Category: Taxpayer Representation

A friend of a friend was recently referred to me for some help with a tax problem. This individual isn’t rich, works a regular job for a paycheck, and simply got behind on personal income taxes. The situation is compounded by the possibility of some errors on the originally filed tax returns, which I have yet to examine to make that determination one way or the other.

This is NOT an uncommon situation these days. Regular, working class folks that owe a few thousand this year that they can’t pay, and the same thing the next year, etc. Do this for 3 or 4 years, and suddenly you owe the IRS $10k, $15k, $20k…with penalties and interest growing it daily. So, what to do?

First and foremost, remember this: Don’t get ripped off by a tax resolution firm promising you the world when you can easily fix the problem yourself.

Yes, the IRS carries a big stick. But they’re not going to hit you upside the head with it if you take care of the situation.

First of all, if you believe you’ve made mistakes on your tax returns that caused the liability, then you should have the tax returns amended. You have three years from the date a return was filed in order to correct it, so if you’re in that time window and you think you would owe less if they were fixed, start there.

Second, if your tax liability is under $50,000 and it’s personal income tax, then there is a special program available called a Streamline Installment Agreement that you should look at. Under this program, the IRS will let you enter up to a 6 year payment plan (or less, if you can shoulder the monthly payment), in order to pay this off. Warning: Penalties and interest still accrue while you’re on a payment plan!

If the tax debt is getting old, say older than 6 years, then another option might be to get you into a non-collectible status and just ride it out until the statute of limitations expires (which is 10 years). For this, you have to be able to demonstrate that, in a nutshell, you are flat broke and scrape by paycheck-to-paycheck. If you suddenly win the lottery, the IRS will see that and come knocking on your door again, of course.

The final option to consider, if you are broke and really just want the monkey off your back, is an Offer in Compromise. Despite the commercials you may see on TV, the Offer program is not a straight up “pennies on the dollar” deal, but you must rather demonstrate financial necessity. If you’re single with no kids, have a car payment, and don’t own anything of value (art, a house, coins, gold, guns, stocks, bonds, retirement accounts, classic cars, an island, etc.), and you make less than about $3000 to $4000 per month (it depends on what part of the country you live in), then you might be a candidate for making an Offer in Compromise of some nominal amount (it has to be at least $1). This route requires extensive personal financial disclosure and takes about 6-12 months from start to finish, most of which is simply waiting on the IRS to process the application. If you have kids or a spouse, the amount you can make and still qualify goes up. If you don’t have a car payment, the amount you can make and still qualify goes down.

Elsewhere on this blog, I cover the OIC program and Streamline Installment Agreements in further detail. Also look for the Guaranteed Installment Agreement post if you owe less than $10,000 — those are easy as pie and can be done over the phone using an automated voice response system.

If you qualify for a Guaranteed or Streamline Installment Agreement, you can easily do it yourself over the phone. Getting into Status 53 (Currently Not Collectible) is almost as easy, and takes less than an hour on the phone with the IRS. An Offer in Compromise is obviously a bit more complicated. While plenty of people do these themselves, many also choose to hire representation to help them out on this. You can find professional assistance with a local tax firm by searching our directory.

Yesterday, the IRS rolled out a shiny, brand new version of Form 656-B, the Offer in Compromise application booklet. After years of complaints from every corner of the tax world, including tax professionals, taxpayer advocacy groups, the government’s own Taxpayer Advocate panel, and even members of Congress, the IRS has finally fixed the worst problem that has ever existed with the Offer in Compromise program.

For the past 15 years, the IRS expected you to include in your offer amount the equivalent of your next 4 or 5 years worth of disposable income. In other words, the IRS would look at your current income, deduct your allowable household expenses, and then multiply that number by either 48 or 60…and then expect you to come up with that amount of money (plus the value of your assets) within the next few months, which obviously isn’t practical and defeats the very purpose of the OIC program.

Here’s an example: If you make $4,000 per month, and the IRS “allows” you credit for $3,500 in monthly expenses, then you have $500 per month left over. If you agree to pay your Offer amount in 5 months or less, they multiply that $500 times 48 months, which is $24,000. If you also happen to have $20,000 of equity between a car and your house, your minimum offer amount suddenly becomes $44,000, or almost an entire year’s salary…and they expect you to come up with that amount in 5 months. And if you owe the IRS less than this amount, then you’re not even eligible for the program.

