls with credit card advances and soon I had unsupportable credit card debts and many other expenses…

As things started to turn around for the taxpayer, he continues:

In early 2001 I noticed that I somehow had enough money to pay my bills. Later, I discovered that I had inadvertently neglected to call in the 941 payment [for fourth quarter], even though the check had been generated by the accounting program. I was consternated but simply didn’t have the money to make good.

This is a common reason as to why people miss a Federal Tax Deposit, often several in a row. They then try to make it up when they can. However, in this case:

I expected a notice from the IRS daily, but nothing happened and when it was time for the next 941 payment I thought, “This is the kind of tax relief I need right now.” As an expedience, I didn’t pay the 941’s for the next several months and used the respite to get back on my feet financially.

Doing this enabled the taxpayer to get current with his vendors, credit cards, etc. He skipped his payroll tax payments for 7 months, then started making them again. By this time, he was on a debt management plan for the rest of his debt, and the business was doing better. However, the taxpayer recognized that this course of action had consequences attached.

Again, the initial non-payment was an unintentional oversight. However, it was so useful in preventing bankruptcy, staying in business, and becoming solvent that I didn’t make another payment for 7 months. By that time I was in good shape and haven’t had serious problems since. I’m grateful to Uncle Sam for the loan, though it is a little like borrowing from the Mafia. However, I’m ready and able to make restitution.

Needless to say, this was an exceptionally difficult penalty abatement for us to craft, and we obviously did not submit this in the form submitted to us by the client. This is actually still an active case, and we are awaiting IRS review of our actual abatement request.

This example, while humorous, illustrates how taxpayers can get in further trouble with the IRS after an initially unintentional oversight. It also illustrates the choices that business owners are having to make in order to stay in business.

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Taxpayer Representation

How the IRS views your cost of living

In general, the IRS appears to take a cynical view at people’s cost of living, and can be fairly judgmental about how we spend our money. This cynicism obviously increases dramatically the moment you have an outstanding tax debt.

Before delving into specifics, I’d like to make two points regarding the IRS personnel you’d normally be discussing your personal finances with. First, IRS field personnel such as Revenue Officers and Settlement (Appeals) Officers typically have higher salaries than the IRS National Standards for the areas in which they are assigned. In other words, even as public servants, they make more money than their own standards set for a middle class lifestyle.

Second, keep in mind that these people are public servants. In fact, most senior IRS personnel are lifetime bureaucrats, meaning that they have never had to work in the private sector. Some senior Revenue Officers, Revenue Agents (Auditors), and Settlement Officers have actually never worked a day in their lives outside of the government, and don’t even have finance or accounting backgrounds.

Combining these two things, you can see that it’s very possible that the IRS person you are explaining your finances to has an interesting view on the world: They’ve always made an above average salary, and lack any personal experience running a business or dealing with the reality of private sector employment. This skewed perspective becomes readily apparent in talking to senior IRS personnel if you’re a middle class taxpayer or “mom and pop” small business owner.

Now, with that said, let’s talk about the IRS National Standards. The government uses national and local cost of living data to establish norms for the cost of living across various categories. Some cost of living standards are the same for everybody, while others, such as housing and transportation, are adjusted by region.

These standards are based entirely on the government’s definition of a middle class existence. In other words, for purposes of determining how much of your income the IRS expects you to fork over in monthly payments on a tax debt, they only allow you to claim a middle class lifestyle.

It is not uncommon for me to have a conversation with a client where I’m explaining this, and they get frustrated. When you’re in IRS collections, they don’t like seeing that you’re making $1500 per month car payments on a Hummer and a Corvette, or have two people living in a 4200 square foot home. If you are used to a certain lifestyle, you may not quite understand why these things would piss off the government when you owe back taxes.

