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.

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 20^th 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:

This debit limit only applies to individuals and out-of-business sole proprietors.
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.
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

What Should You Do When the IRS Corrects Your Returns?

The CP11 letter arrives in the mail. You open it up and see the words “We made changes to your return because we believe there is a miscalculation. You owe money on your taxes as a result of these changes.” Yep, this is going to be a great day.

Usually, these notices are vague. They typically list various reasons which might be the cause of the change. Perhaps it’s an invalid social security number, or maybe it was a limit based on AGI. You get to take your best guess as to which of these reasons applies to you. This can lead some people to put off responding and that is a very big mistake.

CP11 notices are considered to be a “Math Error” procedure by the IRS and not an audit. This is an important distinction. In an audit, you have the opportunity to contest a tax assessment. A Math Error, on the other hand, will get you an immediate assessment if you do not contest it within the 60-day time period. This means IRS Collections will begin immediately.

You can contest the change by calling the IRS. Lots of luck with that approach given that you will be on hold for hours. The better way is to write up your response as to why the original return is correct and mail it certified to the IRS. Do not expect a quick response from the IRS. You will have plenty of time to gather documents to support your position.

For more information, here is a link to a Taxpayer Advocate Service blog

Why you need to Act Now on your IRS Debt Problem

It’s a natural tendency to want to avoid dealing with an unpleasant task such as an IRS debt problem. After all, the IRS is not particularly speedy in most of the things they do, so ignoring them, in the beginning, is easy. But this is probably going to cost you. Waiting for that levy notice to come in the mail is going to reduce the time available for you to arrange your finances so that your payments to the government are minimized.

Why is this? Unless you qualify for a streamlined payment plan, the IRS is going to perform a financial analysis of your situation to determine how much money they should be able to collect. Basically, they are going to relate your income to what they consider to be the “reasonable” costs of living. If that cash flow projection is positive, they are going to want a deal that gives them that amount as a minimum.

Here is where the time problem comes in. Given enough time in advance of that levy notice, you can use the IRS financial analysis approach in advance to figure out what changes you can make to minimize the amount that the IRS might think of as collectible. For example, say you do not have life insurance. The IRS allowable expenses include term life insurance premiums. But, you need at least 3 months of payments to the insurance company before the IRS will include this money in their calculations. So, signing up for life insurance tomorrow is not going to work. Given enough time in advance of negotiating with the IRS could result in you having life insurance with zero difference to your cash flow.

Performing the financial analysis early allows you to develop a strategy to minimize the IRS’s impact on your life. Waiting for the levy notice is a mistake

How does the IRS define “Economic Hardship”?

Economic Hardship is a kind of get-out-of-jail-free card when it comes to dealing with IRS Collections Division. It can be used to get a levy released or an Offer-in-Compromise accepted if the financial analysis showed the result would place the taxpayer in an economic hardship

So, just what is an Economic Hardship? Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The IRS considers the taxpayer’s equity in assets and expected cash flow to determine how much money should be available to pay their tax debts. This information is brought together with a formula that is called the Reasonable Collection Potential or RCP. Much of the “reasonableness” in the formula comes from various tables of allowed or allowable living costs.

Plug all the numbers into the RCP and if the result is positive, the IRS figures you can make payments. If the number comes out negative, then you are in an Economic Hardship situation.

This leads us to one of the major reasons for Offers-in-Compromise to fail. Nobody did the RCP analysis and instead made an offer that was unacceptable on the face of it.

Are Retired People Screwed when it comes to IRS Debt?

A retired couple decides to liquidate some of their stock investments because they are no longer able to handle the ups and downs of the market. This action puts them into a strong and safe cash position but also produces a large tax bill. Paying that bill significantly reduces the savings they have built and depend upon for their retirement years.

They decide to make an Offer-in-Compromise with the IRS instead. The offer is rejected by the IRS because the analysis of their financial position shows that they could full-pay the debt. Is it a lost cause for this couple?

Not necessarily. The IRS can accept the Offer under Special Circumstances where the collection of the debt in full would create an “Economic Hardship”. This would be the case for the retired couple depending upon their savings for the rest of their lives.

The big factor for taxpayers hoping to have an Offer with Special Circumstances accepted is a history of compliance. Investing in dubious tax shelter schemes, repeated non-filing penalties, or failure to pay on a regular basis are all factors that will work against the offer. Most of these offers are in fact initially rejected by the IRS, so you can expect that a trip to Appeals is going to be part of the process.

I will discuss the meaning of “Economic Hardship” in more detail in my next post.

Can the IRS have your Passport Revoked?

The IRS does have the power to have the State Department revoke your passport for owing back taxes is YES. Recently the Fifth Circuit upheld the constitutionality of the government restricting international travel for James Franklin due to back tax debts of $55,000. Mr. Franklin had claimed that revoking his passport had violated his 5^th Amendment rights to due process. Luckily, the US is a big country, so you can still have some places to go while all those IRS notices are building up in your mailbox.

Revoking your passport is not the only tool in the IRS toolkit that goes beyond liens and levies. In 2014 Congress passed the Consolidated and Further Continuing Appropriations Act that prohibited federal agencies from awarding contracts or grants to contractors with any amount of delinquency in federal taxes. This law does not get used consistently, but it is another good reason to avoid getting in the hole with the IRS.