In other words, the Offer program was really only an option for people that owed hundreds of thousands, if not millions, of dollars, and could come up with that kind of cash to make a lump sum payment, OR was only good for people that were absolutely destitute, with absolutely no assets and so little income that they couldn’t even realistically put a roof over their head.

Well, the IRS finally wised up after years of effort by tax consultants such as myself, advocacy groups, and the Taxpayer Advocate. Under the new rules announced yesterday, the IRS has dropped the “multiply by 48 or 60” rule and made it a “multiply by 12 or 24 rule”. If you are paying your offer amount in full within 5 months, this means that your minimum offer amount you must send the IRS just dropped by 80%.

If you would like professional assistance in determining your eligibility for and preparing your Offer in Compromise application, please get in touch with a tax firm near you by searching our directory of professional service providers.

One of the most common points of confusion among business owners in regard to their tax debt has to do with the Trust Fund Recovery Penalty. I’d like to explain what “trust fund” taxes are, where they come from, how the IRS holds somebody personally responsible for them, and, most importantly, what you can do about them.

What Are “Trust Fund” Taxes?

“Trust fund” taxes are any tax that is collected by you, on behalf of somebody else. There are many different trust fund taxes, but the two most common are sales taxes and income withholding taxes.

Most states are very aggressive about collecting sales taxes (North Carolina will physically arrest you for not paying them). Technically speaking, sales taxes are owed by the person making the purchase. However, because they are collected at the point of sale, they are a trust fund tax. This is because the person paying them (e.g., your customer) is “trusting” you to hold that tax money and pay it on their behalf. When you receive sales tax money from your customers, you are supposed to hold it in a separate “trust” account, and then hand it over to the tax man when it is due (usually monthly, in most states/counties).

Income withholding taxes are also “entrusted” to you by your employees. Specifically, these are income taxes you withhold from paychecks, and the employee’s half of Social Security and Medicare that you take out of their paycheck.

Even though the employee never sees the money that’s taken out of their paycheck, they expect it to exist, somewhere. That somewhere is a trust account (generally your payroll account) where you save that money up and then pay it to the government every two weeks or monthly.

Payroll taxes are the one of the biggest enforcement concern to the IRS. Part of running a business and having employees is exercising ordinary business care and prudence. This is fancy lingo enshrined within the tax code that basically means the IRS expects you to exercise common sense in regards to running your business. Part of this common sense is to understand that your employees cost you more than just the paycheck you actually write them, and if your business doesn’t have the revenue to support those extra costs of having employees, then you shouldn’t have the employee.

So, to recap, trust fund taxes are taxes that are owed by other people, such as your customers (sales tax) and employees (income tax, Social Security, and Medicare withholding), but are held by you for actual payment.

Trust Fund Recovery Penalty Personal Assessment

As mentioned above, the collection of payroll taxes is a big enforcement priority for the IRS. Why? Because those taxes are the actual money that funds the Federal government on a day to day basis. Payroll taxes are the Federal government’s biweekly and monthly paychecks from all of us that are working.

Because this is such an important part of funding government operations, trust fund taxes are the only taxes subject to an extremely powerful collections tool. This tool is special to the IRS, because for them, it does not require going to court. This tool is commonly referred to as “piercing the corporate veil”, and means that the government can come after not just your corporation, LLC, or partnership to collect the tax, but can come after individual corporate officers and try to collect these taxes from them personally.

The IRS is required to follow a procedure before sticking you personally with this tax bill. The process is all administrative, meaning that it is done by your Revenue Officer, and does not go to court, never seen by a judge, and no lawyers are involved.

In order to assess the trust fund against you as an individual, the IRS must determine two things:

1. That you were the person within the company responsible for paying over the trust fund taxes.
2. That you were willful in not paying them.

The responsible person is generally considered to be the person in the business that manages the finances, calculates payroll, and signs the paychecks. Even if another employee, such as an office manager or bookkeeper, actually does the physical work of crunching payroll and printing the checks, the responsible person is generally the corporate officer, LLC member, or manager that delegated that task to the employee. For most small businesses, the responsible person tends to be the owner. Also, keep in mind that multiple people can be held responsible.

The IRS must also demonstrate that the responsible person willfully failed to pay the trust fund taxes. What this means is that the person made a conscious decision to use that money for another purpose OR failed to make sure the money existed in the first place. In general, the IRS will look at what other bills got paid instead of the payroll taxes, and use that as sufficient evidence that “willful failure to pay” occurred.

The IRS uses a 4-page interview form to ask all the questions to determine who is “willfull” and “responsible”. This is called a Form 4180, and must be filled out by the IRS employee by telephone or in person. Your representative may use industry lingo and refer to this as a “4180 interview” for short — this is what he is talking about.