The main thing to remember is that the IRS National Standards are calculated from a middle class lifestyle standard. While you may consider yourself middle class, statistically you may in fact be upper-middle or even upper class. Keep in mind that the median household income in the US is about $52,000 per year. This means half of households make more, half of households make less. This number, by definition, represents middle class America, and is what the IRS National Standards are based on.

If you owe the IRS a substantial amount of money, and are living above the IRS National Standards, it is possible to negotiate up to a 12-month “stay of execution” against you with IRS Collections. This time period is designed to allow you to reduce your lifestyle to a middle class existence. This would include downsizing to a smaller home, selling cars, boats, and recreational vehicles, etc.

It wasn’t until March 2012 that the IRS finally allowed taxpayers to claim their minimum credit card and student loan payments as allowable expenses. At the same time, the IRS made a major change in how an Offer in Compromise is calculated, drastically reducing the amount they expect you to fork over in a reduced settlement situation. These changes have made literally hundreds of thousands of tax debtors now eligible for the OIC program that previously were not, so it’s worth looking into.

When it comes to discussing your standard of living and associated expenses with an IRS field agent, understand that you are both going to be frustrated, and for very different reasons. If you live a higher than middle class lifestyle, I would definitely suggest having a representative work on your behalf with the IRS, not only to avoid you frustration with these types of conversations, but also because a representative is going to be more knowledgeable regarding what expenses can be negotiated for inclusion with the IRS.

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Taxpayer Representation

How To Deal With An IRS Notice

Most people tend to panic when they receive a notice from the IRS. Many, many people think that by stuffing that notice under the mattress, the problem will go away. Unfortunately, it doesn’t work like that. The best way to address a notice from the IRS is to deal with it immediately and head on. Here are some tips for what to do when you receive an IRS notice.

1. Don’t panic, and don’t shred it. Most IRS notices can be dealt with pretty simply. Not quickly, but simply.

2. Be sure you understand WHAT the notice is for. The IRS sends all sorts of notices — bills for overdue taxes, requests for you to file a missing tax return, to request additional information about something, notify you of pending deadline, etc. The notice will ALWAYS thoroughly explain why you are receiving it. READ IT.

3. Every notice from the IRS will explain what you need to do with it. If they want extra information from you, it will explain what information they need. If it’s a bill, well, then they just want your money.

4. If you receive a notice about a correction to your tax return, you should review the correspondence and compare it with the information on your return.

5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.

6. If you do not agree with the correction the IRS made, it is important that you respond as requested, within the time limit. Respond to the IRS in writing to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days for a response from the IRS.

7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the correspondence available.

8. Keep copies of any correspondence with your tax records. Also keep record of who you talk to, including their IRS employee ID number (they’re required to give it to you), and detailed notes of your conversation.

If you receive a notice that you don’t understand or don’t agree with, then obviously consider speaking to a professional.

Categories
Taxpayer Representation

The Truth About Tax Resolution Fees

Within the tax resolution industry, there are a variety of fee models that you should be aware of. Different fee models have different potentials for abuse by the firm offering the services, and it is important to do your due diligence and fully understand what you are paying for, how much, and when, before ever paying a single dime to a tax resolution firm.

One of the most common fee models is a retainer model, which is a carryover from the world of legal and CPA firms from which many tax practitioners come. Under this model, you pay an up front amount, which the firm holds on to and then bills against on an hourly basis. Close to the time when the retainer is all used up, you will  get a bill showing what was done, how long it took, and the hourly rate it was billed at. This bill will usually also include a request for additional retainer. The key thing to remember here is that if you don’t keep paying, they don’t keep working.

If you’ve been researching particular companies online, you may already have come across BBB, forum, Attorney General, and other complaints against some firms that aggressively bill down retainers, and are constantly asking their clients for more money, without making much significant progress on a client’s actual tax case. It is important that you thoroughly vet a company before giving them money, in order to avoid becoming another victim of a devious company.

