Author: Jim Payne

The Promise of Tax Relief

When facing substantial IRS tax debt, many Americans turn to national tax resolution firms that promise to reduce their tax burden. While some companies provide valuable services, others employ questionable strategies that could leave taxpayers in an even worse position. A recent case highlights the potential pitfalls of working with such firms without proper due diligence.

A Case Study in Tax Resolution Risks

Consider this scenario: A taxpayer with over $30,000 in tax debt sought help from a national tax resolution company. The firm’s promise was appealing – they claimed they could settle the debt for less than the full amount owed. However, their approach raised serious red flags that taxpayers should be aware of.

Dangerous Delay Tactics

First, the firm advised holding off on filing the client’s already-late 2020 and 2021 tax returns. Their strategy? Wait until 2024 to file everything together for a comprehensive installment agreement. This advice directly contradicts sound tax practice and IRS requirements. While the failure-to-file and failure-to-pay penalties would have already reached their respective caps of 25%, delaying tax filings still results in continued interest accrual on the unpaid tax and penalties. Most importantly, maintaining compliance with filing requirements is fundamental to establishing credibility with the IRS and accessing various relief options.

Missing Critical Analysis

Perhaps more concerning was the firm’s failure to perform a Reasonable Collection Potential (RCP) analysis – a crucial step in determining whether a taxpayer might qualify for an Offer in Compromise or other tax relief programs. Without this analysis, it’s impossible to know whether the installment agreement they eventually arranged was the best option for their client.

Risky Payment Planning

The firm then set up a payment plan that presumably included an estimate of the taxes for the unfiled returns. This approach is precarious because if the actual tax liability is higher than estimated, it could default the entire agreement, potentially leaving the taxpayer in an even worse position than before.

The Right Approach to Tax Resolution

The proper approach would have been to:

1. File all past-due returns immediately to stop the accumulation of failure-to-file penalties
2. Conduct a thorough RCP analysis to understand all available options
3. Consider alternatives such as an Offer in Compromise or Currently Not Collectible status
4. Implement the most advantageous solution based on the taxpayer’s specific circumstances

Conclusion

This case serves as a reminder that when dealing with tax debt, immediate action, and proper analysis are crucial. While tax resolution companies can provide valuable services, taxpayers should be wary of strategies that involve delaying filings or skipping essential analysis steps.

The world of tax resolution can be difficult to navigate. Many taxpayers seeking relief from IRS debts fall victim to unscrupulous firms. These companies often promise the moon but deliver little—or nothing at all. Recently, I spoke with a taxpayer in distress. His story sounded all too familiar.

He had turned to a nationwide resolution firm for help with his past-due tax debts. The company promised to settle his debts for “pennies on the dollar.” But they failed to deliver even the basics. They hadn’t gathered any financial information to calculate the Reasonable Collection Potential (RCP). This is a critical step in preparing an Offer in Compromise (OIC).

Any offer sent to the IRS without an RCP calculation is just a guess. It could be far higher than necessary, worsening the taxpayer’s financial situation. Or, it could be so low that the IRS rejects it outright. In either case, the taxpayer is left in a worse position and has wasted time and money.

To make matters worse, many taxpayers are misled by ads for the IRS Fresh Start Program. These ads suggest it’s a special or new offering. The truth is, the program ended over a decade ago. Its features—like flexible installment agreements and expanded Offer in Compromise rules—are now standard IRS processes. These ads prey on taxpayers’ hopes for quick fixes but offer little real help.

This reminded me of Roni Lynn Deutch, the so-called “Tax Lady.” Her resolution firm promised to settle debts for a fraction of what taxpayers owed. However, investigations revealed deceptive practices. In 2010, the California Attorney General sued her for $34 million, alleging she defrauded thousands of clients. Her business collapsed, leaving taxpayers worse off than before.

These stories highlight the need to choose tax professionals carefully. Working with someone who understands IRS processes is essential. A thorough financial analysis is the cornerstone of any effective IRS resolution strategy. A reputable tax professional will guide you through this process and set realistic expectations.

For taxpayers in trouble, quick fixes can be tempting. But as my recent caller and the victims of the Tax Lady learned, shortcuts often lead to dead ends. If you’re facing IRS debts, do your research. Seek qualified help, and remember—if it sounds too good to be true, it probably is.