After a 4180 interview is conducted, the Revenue Officer will make a determination, and issue an IRS form called a Letter 1153, which is usually accompanied by a Form 2751. The Letter 1153 is the document proposing the assessment of the trust fund against you personally, and the Form 2751 is the form you would sign to skip the appeals process and simply accept the assessment.

In some cases, part of the resolution plan worked out by your representative will include simply accepting the assessment, in exchange for something else, such as a payment plan. However, unless your representative explains that it’s part of the plan, NEVER SIGN A FORM 2751.

If you did not file an Appeal, the Letter 1153 goes into force, and the trust fund is assessed against you after 60 days. Appeals will be discussed below.

If the Trust Fund Recovery Penalty (the term for the individual assessment) is tacked onto your personal taxes, then you owe it just like you would personal income taxes. At this point, the IRS can come after your personal paychecks, personal assets, personal bank accounts, etc.

Resolving Trust Fund Recovery Penalty Cases

Resolving Trust Fund Recovery Penalty cases can be complicated. The first route usually taken by a tax professional that you hire to help you with this is to fight the “responsible” and “willful” determination. In a larger company, there is often one person responsible, and another willful, but neither is both.

An example of this is a company with a CFO or comptroller that makes financial decisions for the company, and might make the decision to pay rent, utility bills, paychecks, etc., instead of the taxes. However, this person is not the individual that is actually responsible for calculating payroll, signing paychecks, and performing other payroll related functions. In this case, there might be nobody that fits both the “responsible” and “willful” criteria.

Unfortunately, in most small companies, the person that is responsible and willful is generally the same person, usually the business owner. In the case of a small business owned by a married couple, it is fairly common for both spouses to be involved in the financial decision making for the business, which usually makes both of them responsible and willful.

Basically, the smaller the business, the more likely it is that one person, and only person (the owner), is going to get whacked with the Trust Fund Recovery Penalty.

In some cases, the IRS may be willing to delay the assessment of the trust fund against a person. In order to do this, you’re going to need to agree to an extension of the maximum legal length of time that the IRS has for making the personal assessment, which is done by signing a Form 2750 (do not confuse this with Form 2751!). In exchange, the IRS will often accelerate the granting of a payment plan to the business itself, based on the theory that the business will pay off the trust fund over time, and therefore make it pointless to hold you personally responsible.

If the assessment can’t be avoided, then it becomes a personal tax matter. At this point, the other resolution options normally available for personal tax matters come into play, such as payment plans, reduced settlements (Offer in Compromise), and uncollectible status. One thing to keep in mind is that trust fund taxes CAN NOT be eliminated in bankruptcy.

Conclusion

This has been a long article, and probably a lot to digest. However, it explains the entire process of trust fund recovery penalty assessment, where it comes from, and what you can do about it. Hopefully, if you are facing this particular IRS demon, you now have a better understanding of how you can fight it.

While some tax problems can be resolved on your own, Trust Fund Recovery Penalty cases are a situation where you really should obtain professional representation. If you are in this situation, please contact a local tax firm from out directory that specializes in these types of cases.

TaxMasters, a tax resolution firm based out of Houston, TX, had been under investigation by the Texas Attorney General since 2010 for unethical sales practices. After finally going to trial earlier this year, a jury has passed down a verdict of $195 million against the firm. This amount includes $113 million in restitution to the firm’s customers, $81 million in civil penalties, and $1 million in attorney fees. The company was found guilty of 110,000 violations of Texas consumer protection laws.

Founder and CEO Patrick Cox himself must pay well over $40 million of the award from his own personal fortune.

The firm was primarily accused of failing to disclose it’s no-refund policy, and for failing to immediately start work on a client’s case, but rather waiting until fees were fully paid before even doing anything to protect clients.

The firm recently filed for Chapter 11 bankruptcy protection during the course of the trial.

If you were a TaxMasters client, however, don’t expect to get any money. In it’s bankruptcy filing, the company only listed $50,000 in assets, and it is unlikely that Patrick Cox possesses the $40 million assessed against himself.

So, what can you do if you are a victim of TaxMasters, or any other company? Here are some quick tips:

1. Contact your Revenue Officer immediately, to find out the status of your case in the collections process.
2. If you have tax returns that are overdue, get them filed immediately.
3. Assemble any financial information requested by your Revenue Officer.
4. Request a 120 day collections hold in order to give you time to put everything together and prepare a plan of attack, particularly if you can’t pay your tax debt in full.
5. If your tax situation is more complex than you are comfortable handling, then seek professional assistance from a licensed taxpayer representative (Enrolled Agent, CPA, or tax attorney).