Another common fee model is a flat fee-for-service model. This fee model has a large number of variations, from a flat fee for a specific package of quoted services, to a “menu of services” model where each service you can order off the menu has a specific fee. This latter method is very akin to the most common pricing model used in tax return preparation, where each specific tax form has a particular fee for preparing it. You’ll see this fee model used at many CPA firms and most retail tax preparation outlets.

When you are speaking with any tax firm regarding a package of services, it is very, very important that you understand exactly what services you are being quoted for, and what the company’s policy is regarding fees for additional services. When it comes to tax matters, it is not uncommon for additional services to be required, which will require additional fees if they are not covered in the quotation you are already working under. Ideally, the sales person you speak with will have conducted a thorough analysis of your situation and will have included everything in the proposal sent to you.

When comparing proposals between multiple companies, keep in mind that you probably aren’t comparing apples and apples, but rather apples and oranges. Here are things to consider when comparing proposals between firms that are competing for your business:

  • Is any tax return preparation included in the quote?
  • Does the fee include all appeals necessary for handling your case?
  • For business owners, is Trust Fund Recovery Penalty representation included?
  • How many quarters or years of tax issues are covered by the fee quote?
  • Is a penalty abatement application included, or is that extra?
  • What specific resolution option does the fee cover, and what happens if the resolution strategy changes?

This last question is particularly important. There are some tax resolution firms that will try to sell everybody an Offer in Compromise, because they charge a higher fee for this service. However, it is critical for anybody and everybody to understand that most individuals and small businesses DO NOT QUALIFY for an Offer in Compromise. In fact, the IRS accepts less than 40% of all Offers that are ever submitted, and the only reason this number is so low is because of the high number of ineligible offers that get submitted in the first place. On top of that, less than one third of one percent of all tax debt cases are resolved through an Offer in Compromise. It is also important to understand that the average processing time for an Offer in Compromise exceeds 10 months.

What does this mean for your fee? Well, a reputable firm will conduct a thorough financial analysis, and tell you whether or not you are an Offer candidate. If you are not, then they will negotiate another resolution option for you within the same fee. If a firm tells you they will charge an additional fee for negotiating an Installment Agreement (monthly payment plan) after you’ve already paid a higher fee for an Offer in Compromise, then you should seriously question this.

You should also beware the firm that tells you that, yes, you are an Offer candidate, even when you own assets in excess of your tax liability. Simply put, if you have assets that exceed your tax debt, then the IRS will never accept your Offer. There is an incredibly rare exception to this rule, but it’s so rare that it only happens a few times per year.

Another big thing to consider when discussing fees is the issue of what’s an appropriate fee, and what is too much. The cost of a service obviously varies based on geographical location, but in general fees for tax resolution services across the country do fall into a line of what’s appropriate and what’s not. Here are some examples of what would be considered standard fee ranges for certain services:

  • Negotiating an IRS Installment Agreement, penalty abatement, and all appeals on a $40,000 personal income tax debt: $2500
  • Same as above, but on a $200,000 business employment tax debt: $5,000 to $7,000
  • Trust Fund Recovery Penalty representation: from $1,000 to $2,500, depending on the nature of the case
  • Preparing a basic personal income tax return, married filing jointly, a home, two jobs, couple kids: $300-$500
  • Preparing a small corporate income tax return with less than $250,000 per year in revenue and no significant assets: $500-$800
  • Preparing a more advanced corporate tax return with multiple shareholders, assets, high revenues, etc: $1,200-$2,500
  • Negotiating an Offer in Compromise on a $150,000 personal tax debt: $3500 to $5000
  • Negotiating the release of a wage garnishment, and nothing else: $400 to $1,000

These are just examples of the types of fees you may see when it comes to working out tax problems. There are numerous factors that go into properly quoting a tax resolution fee, but when comparing proposals, these numbers can give you a good idea of what is considered reasonable across the country.

To obtain a fee quote for tax debt representation services, contact a local firm from our directory of tax professionals.