Category: Tax Debt Resolution

News and expert advice for tax debt resolution with less hassle at the lowest cost

Understanding the Three Types of Innocent Spouse Relief

Filing a joint tax return with your spouse has its perks—like better tax rates and deductions—but it also means both of you are responsible for any taxes owed. That’s all fine and dandy when everything is on the up and up. But what if your spouse (or ex-spouse) messes up the taxes or straight-up lies on the return, and now the IRS is coming after you?

That’s where Innocent Spouse Relief comes in. The IRS knows that sometimes one spouse isn’t at fault, and they offer three different types of relief to help people get out of unfair tax debt. Let’s break them down in plain English.

1. Innocent Spouse Relief (a.k.a. “I had no idea!”)

This applies if your spouse understated income, lied about deductions, or otherwise fudged the numbers, and you had no clue when you signed the return. The IRS will consider whether:

  • You knew (or had reason to know) about the mistake.
  • It would be unfair to hold you responsible.
  • You benefited from the tax savings in a significant way.

Beware of benefiting too much! If you lived a lavish lifestyle thanks to the lower tax bill—think fancy vacations, luxury items, or significant savings—the IRS might say, “Sorry, you still owe.” But if the extra money covers basic household needs, you have a better shot at relief.

2. Separation of Liability Relief (a.k.a. “That’s their problem, not mine.”)

If you’re divorced, legally separated, or widowed, you can ask the IRS to separate the tax debt between you and your ex—so you only pay your fair share. However, you must prove:

  • The mistake was due to your ex’s actions.
  • You didn’t know (or have reason to know) the errors when signing.
  • You didn’t personally benefit beyond everyday living expenses.

Example: If your ex falsely claimed a bunch of deductions, and you had no idea, you might qualify. But if you enjoyed the extra tax savings, the IRS may still hold you partially responsible.

3. Equitable Relief (a.k.a. “Life isn’t fair, and neither is this tax bill.”)

If neither of the first two options work, Equitable Relief is a last resort—especially if the tax bill is from unpaid taxes (rather than a mistake on the return). The IRS will consider:

  • Whether paying the debt would cause financial hardship.
  • If you were in an abusive or controlling relationship.
  • Whether you benefited from the unpaid taxes.

Again, if you lived comfortably because your spouse skipped paying taxes, the IRS may not let you off the hook. But if you were struggling financially, that could work in your favor.

How to Apply

You generally have two years from when the IRS starts collecting to apply, using Form 8857. Be ready to provide proof that you qualify—especially if you’re claiming you didn’t know about the mistakes.

Final Thoughts

The IRS isn’t known for its sympathy, but they do recognize unfair situations. If you’re being blamed for tax debt that isn’t yours, Innocent Spouse Relief could be a way out. If you’re unsure which type applies to you, getting professional advice is always a good idea.

The Hidden Dangers of Tax Resolution Companies: A Cautionary Tale

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.

Navigating IRS Collections: A Cautionary Tale

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.

 

Stuck With Payroll Tax Debt? Here’s How to Avoid the IRS Shutting You Down!

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.

Negotiating with the IRS When You Owe Over $100,000

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.
  1. 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.
  1. 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.

The Real Issue Behind Payroll Tax Problems: Fixing Profitability First

You’re not alone if you’re struggling to keep up with payroll taxes. It’s a problem many small business owners face, especially when cash is tight, and profits aren’t where they need to be. But here’s the thing: payroll tax issues usually aren’t the main problem—they’re a symptom of something bigger. At the heart of it, the real challenge is profitability.

It’s easy to feel overwhelmed when the IRS sends notices or punishes you. But instead of focusing only on the payroll tax deadlines, it’s essential to take a step back and look at the bigger picture. Why is it that these taxes are burdensome to pay? More often than not, it’s because your business isn’t generating enough profit to cover your obligations comfortably.

What’s Going On?