It’s a travesty that unscrupulous companies such as TaxMasters, American Tax Relief (shut down by the FTC with a $105 million judgement), Roni Deutsch (shut down by the California AG), and JK Harris (went bankrupt in 2011) have been stealing from hardworking taxpayers for years (TaxMasters complaints ran back to 2005). Always conduct proper due diligence before hiring any tax resolution firm.

Even if you already have representation, if you want a second opinion about your case, be sure to contact a local tax firm in our directory.

Note: This is a guest post written by an attorney that formerly worked in the tax resolution industry, and later went on to work with the US Attorney’s Office. He has asked to remain anonymous, but wanted to share some personal insights about the IRS Collections process.
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For those that don’t work much with the Collections Division of the Internal Revenue Service, there is a stigma attached to both the methods and people involved. On one side, the IRS is seen as bullying taxpayers, especially the “little old ladies” and the “working men.” On the other side, the taxpayers are seen as being inadequate business people and as “stealing” from the government. Is the IRS an evil organization created by bureaucrats to systematically take the wealth of it’s citizens? Are the individuals caught up in the system evildoers needing to brought to justice? Both statements are a little extreme.

In all reality, the Collections Division of the IRS does not care where the money goes. Sometimes, it does not even care if it gets it. It, like many administrative agencies, seems more caught up it’s own procedures. Anyone having worked with the IRS might wonder if they are on a fool’s errand, considering how many of the installment agreements entered into by the IRS default.

The Collections Division is concerned primarily about getting taxes that should have been paid, but were not (a.k.a. “the tax gap”). These can be personal income taxes, employment taxes, trust fund recovery penalties, corporate income taxes, etc… The majority of this collections is done in a civil (i.e. non-criminal) setting. Within this context, there are common dilemmas that rear their heads every day, especially with regards to employment (withholding and FICA) taxes.

Although there are many reasons for a business to fall behind on its employment taxes, a common scenario is as follows: Small business owner falls on hard times; bills must be paid, but there is not enough to go around. The IRS relies exclusively on voluntary compliance (at least at the outset), as do most creditors. However, the IRS probably has more debtors than any other creditor in the country. As such, they cannot detect and move fast enough to put the strong arm down on the taxpayers. Because there is only so much to go around for the taxpayer, they pay the bills that need immediate attention (i.e. payroll, rent, utilities) and the employment taxes go unpaid. They do this because their business is their only livelihood and paying the necessary bills is the only way to keep it a going concern and have a possibility of paying the back taxes.

After first missing a payroll tax payment, an amazing thing happens…nothing. The sky does not fall, the business is not overrun by men in black suits; there is not so much as a phone call or notice in the mail. However, of course, there a penalties and interest looming on the loan that that the taxpayer is taking from the federal government.

As always, these scenarios do not happen in a bubble and there are many other stresses and concerns for business owners going through a difficult time. To make matters worse, many small business owners are not sophisticated enough to run their companies from a “business” standpoint. They were simply good at what they did (e.g., plumbing, auto work, etc) and decided to start a business for themselves and their family. After missing a tax deposit and having no immediate repercussion, the taxpayer, many times, will continue on with their lives, trying to ignore the failure. If times are still tough, they will continue to miss tax deposits. Before they know it, they are operating the business at a loss and are racking up a massive tax debt (with both business and personal consequences). All of this happens without any word from the IRS.

At some point, oftentimes up to two years later, the taxpayer may begin to receive correspondence. Like a jilted ex-romance, the IRS starts to demand attention. At this point, it is only in writing. Having witnessed this first hand on many occasions, the taxpayer may read the first couple of notices and may even call the IRS with questions, but many times the problem goes unsolved, usually because the taxpayer does not have the money to handle it (especially with the penalties and interests that have been and will continue to be assessed). Sometimes, they are unable to reach anyone at the IRS who might be able to help them. Sometimes they do not even receive the notices. For any number of reasons, there are millions of cases that do not get handled by the notices mailed to taxpayers and, eventually, the cases end up “in the field” with a Revenue Officer.

