Author: Jim Payne

Jim Payne, a Florida Certified Public Accountant (CPA) since 1976, offers candid insights on getting square with the IRS — with the least pain, and at the lowest cost — with (or without) the help of a tax representative. Mr. Payne is a former IRS agent and expert in business profitability, IRS audits, IRS payroll tax, and IRS non-filer issues. As a Tax Representative, his goal is clear: " I will speak on your behalf to all IRS agents, so you never have to, and I'll guide you in executing a strategy to resolve your IRS problem so you can get back to enjoying life."

Options for Challenging a Bad Tax Assessment

If you’re in collections and facing a tax assessment you believe is incorrect, all is not lost. The IRS provides several options to challenge the assessment and manage your tax debt. Here are five key avenues to explore:

  1. Audit Reconsideration

Audit reconsideration is an option if you disagree with the results of an IRS audit. This can be particularly useful if you didn’t attend the audit, didn’t present certain facts during the audit, or have new information that could change the outcome.

  • How to Apply:
    • Submit a written request to the IRS office that conducted the audit.
    • Provide new documentation or information that supports your position, such as receipts or bank statements.
  • Outcome:
    • The IRS will review your request and may adjust your tax liability if they agree with your new evidence.
  1. Doubt-as-to-Liability Offer

A Doubt-as-to-Liability Offer in Compromise allows you to settle your tax debt for less than the full amount if there is genuine doubt about the accuracy of the tax liability.

  • Eligibility:
    • You must have filed all required tax returns and cannot dispute a tax liability already finally determined by a court.
  • Outcome:
    • If accepted, you settle your tax debt for the agreed-upon amount.
  1. Collection Due Process (CDP) Hearing

If you receive a Notice of Federal Tax Lien or a Notice of Intent to Levy, you have the right to request a CDP hearing to dispute the collection action.

  • How to Request:
    • Submit Form 12153, Request for a Collection Due Process or Equivalent Hearing, within 30 days of the notice.
  • During the Hearing:
    • Present your case and any supporting documentation to an independent IRS Appeals Officer.
  • Outcome:
    • The Appeals Officer will review your case and make a determination, which could result in the removal of the lien or levy.
  1. Pay and Refund

If you disagree with the tax assessment but cannot resolve it through other means, you can pay the disputed amount and then file a claim for a refund.

  • How to Proceed:
    • Pay the full amount of the disputed tax.
    • File Form 1040X, Amended U.S. Individual Income Tax Return, or Form 843, Claim for Refund and Request for Abatement, to request a refund.
  • Outcome:
    • If the IRS denies your refund claim, you can file a lawsuit in a U.S. District Court or the U.S. Court of Federal Claims to seek a judicial review.
  1. Bankruptcy

In some cases, discharging tax debt through bankruptcy might be an option, although this is generally a last resort and has specific criteria.

  • Eligibility:
    • The tax debt must be at least three years old, and you must have filed the tax returns at least two years before filing for bankruptcy.
    • Other conditions, such as passing the “240-day rule,” also apply.
  • Outcome:
    • If successful, your tax debt may be discharged, relieving you of the obligation to pay it.

Conclusion

Challenging a bad tax assessment while in collections is possible through several IRS mechanisms, including audit reconsideration, Doubt-as-to-Liability offers, Collection Due Process hearings, the pay and refund method, and bankruptcy. Understanding these options and following the appropriate procedures can help you effectively manage and potentially reduce your tax debt.

Navigating IRS Payment Plans: Finding the Right Fit for Your Tax Situation

Dealing with tax debt can be a real headache, but guess what? The IRS would rather make a deal with you over the expense of sending Collections people to make threats. The IRS offers some pretty flexible payment plans to help you out. Let’s break down your options:

Short-Term Payment Plans

Who’s It For?
  • Perfect if you can knock out your tax debt in 180 days or less.
  • Available if you owe less than $100,000 in combined tax, penalties, and interest.
What’s the Deal?
  • There is no setup fee, but keep in mind that interest and penalties will still accrue until you pay in full.
How to Apply:
  • You can do it online, over the phone, by mail, or in person at an IRS office.

Long-Term Payment Plans (Installment Agreements)

Who’s It For?
  • If you need more than 180 days to clear your debt.
  • Available if you owe less than $50,000 in combined tax, penalties, and interest.
What’s the Deal?
  • Setup fee: $31 for online applications (direct debit), $149 for other methods, with discounts for low-income applicants.
  • Pay it off over up to 72 months.
How to Apply:
  • Same deal: online, by phone, mail, or in-person.
  • Pro tip: Go for direct debit to dodge extra fees and avoid missed payments.