Cash flow becomes a juggling act when a business isn’t consistently profitable. Sure, you’re making sales, but when you look at what’s left after paying your bills, suppliers, and employees, there’s often insufficient to cover everything—including those payroll taxes. It’s a vicious cycle: the less profit you have, the harder it becomes to stay on top of obligations like taxes, and the penalties keep adding up.

If your profit margins are tight, any small hiccup—a slow month, an unexpected expense—can throw everything off balance. Payroll taxes, because they’re not always front-of-mind day-to-day, become something that gets delayed, and that’s where trouble with the IRS starts.

Turning It Around: Focus on Profitability

So, what’s the solution? It comes down to increasing profitability so that paying your payroll taxes and other bills becomes less of a strain. Here are a few practical steps to help you get started:

  1. Take a Hard Look at Your Pricing: Are you charging enough for your products or services? Sometimes, businesses underprice to stay competitive, which could hurt your bottom line. Make sure your pricing reflects the true value of what you offer.
  2. Trim Unnecessary Costs: It’s incredible how small expenses can add up. Review your expenses and cut anything that isn’t necessary. Whether it’s unused subscriptions or overpriced services, reducing these costs can free up much-needed cash.
  3. Improve Cash Flow: A profitable business needs steady cash flow. Speed up how quickly customers pay you, negotiate longer payment terms with suppliers or offer discounts for early payments. These small changes can make a big difference.
  4. Focus on Your Best Sellers: Every business has products or services that are more profitable than others. Putting more energy into what makes you the most money can improve profitability without increasing your workload.

The Long-Term Benefits

Once you get a handle on profitability, you’ll find it’s much easier to stay on top of payroll taxes. Instead of scrambling every quarter to find the money, you’ll have a cushion to meet your financial obligations comfortably. Even better, you’ll have peace of mind knowing the IRS won’t be sending you any surprise letters.

Ultimately, payroll tax problems are often just the tip of the iceberg. The real issue is profitability; once you fix that, everything else—including taxes—falls into place. So, take the time to focus on increasing your profits, and you’ll not only avoid IRS trouble but build a more substantial, more stable business.

By addressing profitability, you’re not just solving one problem—you’re setting your business up for long-term success.

Differences Between RCP Type OIC and ETA OIC: Actual Negotiation Required

I recently represented a woman in her 80s who had been defrauded from most of her life savings. She was forced to liquidate her brokerage and retirement accounts, which created a large tax bill due to income and capital gains. Although she had enough left to pay the taxes, doing so would have left her financially unstable for the rest of her life.

Our only option was an Offer in Compromise (OIC) based on Effective Tax Administration (ETA OIC). A Reasonable Collection Potential (RCP) OIC wasn’t an option because she could technically afford to pay full taxes. After lengthy negotiations, the IRS settled for about half of the taxes owed. The process, however, was far more complicated and subjective than a typical RCP offer. In the end, neither my client nor the IRS was particularly happy, but it was a compromise that allowed her some financial security.

This case highlighted the key differences between an RCP OIC and an ETA OIC—especially during negotiations.

RCP Type OIC (Doubt as to Collectibility)

An RCP-type OIC is for taxpayers who cannot fully pay their tax debt. The IRS calculates its Reasonable Collection Potential (RCP) by looking at income, assets, liabilities, and living expenses. If the taxpayer’s financial situation shows they can’t afford to pay, the IRS may agree to settle for less.

RCP OIC Negotiation:

  • Numbers-Driven: The IRS relies on strict calculations to determine how much the taxpayer can afford to pay.
  • Little Room for Subjectivity: It’s about the numbers. If the offer matches the taxpayer’s RCP, it’s likely to be accepted.
  • Rigid Process: If the IRS determines taxpayers can afford to pay, they likely won’t accept a lower offer.

ETA OIC (Effective Tax Administration)

An ETA OIC is different. It’s for taxpayers who can technically pay their debt but would find it difficult to do so. In my client’s case, paying the full amount would have left her financially vulnerable for the rest of her life.