If the taxpayer can catch the case in the “ACS” (Automated Collection System), they may be able to get on an installment agreement by providing a minimal amount of information. This is, of course, assuming that the IRS employee on the other end of the phone knows what they are doing, is friendly, and knows how to properly work the IRS’ proprietary computer system. More often than not, though, the people on the other end of the line are unhelpful, unknowledgeable and downright rude. To get into a repayment plan, the taxpayer must be current with all of their tax returns and tax deposits and must be able to prove that they are capable of repaying the debt while remaining current (there are some exceptions to this depending on the type of tax and amount owed). Many times, the IRS contact on the phone does not want to deal with the taxpayer (who can be surly and argumentative) and the phone conversation ends with both parties frustrated and no resolution intact. All of this is assuming that the taxpayer was able to get through to somebody before hanging up because they were on hold for longer than half an hour. Keep in mind that these people are small business owners and do not have the time necessary to deal with the IRS.

If the taxpayer is unable or unwilling to call the IRS, and even if they do but receive erroneous verbal advice, they may start trying to pay the back taxes without any sort of installment agreement. While this is in the spirit of what the IRS is hoping, many times it is done improperly and with money that should be being used to stay current. When the taxpayer does not remain current because they are paying off old debt, they simply create new quarters of debt that then get kicked into collections. The taxpayer who was hoping to climb out of the hole has only dug it deeper. (At this point, you should start to realize that this process is filled with pot holes and ways to make the situation worse).

If things continue to go unsettled, the taxpayer’s case is then sent to into the “field” and is assigned to a Revenue Officer. The Revenue Officer’s job is somewhat confusing. He or she must attempt to bring the taxpayer into compliance, get the debt repaid, follow due process procedures, protect the government’s interest, inform the taxpayers of their rights, please their group manager, withstand venom and vitriol, show sympathy where it is needed, climb the GS ladder, only work 40 hours a week, and represent an organization whose purpose may be, at some point, to close down the business of the taxpayer. They also might want to be pretty knowledgeable of the Internal Revenue Manual in case they run into a tax attorney along the way.

So, the Revenue Officer receives the case file and is set to make a visit to the taxpayer. If the taxpayer is not current and compliant, the conversation might not be a pleasant one. Many of the Revenue Officers (not all) use intimidation, lies, exaggerations, unreasonable deadlines and anything else that may brings results. On the flip side, some Revenue Officers are professional, reasonable and accommodating.

Let’s say the taxpayer wants to pay the debt back. However, the business is losing money and they are not current. The business is automatically not eligible for an official installment agreement (there may even be some tax returns outstanding). The Revenue Officer is put in a difficult position. The Revenue Officer will put the taxpayer on a deadline to get the missing returns in, for potential collections information, and make a demand that the taxpayer get current with its tax deposits.

As stated earlier, these situations do not happen in a bubble. As such, the massive amount of information that has just been requested by the Revenue Officer dauntingly hangs over the taxpayer’s head along with everything else that has been causing the business to fail. Even further, the taxpayer does not realize the deadline that has been set comes with very real consequences if it is missed (they have been told about this, but for some reason many taxpayer’s seem to call the government’s bluff).

So, the Revenue Officer has the case, has visited the taxpayer, has put them under a deadline for information, and has demanded that they get current. If the taxpayer cannot get current or if they miss the deadline for information, the Revenue Officer may move forward with “enforced collections action.” This can include bank levies, accounts receivable levies, etc… If the due process procedures have been followed (the notices mentioned earlier), these levies are legal. However, if the levy hits an operating account for the business, the government has just taken away any hope of the business being current. On top of that, the money taken does not get applied to the most recent quarter of taxes, but the oldest. Even further, the money is applied in the government’s best interest. Not only does the business lose hope of getting current, it loses its operating capital.

Any professional who has worked with taxpayers and Revenue Officers knows that, at this point in collections, the blame shifting begins. The Revenue Officer will not take any responsibility other than stating that it was within their right and that it was their job. It was the taxpayer’s fault for not following the rules of a game they did not understand in the first place. By levying, the Revenue Officer has sought to protect the government’s interest and to punish the taxpayer.

If the taxpayer is lucky enough to survive this, they may get hit again, depending on what information is outstanding and how much contact they have with the Revenue Officer. If things do continue in this manner, the IRS ends up kicking a taxpayer while they are down and the Revenue Officer begins assessing the taxpayer personally for the “Trust Fund” portion of the business debt (which may happen even if the taxpayer does attempt to pay the tax debt back).