Streamlined Installment Agreements

Who’s It For?
  • Owe $50,000 or less and can pay off within 72 months.
What’s the Deal?
  • Same fees and process as long-term plans.
  • No need for a financial disclosure, so it’s less hassle.

Partial Payment Installment Agreements (PPIA)

Who’s It For?
  • Can’t pay your full tax debt within the usual 10-year limit.
What’s the Deal?
  • Payments are based on what you can afford after covering your necessary living expenses as determined by various rules.
  • Requires detailed financial info and regular reviews to adjust payments if your situation changes.
How to Apply:
  • Submit Form 9465 (Installment Agreement Request) with a financial statement (Form 433-F or Form 433-A).

Wrap-Up

Picking the right IRS payment plan can save you a lot of stress and hassle. Here’s some quick advice:

  • Don’t agree to a monthly payment that you can’t live with. Defaulting can make the IRS way harder to deal with.
  • If you’re looking at a long-term or partial payment plan, getting some professional help can make a big difference. Doing a financial analysis beforehand, using the IRS formula to figure out your reasonable living expenses, can help you organize your finances so you qualify for a lower monthly payment.

So there you have it! Knowing your options and picking the right plan can make dealing with the IRS much easier.

Common Business Mistakes in Dealing with the IRS

Dealing with the IRS can be intimidating and a real pain. However, avoiding the common mistakes can reduce your financial risks and heartburn. Here are some pitfalls to watch out for and tips on handling them effectively.

1. Ignoring IRS Notices

This is by far the biggest mistake you can make. Nobody likes to be ignored. This is particularly true of large government organizations that feel they are what keeps the Country going. IRS notices are not going to disappear if left unattended. Ignoring them can lead to more severe consequences, such as additional penalties, interest, or even enforcement actions like wage garnishments or bank levies. Dealing with the problem by reading and responding to IRS communications is always the best way.

2. Procrastinating on Filing and Payments

Delaying your tax filings and payments can lead to unnecessary penalties and interest. Even if you cannot pay your tax bill in full, filing your return on time is crucial to avoid the late filing penalty. The IRS has made it easy to set up payment plans. Use this option.

3. Misunderstanding Payment Options

If you owe more than you can pay, it’s important to understand your options rather than avoiding payment altogether. The IRS offers several solutions, including Installment Agreements and Offers in Compromise (OIC). Installment Agreements allow you to pay your debt over time, while an OIC lets you settle for less than the full amount owed if you meet specific criteria.

4. Not Addressing the Core Issue – Business Profitability

Low profitability is almost always why business owners fall behind in tax payments. Most of us tend to treat losses or break-even situations as a hopefully temporary thing. In the long run, the safer approach is treating it as if it were an existential risk to the business. Immediately focus on improving your business’s profitability by revising prices and cutting unnecessary expenses. If you can’t fix this problem, consider closing the business before the buildup of tax debt makes your future miserable.

Conclusion

Dealing with the IRS doesn’t have to be daunting if you avoid these common mistakes and take proactive steps. Responding promptly to notices, filing timely, understanding your payment options, and addressing your profitability issues timely will reduce your IRS interactions to nothing more than an irritation.

What to Do If Your Offer-in-Compromise (OIC) Is Rejected

The IRS rejects 60-70% of Offers in Compromise (OIC) submitted by taxpayers. Receiving a rejection for your OIC can be disheartening, but it’s not the end of the road. Here’s what to do next:

Understand the Reason for Rejection: Carefully review the rejection letter. Common reasons include discrepancies in your financial information or the IRS determining you can pay the full amount through a payment plan.

Consider Appealing: If you believe the rejection was unjustified, you can appeal within 30 days. Use Form 13711, Request for Appeal of Offer in Compromise, to start the process. Be ready to provide additional documentation. The IRS does not publish official statistics on OIC appeal success rates, but many tax professionals report high acceptance rates for well-prepared appeals.

Evaluate Alternative Options: If an appeal isn’t viable, explore other avenues. You might qualify for an Installment Agreement to pay off your debt in monthly installments. If you’re experiencing financial hardship, you could request Currently Not Collectible (CNC) status. This temporarily pauses collection efforts.

Remember, a rejected OIC doesn’t mean you’re out of options. By understanding the reasons, exploring alternatives, and seeking expert advice, you can find a viable solution to manage your tax debt.

When Will the IRS Army of Auditors Hit the Warpath?

The IRS received a significant funding increase through the Inflation Reduction Act of 2022. This led to speculation about a sudden surge in audit activities. Many wondered, “When will the IRS army of auditors hit the warpath?” However, the actual plan for deploying these resources suggests a more measured approach by the IRS.