Falling behind on payroll taxes can feel like a ticking time bomb. The IRS takes unpaid payroll taxes seriously, viewing them as “trust fund taxes” withheld from employees. While the IRS offers resolutions like payment plans, their focus on preventing debt growth can leave your business struggling to survive. To avoid the IRS shutting you down, you must act decisively.

1. Commit to Same-Day Payroll Tax Deposits

The most critical step is making all future payroll tax deposits on the same day employees are paid. No exceptions. This prevents additional payroll tax debt, a key IRS requirement to keep your business open.

If you can’t afford to pay both payroll taxes and wages, prioritize taxes and reduce your payroll. Downsizing is difficult but necessary to avoid enforcement actions that could shut you down entirely.

2. Respond Immediately to IRS Notices

If the IRS contacts you, don’t ignore their notices. Prompt communication shows good faith and can prevent harsher actions like liens or levies. Working with the IRS can keep your business operational even if you can’t pay the full amount.

3. Negotiate an Installment Agreement

After ensuring compliance with future payroll taxes, address existing debt. An Installment Agreement allows you to pay over time while staying operational. The IRS requires strict adherence to the plan and ongoing compliance with current payroll obligations.

4. Focus on Cash Flow Management

Effective cash flow management is critical for staying compliant and resolving your debt:

• Revise Pricing Policies: Raising prices is the fastest way in the short term to prove your business has long-term potential. By increasing margins, you can generate additional revenue quickly, demonstrating viability to the IRS while helping cover obligations.
• Cut Non-Essential Expenses: Eliminate costs that don’t directly support revenue generation or tax compliance.
• Separate Payroll Tax Funds: Use a dedicated account for payroll taxes to ensure they’re not accidentally diverted.
• Automate Payments: Leverage payroll software to ensure timely deposits and filings, avoiding penalties.

5. Seek Professional Guidance

Navigating payroll tax debt is complex. A tax professional can help assess your situation, negotiate with the IRS, and implement compliant processes, giving you a more substantial chance of success.

The Bottom Line

The IRS’s priority is to stop payroll tax debt from growing, even if it means forcing businesses to shut down. Committing to same-day tax deposits, revising pricing, and making tough but necessary changes can stabilize your business and avoid drastic IRS enforcement. Take action now to secure your business’s future.

Understanding the IRS’s perspective is key when negotiating a tax debt exceeding $100,000. Using the Reasonable Collection Potential (RCP) formula, they evaluate your ability to pay. Centering your strategy on this formula improves your chances of a favorable resolution.

WHAT IS THE RCP?

The RCP measures how much the IRS believes it can collect from you based on:

• Net Equity in Assets: Includes cash, real estate, vehicles, and other valuables.
• Future Income: Disposable income after allowable expenses.

This calculation determines your eligibility for programs like an Offer in Compromise (OIC) or an Installment Agreement.

Preparing for Negotiation

1. Calculate Your Assets and Equity
   Review all assets and liabilities. Subtract secured debts to find net equity.

• Quick Sale Discount: The IRS applies a 20% discount to hard assets (e.g., real estate, vehicles) to reflect distressed sale values. Liquid assets like cash are valued at the full amount.

2. Assess Income and Expenses
   Determine your monthly disposable income. The IRS uses strict guidelines (Collection Financial Standards) for allowable expenses like housing and food.

• Tip: If your actual expenses exceed these limits, be prepared to justify them with documentation.

3. Lower Your RCP

• Document Hardships: Highlight expenses like medical bills or dependent care.
• Non-Liquid Assets: Show why selling certain assets would create hardship.
• Maximize Allowable Expenses: Claim every permissible expense under IRS standards.

Applying RCP to Resolution Options

• Offer in Compromise (OIC): The IRS won’t accept offers below your RCP. Pursuing an offer if your RCP shows you can full-pay wastes time and money.
• Installment Agreements: Monthly payments depend on your disposable income. Lower RCP means smaller payments.
• Currently Not Collectible (CNC): If you can’t pay, the IRS may temporarily halt collection efforts.

Final Tips

• Provide Accurate Documentation: Support claims with bank statements, bills, and pay stubs.
• Be Transparent: Misleading information can damage your credibility.
• Seek Professional Help: Tax professionals can navigate RCP nuances and build a strong case.

Conclusion

Focusing on the RCP formula is essential when resolving tax debts over $100,000. By understanding how the IRS evaluates your financial situation, you can strategically reduce your liability and work toward a resolution. With preparation and guidance, you can regain control of your tax debt.