Now, there are procedures in place to stop the IRS from causing a “hardship” for taxpayers and even a separate office within the IRS (“the Taxpayer Advocate”) to help with these situations, but they often move slow and many taxpayer’s do not know that they should contact them or what arguments to make. Oftentimes, proving a hardship with documentation is difficult and time consuming. In fact, the Taxpayer Advocate can only make “recommendations” to the IRS and does not have any real power. Even further, it seems to many that forcibly taking money from a business is, in and of itself, something that causes a hardship. If the taxpayer does know to file an appeal on the enforcement action, these appeals are only heard from a procedural perspective and rarely include equitable actions.

As may be clear from this summary of a collections case, the process is filled with many opportunities for the taxpayer to fall on bad terms with the IRS, including the method of paying taxes in the first place.

Although many flaws are going to be inherent in an administrative agency, it seems that the IRS has caused many of its problems (and, therefore, taxpayers’) by handling the issue of taxpayer delinquency in an inappropriate way. It is the hopes of many practitioners that the speed and efficiency of the IRS will be improved by moving employers on to the Electronic Federal Tax Payment System.

The consistent argument by any person who works for the IRS is that it is the taxpayer’s responsibility to pay taxes, and that, if they don’t, they deserve everything that comes at them. This may be true, but, to a certain extent, taxes are very different than any other governmental obligation. On top of that, the penalties and interest that accrue on an account (which are, conceivably, meant to prevent and punish late payment of taxes, although taxpayers rarely know the penalties exist to the extent that they do), are astronomical in many cases. The notice/penalty system currently in place to prevent and punish delinquency, in many ways, encourages the very thing it seeks to eliminate, and also wastes the very resources that taxes provide.

As can be seen by the proliferation of “Tax Representation” firms across the country, the problem with IRS collections is very real. The fact that there are businesses and professionals using the fear of the IRS to profit from the taxpayers means that they taxpayers now have to face attack from multiple sides. Oddly enough, the IRS controls the licenses held by Enrolled Agents and the Central Authorization Numbers of Attorneys and CPA’s. This, however, is a whole other issue.

An IRS Installment Agreement, or payment plan, is the primary means by which taxpayers with tax debts settle up with the government. A special provision in the law allows the IRS to accept payment plans without reviewing your financial information, which they are otherwise normally required to do. These simpler payment plans are called a Streamline Installment Agreement.

Normally, applying for an IRS payment plan is literally like applying for a home mortgage loan, and requires extensive prying into your personal finances. Historically, the IRS will simplify this procedure if you owe less than $25,000 and can make large enough payments to pay off the tax debt within 5 years (60 months).

The IRS has issued new regulations regarding Streamline Installment Agreements, due to the continued economic difficulties and the fact that their collections case burden is skyrocketing and they don’t have the personnel to manage so many tax debts.

The IRS will accept now a Streamline Installment Agreement for taxpayers that owe up to $50,000. In addition, they will give you up to 6 years to pay it all off. This effectively makes the vast majority of tax debtors eligible for the program, allowing the IRS to expend resources chasing after people that owe much larger sums of money, and lessening the headache and aggravation they cause to middle class families that have enough to worry about without the threat of the IRS seizing funds in bank accounts or garnishing wages.

Setting up an Installment Agreement under these criteria can be done over the phone or on the IRS web site. Of course, you may wish to consult with a licensed tax professional to determine if another option, such as Status 53 or an Offer in Compromise, may be better for you financially. Oftentimes, individuals and small businesses that qualify for a Streamline Installment Agreement with a small payment amount may also be eligible for these other programs. Status 53, also called “Currently Not Collectible” status, doesn’t require you to make any payments, but does require full financial disclosure. An Offer in Compromise also requires full financial information from you, but allows you to settle your entire tax liability for some fixed amount that is less than what you actually owe.

As with most things in life, make sure that you explore all your options, and that you thoroughly understand both your rights and your obligations under any tax resolution program you enter into. Seeking advice from a qualified professional, even if you are going to negotiate a resolution on your own, is always suggested.

Every year, the IRS rolls out new initiatives to make sure everybody is complying with the tax laws. While certain things, such as frivolous tax arguments, are always enforced, the IRS shuffles personnel around to enforce compliance with certain parts of the tax code based on the trends they identify. Five of those trends are discussed here.

1. Foreign accounts and assets. If you have money or assets overseas, the IRS wants to know about it. If you have more than $10,000 in a foreign bank account, you’re required to file an annual disclosure statement with the Treasury Department. In addition, the IRS is now requiring foreign banks to enter into information sharing agreements, or else have 30% of payments transferred to them from the U.S. withheld to pay potential tax bills. The failure to disclose your overseas assets can result in significant penalties, and potentially criminal prosecution.