The Funding Context

The IRS’s additional $80 billion plans extend beyond just increasing enforcement. This funding is also earmarked for upgrading technology and improving taxpayer services. The aim is to make the IRS more efficient and responsive rather than merely more aggressive.

Recruitment and Training

Integrating new auditors into the IRS is a structured process. It begins with the challenge of recruitment. Finding the right candidates is not quick or easy. Once hired, these new auditors go through extensive training. They must master the complexities of tax law, ethical auditing practices, and the use of sophisticated technological tools.

Phased Deployment

Auditors are not deployed abruptly. Recruits start their careers by handling simpler cases under the supervision of seasoned auditors. This integration ensures they are fully prepared before they tackle more complex audits.

Projected Timeline for Deployment

  • Year 1-2 (2022-2023): The focus is on recruitment and training.
  • Year 3 (2024): New auditors start with simpler audit cases.
  • Year 4-5 (2025-2026): They begin to handle more complex audits as their experience increases.
  • Year 6 and beyond (2027 onwards): Auditors are fully integrated and handle various audits.

Implications for Taxpayers

The gradual deployment of new auditors means there will be no immediate spike in audit activities. The IRS aims to improve the accuracy and efficiency of audits. Taxpayers can probably find better things to worry about rather than an oppressive audit increase.

Conclusion

The immediate “army of auditors” concept does not accurately reflect the IRS’s strategy or ability.  Improving audit processes takes time.  Personally, I would be happy if the IRS would just answer their phones

Understanding the IRS Fresh Start Program: Evolution and Current Misconceptions

As a CPA who handles IRS collection issues, it’s ironic and revealing when marketing firms call me, offering to “rescue” me from tax debts through the IRS Fresh Start Program. These unsolicited calls miss the mark and show a deep misunderstanding of my professional role and the program they tout.

This common confusion highlights a bigger problem: widespread misinformation about tax relief programs. Anyone with tax debts needs to understand the true nature and evolution of the Fresh Start Program.

The IRS Fresh Start Program: A Brief Overview

Introduced in 2011, the Fresh Start Program aimed to help taxpayers struggling financially by simplifying the process of paying back taxes and avoiding liens. Despite being advertised as ongoing, the program’s special initiatives have become standard IRS procedures. Here are the key changes:

  • Lien Thresholds: The program raised the liens automatically filed on tax debts from $5,000 to $10,000.
  • Installment Agreements: These agreements allowed more taxpayers to set up installment plans for debts up to $50,000 without detailed financial disclosure.
  • Offers in Compromise: The program introduced more flexible terms, enabling some taxpayers to settle their debts for less than the full amount owed.

Evolution of the Program

The Fresh Start Program started as a pilot project introducing more forgiving methods for managing tax debt. Its success resulted in these methods being permanently adopted into the IRS’s regular procedures. This transition from a temporary measure to standard practice often leads to misunderstandings due to the program’s initial marketing.

Misleading Advertisements

Today’s advertisements can mislead taxpayers by portraying the Fresh Start Program as either still running or as a special relief effort. In reality, the beneficial changes introduced are now just routine IRS procedures.

Understanding these details about the Fresh Start Program can help taxpayers manage their responsibilities more effectively and avoid confusion and scams.

What to do if you can’t pay your payroll taxes?

The IRS really hates businesses that fail to pay their payroll taxes for good reason. The government ends up paying for these failures twice. First, they never get the money. Second, they end up having to credit the employees with the withholding and potentially pay refunds on the money they never received. The resulting IRS policy is to put you out of business as soon as possible to avoid the run-up of these tax debts.

What should you do if your cash flow just can’t hack it?

Step 1 is to stop digging the hole. Immediately, start paying your payroll taxes for each payroll at the same time you pay the employees. If your cash situation is so bad that paying your payroll taxes and employees is not feasible, start laying them off until you get it down to what you can pay. In my experience, the idea that your business is going to magically improve next week never happens.

Step 2, you need a new business plan yesterday. The planning process needs to consider all the standard cash flow options such as collecting on receivables, stringing out suppliers, and improving inventory turns. Cash flow is one thing, but profitability is the only thing that works in the long term. Unless you can find a clear path to profitability, the company is not going to survive. Recognize it. Close it. Go on to something new.

Step 3 is to minimize the impact on you the business owner. The IRS will eventually show up and assess a penalty on you personally for the monies withheld from the employees’ paychecks. You can minimize this impact by paying those trust funds personally and designating that payment to be applied to the “trust funds only”. This will reduce the unpaid trust funds portion that the IRS could eventually assess upon you. This only works if you make the payment voluntarily. The company cannot do this.