ETA OIC Negotiation:

  • Focus on Hardship: This type of offer considers personal circumstances, such as age, health, and future financial needs.
  • More Subjective: I had to argue that even though she could full-pay, it would have been unfair. This type of negotiation requires a narrative backed by facts, showing why paying the debt would be unjust.
  • Longer and More Complex: The IRS takes more time to review these cases and has more back-and-forth than RCP offers.

Key Differences in Negotiation

The main difference between an RCP OIC and an ETA OIC is the negotiation focus. With RCP offers, the numbers drive the decision. If taxpayers can’t afford to pay, the IRS will accept less. The process is straightforward and primarily based on financial data.

With an ETA OIC, it’s more about fairness. I needed to show that paying in full would cause undue hardship, even if the taxpayer could technically afford it. These negotiations are more subjective and can be drawn out as both sides work through the details.

In my client’s case, the ETA OIC allowed her to avoid full payment, giving her a chance to live out her final years with some financial peace of mind. While the process was complicated, and neither side was thrilled with the outcome, it was a fair resolution for her situation.

Understanding the Different Types of Offer-in-Compromise: A Path to Tax Relief

An Offer-in-Compromise (OIC) can be a lifeline for taxpayers with overwhelming tax debt. It lets individuals settle their tax liabilities for less than what they owe, but only if they meet specific criteria. This isn’t a free pass. The IRS closely reviews each application, considering your ability to pay, income, expenses, and assets. There are three main types of OICs: Doubt as to Collectibility, Doubt as to Liability, and Effective Tax Administration. Each one applies to different situations. Knowing which one fits your case can help improve your chances of approval.

1. Doubt as to Collectibility (DATC)

This is the most common type of OIC. It applies when you can’t afford to pay the total tax debt. The IRS looks at your income, assets, and allowable expenses to see if you can’t pay the total amount. You must provide detailed financial documents like bank statements and pay stubs to qualify. If the IRS determines that you won’t be able to pay off the debt within the remaining collection period (usually ten years), they may accept your offer for a lower amount.

Given your current financial situation, your offer must be the most the IRS could reasonably expect to collect from you.

2. Doubt as to Liability (DATL)

This type of OIC applies when you disagree with the tax debt or believe it’s incorrect. You might submit a DATL offer if you think there was a mistake in the audit process or if you have new evidence that reduces your liability.

To succeed with this offer, you’ll need robust documentation showing why the IRS’s assessment is wrong or why the amount should be lower.

3. Effective Tax Administration (ETA)

An Effective Tax Administration offer is used when paying the full tax would cause serious hardship. This type of offer is rare. It’s for people who can technically pay the debt, but doing so would leave them unable to meet basic living expenses. For example, an ETA offer might apply if you liquidated a brokerage or IRA account due to fraud and now face high taxes on top of the loss. Even though the debt is valid, the IRS may accept less if collecting the total amount would cause undue financial strain.

Conclusion

Choosing the right Offer-in-Compromise is crucial to improving your chances of acceptance. The OIC process offers a possible solution, whether you’re facing financial difficulties, disputing the tax, or dealing with hardship. Be sure to meet the eligibility requirements and provide the necessary documentation to back your case.

Defending the Schedule C “Hobby Loss” Exam

If you run a small business and report income and expenses on a Schedule C, the last thing you want is for the IRS to categorize your endeavor as a hobby. Why? Because hobby losses aren’t deductible, while business expenses are. The IRS scrutinizes businesses that consistently report losses, and if they suspect your business is more of a “hobby,” you could find yourself facing a Schedule C “Hobby Loss” examination. Here’s what to expect and how to defend your business if you’re audited.

What is a Hobby Loss Exam?

The IRS uses the “hobby loss” rule under IRC Section 183 to prevent taxpayers from deducting losses from activities that aren’t conducted to make a profit. If your business hasn’t generated a profit in three of the last five years (two out of seven for horse-related activities), the burden of proof to show your profit intent moves from the IRS to you. In that case, the IRS may challenge the legitimacy of your deductions. This triggers a “hobby loss” examination, where they’ll determine if your business is a legitimate for-profit activity.