2. Payroll taxes. The single biggest emphasis of enforcement within the employment tax arena has to do with taxpayers that pyramid their employment tax liabilities, meaning that they owe money, and continue to accrue new liabilities each quarter. The IRS is also heavily targeting the owners of S-corporations that don’t pay corporate officers a fair wage (and thus payroll taxes), but rather take nothing but distributions, which are not subject to payroll taxes.

3. Gift tax audits. Many people don’t realize that giving cash gifts to their friends and family can have tax consequences. Every person has a lifetime cumulative exemption from gift taxes, and there are also annual limits. The IRS has started to electronically examine property transfers based on public records in order to ferret out people that may owe gift taxes.

4. Automated Substitute for Return Program. Section 6020(b) of the Internal Revenue Code allows the IRS to file a tax return for you if you fail to do so. They prepare this Substitute for Return (SFR) based on information they have on file, such as W-2 and 1099 information sent to the IRS by your employer. A computerized system now prepares these returns, and the IRS has asked Congress for the past several sessions to make it a felony when you fail to file a tax return for three out of five straight years and the tax exceeds $50,000. Fortunately, this has never been passed into law, but it is a law that the IRS will likely continue asking for.

5. Schedule C audits. The IRS just spent several years and millions of dollars to analyze the tax returns of small businesses that file a Schedule C, which includes sole proprietors and self-employed individuals. Based on this analysis, they have developed a set of criteria for attempting to determine who is either under reporting self-employment income, or overstating their expenses. The IRS believes that the biggest piece of the “tax gap” comes from the self-employed, and they’re probably correct in that assumption. They are now heavily scrutinizing Schedule C’s attached to personal income tax returns and increasing audits against self-employed folks that raise any red flags.

Knowing what the IRS is focusing on can help you make decisions about how to handle your own tax situation. After reading this, perhaps you’ll consider forming a corporation, partnership, or LLC in order to run your business, rather than operating as a sole proprietorship. Or perhaps you will give consideration to paying yourself a salary out of your S-corp, or think twice about how you send money to an overseas account.

Never forget that, no matter what, the tax code doesn’t require you to pay one single penny more to the IRS than you have to. Even if you are the subject of one of these increased enforcement measures, you still have rights, and if you did everything right, then you have nothing to worry about. If something somehow did fall through the cracks, you still have rights, and their are ways to get things straightened out. Contact one of the professional tax firms in our directory to find local assistance in protecting your rights.

When a taxpayer owes money to the IRS, they enter the IRS Collections system. The IRS has a very detailed process that they are required by law to follow when it comes to collecting tax debts. Knowing a little bit about how this system works and how IRS collections personnel are required to act can be very beneficial to you.

There are two distinct collections units within the IRS. The first is the Automated Collection System (ACS), which consists of computerized lien filings, automated send out of bills and notices on set intervals, and the call center agents that perform basic collections functions. It is important to understand that the people you’re talking to on the phone at ACS have limited authority, and may not be able to assist you with every tax matter without elevating to a supervisor or other personnel.

The other distinct collection unit within the IRS is the Collection Field Function. Field agents, called Revenue Officers, are located in cities and towns across the country. Rural Revenue Officers may work from home and have a field territory covering hundreds of miles, while thousands of agents in big cities have extremely small territories and may hardly ever leave their Federal Building.

Revenue Officers are required to do many things in order to “resolve” a tax liability placed under their control. They are required, by law and regulation, to collection certain information, verify things through whatever means available, and close out cases. Over the course of the past year and a half or so, I have personally noticed a significantly reduced emphasis on simply reducing the number of open cases, and instead increasing cash collections through whatever means necessary.

In order to demonstrate to IRS management that they are doing their jobs properly, here are some of the biggest actions that Revenue Officers are required to perform (and document in their files):

• Make sure you’ve filed every past tax return you should have (and if not, make you do so)
• Verify that you are making payments on time and in full for any new taxes you have come up, such as employment taxes or estimated tax payments (and if you’re not, making sure that you do)
• Collect detailed financial information from you concerning your income, expenses, assets, and other debts
• Based on that financial information, determine sources of money from which the government can collect on the tax debt (this can include forcing you to apply for loans against property with equity or tapping into retirement accounts)
• Place you into whatever program you qualify for in order to address the tax liability, such as a monthly payment plan, reduced settlement, or even giving you a grace period of a year or two in which they close your case (but you still owe the debt, and it grows)
• Make sure you don’t accumulate any new tax debts
• Physically visit your home or business at least once in order to determine if you’re hiding anything (free and clear Hummer sitting in the barn — it’s happened)
• If you are a business and owe employment taxes, determine whom to assess the Trust Fund Recovery Penalty against on a personal level, and do so
• If you are not meeting deadlines or they believe you are stalling, hiding money, or have an ability to make payments and you’re simply not, then to issue levies and take money from your bank account, paycheck, customers, etc.