Conclusion

Unpaid payroll taxes are the worst tax debt you can have. The IRS will eventually shut you down, but they usually don’t show up until the debt is large. You then file for bankruptcy, but the IRS will assess the Trust Funds Penalty on you personally. Now you’re out of business and an employee again. But you owe $100k or more with the IRS threatening levies against your wages for the next 10 years. The time for action is now.

 

What are the most Common Problems that cause an Offer-in-Compromise to be Rejected?

If you owe the IRS money, you might be considering an Offer-in-Compromise (OIC) as a way to settle your tax debt for less than the full amount you owe. This is the so-called “pennies on the dollar” approach you hear in ads.

While an OIC can be an excellent way to resolve your tax debt, it’s essential to understand that the IRS does not accept every Offer-in-Compromise that is submitted. In fact, the IRS rejects the majority of OICs that are submitted.
The most common reasons for these rejections include:
    1. Compliance Problem – All of the returns due for the last 6 years have not been filed or the current year’s estimated tax payments are not being made. This results in an immediate rejection of the offer.
    2. Ability to Full-Pay – The IRS has a methodology for analyzing a taxpayer’s financial situation. If the offer amount is below what they determine the taxpayer could pay, they will reject the offer.
    3. Dissipated Assets – The IRS finds that the taxpayer has sold assets to friends, relatives, or lenders sometime in the last 3 years. The IRS’s position is that the cash from these transactions should have been used to pay down the tax debt.
Nobody can guarantee that an OIC will be accepted. However, avoiding these 3 common problems should put you in the 95% chance of success range.

The COVID Policy of Streamlined Payment Plans for up to $250,000 is Permanent.

Darren Guillot, Deputy Commissioner, Collections and Operations Support announced on January 20th that the trial policy of allowing installment plans without requiring financial information for tax debts up to $250,000 is now permanent.

Why is this a Big Deal?

The requirement to provide financial information is no easy task. Most people need professional help with preparing Form 433. Answering a question wrong, such as do you or have had any cryptocurrency transactions, could get you a visit from the Criminal Investigations Division. The ability to simply go to the IRS website and start a payment plan without financial analysis is a big time and money saver for tax debtors.

        What’s the Catch?

There are a few caveats:

  1. This debit limit only applies to individuals and out-of-business sole proprietors.
  2. This option goes away if your case has been assigned to a Revenue Officer. The old limits of $50,000 and $25,000 still apply if you are dealing with an RO.
  3. Your payment amounts must be adequate to fully pay the debt before the Statute of Limitations runs.

Should you consider this without professional help?

Certainly, seems like a good idea to go give it a try. If the IRS calculator comes back with a monthly payment that you can’t live with, then go talk to someone. There are other options such as a Partial-Pay or an Offer-in-Compromise that will probably make more sense in these cases. Setting yourself up for a future default will make your problems worse

Are you Out-of-Luck when the IRS cannot be convinced that its Assessment is Incorrect?

It happens. The IRS audits you and makes an assessment that you know is wrong. Maybe you missed the audit appointment, and the auditor disallowed all your deductions. Or maybe the IRS has a 1099 or W-2 showing that you have unreported income and you have never heard of the issuer. If you just can’t get the IRS to listen to reason, one of your options is an Offer-in-Compromise based on Doubt-as-to-Liability.

What is an Offer-in-Compromise?

An Offer-in-Compromise is an agreement with the IRS to pay less than the full amount of the assessment. Usually, the basis for this offer is based on the inability to pay the amount before the Statute of Limitations runs. The IRS accepts these offers after doing a financial analysis and concluding that it’s their best option to collect.

The Offer-in-Compromise due to a doubt-as-to-liability is the less well-known sibling to the offer based on lack of potential to pay. Rather than submit financial information, you submit your evidence one last time as to why the assessment is in error. It gives the IRS the option of settling the issue without going through the expense of going to court and possibly losing.

What’s Different about DATL Offers?

There are two major differences. First, the offer can be very low. Second, you are not submitting information about your personal or business financial condition which is full of potential problems if there is an error on the form.

How Much Should You Offer?

This all comes down to how strong is your case. The more likely the IRS is to lose in court, the smaller your offer should be. The minimum I would suggest is $150 so that they can feel like the offer at least covers their processing costs. If it’s a 50-50 likely win for both parties, I would be inclined to make an initial offer between 30 and 50 percent. There will be an opportunity to negotiate the final amount.

Conclusion

All is not lost when it comes to assessments that you believe are in error. Try to use the regular appeals processes first. But if that does not work, then an Offer based on doubt-as-to-liability is well worth trying.