Proving Your Business is Not a Hobby

If you’re facing a Schedule C audit, the burden of proof is on you to show that your activity is a business with a profit motive. The IRS looks at several factors, including:

  1. Business-like Manner: Do you keep accurate books, maintain separate bank accounts, and professionally conduct your activity? The more you treat your business like a serious venture, the better your chances.
  2. Time and Effort: Do you spend significant time and effort in the business, or is it more of a casual pastime? Documenting your working hours and your attempts to grow and improve the company will help bolster your case.
  3. Expertise: Do you have knowledge or expertise in the industry? Showing that you’ve sought advice, attended relevant training, or engaged with professionals in your field strengthens your claim.
  4. History of Income and Losses: While reporting losses is not unusual for new businesses, a pattern of profitability, even if sporadic, helps demonstrate intent. You don’t have to show profits every year, but consistent and serious efforts to make the business profitable are crucial.
  5. Appreciation of Assets: If your activity involves assets that appreciate over time (like real estate or collectibles), it suggests a potential for profit, even if income isn’t immediately apparent.

Preparing for the Exam

Gather and organize your financial records if you receive notice of a Schedule C exam. Documentation like receipts, invoices, contracts, and tax returns are essential. In addition, prepare a narrative that explains your efforts to make a profit, any challenges faced, and your future business plans. It’s also helpful to work with a tax professional experienced in defending hobby loss exams, as they can provide guidance on specific documentation the IRS may request.

Conclusion

While facing a Schedule C “Hobby Loss” exam can be stressful, being proactive and organized in demonstrating your profit motive can turn things in your favor. By treating your business seriously and documenting your efforts, you can defend your deductions and keep your tax bill in check.

How Best to Utilize IRS Collection Appeals

Knowing how to use the IRS Collection Appeals Process (CAP) can help protect your rights if you’re facing IRS collection actions like levies or liens. CAP lets taxpayers challenge IRS enforcement actions. It may also delay or prevent those actions while your case is reviewed. Here’s a guide on how to make the most of IRS Collection Appeals:

What is the IRS Collection Appeals Program (CAP)?

The Collection Appeals Program (CAP) lets taxpayers appeal IRS collection actions. CAP covers liens, levies, installment agreements, and property seizures. It’s faster than other appeal processes, often resolving cases within five days.

When to Use CAP

There are several situations where CAP can help:

  • Lien Filings: If the IRS places a lien on your property, you can appeal it through CAP. This gives you time to devise another solution, like an Installment Agreement.
  • Levies: If the IRS plans to seize your wages or bank accounts, you can file a CAP appeal to stop or reverse the levy.
  • Installment Agreement Rejection: If your request for an installment agreement is denied or an existing one is modified or terminated, you can appeal through CAP. This is useful if the IRS is misjudging your ability to pay.
  • Seizure of Property: If the IRS is about to seize your property, CAP can force the IRS to reconsider before taking your assets.

How to File a CAP Appeal

To file a CAP appeal, complete Form 9423 (Collection Appeal Request). Send it to the IRS office that took the collection action. File your appeal quickly since you can only request a hearing before the action occurs—except for liens and levies, which you can appeal after they happen.

Tips for Success

  • Act Quickly: The CAP process is fast. File your appeal as soon as you receive notice of a collection action. Once the action occurs, you have fewer options.
  • Provide Strong Documentation: Support your appeal with financial documents, hardship information, or reasons for unfair action. This can boost your chances of success.
  • Seek Professional Help: Consider working with a tax professional experienced in IRS appeals for complex situations. They can help present your case effectively.

Conclusion

The IRS Collection Appeals Process can stop aggressive collection actions. You can potentially reverse liens, levies, and more by acting quickly, filing an appeal, and providing solid documentation. Getting professional help can also improve your chances of a successful outcome for tricky cases.