All IRS collections employees keep meticulous notes whenever they talk to anybody (hint: so should you!). It’s not uncommon for an IRS Collections file to be hundreds of pages of material, even for what might seem like a relatively small case.

All in all, don’t forget that the IRS Collections division has one priority: To collect money. Hopefully, having a little bit better understanding of how they work cases will help you in resolving your own IRS matters. Be sure to contact a licensed tax professional for assistance with these kinds of matters, especially if a Revenue Officer is assigned to your case.

Back in October, the largest tax resolution company in America, JK Harris, filed for bankruptcy under Chapter 11, which would have allowed them to continue operating and restructure their debts under a payment plan.

However, their largest creditor, which appears to have had a claim against the company exceeding $11 million, has decided not to allow them to restructure the debt, and has instead seized all the companies cash and assets in a liquidation of the company.

This means that, within the past 15 months or so, the 3 largest tax resolution firms in the United States have gone out of business, either by bankruptcy or government action. A little over a year ago, American Tax Relief in Los Angeles was shut down by the FTC, and the owners are facing numerous criminal charges. In early 2011, Roni Deutch was shut down by the California Attorney General, and Roni herself was forced to turn in her law licensed and faced state perjury charges.

JK Harris has been the target of several class action lawsuits regarding their sales practices and poor customer service. They have also been investigated by the Attorneys General for several states.

If the closing of JK Harris has left you in a bad place regarding your tax matters, please contact a local taxpayer representation firm from our directory.

When it comes to something as important as resolving your tax liabilities, it is important to conduct research on the tax resolution firm(s) you are considering before agreeing to purchase their services.

What sort of things should somebody do as part of conducting their “due diligence”?

First of all, visit the Better Business Bureau at www.bbb.com and look for any complaints or outstanding issues that they have with clients.

Second, you may actually want to turn to an unlikely source for information on certain companies: Your IRS Revenue Officer. Revenue Officers will not provide an unbiased opinion, of course, and many of them will even tell you not to secure representation (which is a violation of IRS policies for them to say, but they still do it). However, your RO has probably worked with most of the large, national tax resolution firms and can give you their personal opinion on the firm if you ask.

Third, before signing a contract for taxpayer representation, be sure to confirm that the firm that will provide your representation will assign your case to a licensed representative. You should be guaranteed that your representative is a licensed attorney, licensed Certified Public Accountant, or a licensed Enrolled Agent, before you sign any contract. The IRS will not allow non-licensed representatives to negotiate for a taxpayer, but you would be surprised at how often large firms have unlicensed assistants doing the actual IRS negotiation.

Fourth, be sure to ask if the individual selling you the tax resolution service if they have ever been involved in actual IRS or state tax negotiations. Many times you will get a delayed answer because that answer is “no.” Be weary of salespersons that will base how they can help you from a sales script. Any case-experienced salesperson should be able to walk you through the case proceedings from start to finish.

Understand that hiring a representative to negotiate on your behalf is not a guarantee that your case will be resolved. You will need to work closely with your representative to ensure that your best
interests are always held in high regard. Although your representative should do nearly all of the interaction with the taxing authorities, your participation with your representative is vital to the resolution process.

You will want to confirm that the fee you are paying for the service you are purchasing is a flat fee. If you cannot get this guarantee in writing, it is not a flat fee. Many salespersons will state flat fee over the phone but will not guarantee this in writing. If you do not understand the terms and conditions of your representative’s contract, you may be trapped into receiving unexpected requests for additional fees.

It is very important for you to keep in mind that most of the time when you are speaking with a tax resolution firm, you are speaking to a commissioned sales rep on the phone. These sales reps usually have zero actual tax experience, and much of what they tell you may have been passed to them from OTHER untrained personnel. This is important to understand because it is not
uncommon for these salespeople to give blatantly incorrect information to people simply so they can close a sale.

Armed with these tips, you should be better positioned to make a wise decision regarding hiring professional tax relief services. Search our directory on this site for a competent, licensed practitioner near you.