Podcast: IRS Debt Do's & Don'ts

Strategies for Dealing with IRS Debt

Step Number 1 for developing a strategy to deal with IRS debt is to do a financial analysis of the client to determine what your options are. This involves the client’s information on what they own and their future cash. The results are fed into the same formulas that the IRS uses to determine the ability to pay.

Step Number 2 is to consider which is the optimal strategy based on the ability to pay results. These strategies can be thought of as follows:

    1. Make an offer to the IRS to settle the debt for less than the total owed.
    2. Make a payment plan that the client can live with.
    3. Get the IRS to back off by showing that the client is simply not in a position to make payments.
    4. Attempt to get the original assessment modified because of errors.
    5. File an Innocent or Injured Spouse claim.
    6. If this is a problem of errors on the IRS side, file a Form 911 with the Taxpayer Advocate Service to push them to correct the records.
    7. If this is a business owner, develop a new business plan to improve profitability and cash flow to the client so that they can pay the debt.

Additionally, there is the possibility of filing bankruptcy and having some of the assessments washed out by the bankruptcy court. This requires an attorney that specializes in bankruptcy.

My next 7 posts will discuss each of these strategies in more detail.

Statute of Limitations Exceptions for IRS Refunds

I have been writing about the statute of limitations as they relate to non-filers. But there are other special circumstances in that Congress and the Courts have developed rules that affect the statute of limitations regarding refunds. Here are a few pointers to think about:

Missing the date for claiming a refund is a real bummer.  If you are lucky, maybe one of these exceptions will save the day.

Non-Filers and Refunds – The Medical Exception

Previously I detailed that there was a statute of limitations on when you could file a claim for refund and get credit for any overpayments. That limit is 3 years from the due date or 2 years from the date of payment whichever is later. There are exceptions to this law and one of those is for medical reasons.

Sometimes it’s not laziness that produces a non-filer situation. Medical problems can also result in non-filer status. Congress carved out an exception for this in the tax code and the IRS issued Rev. Proc. 99-21 to cover this situation. The statute of limitations is suspended when the taxpayer is determined to have a mental or physical impairment that can be expected to result in their death or last for a period of at least 12 months.

There are two major requirements to use this exception:

    1. No person was authorized to act on behalf of the taxpayer, including their spouse, during the disability period, and
    2. There must be a written statement from a qualified physician as to the disability. This statement must be detailed and specifically state that the taxpayer was prevented from managing his or her affairs.

There are lots of ways to get the physician’s statement wrong, so pay attention to Rev. Proc. 99-21 if you are going to use this exception.

Non-Filers and Refunds – You will be Sorry

Lots of Non-Filers are not out to rip off the IRS. They figure they have a refund, so the due date is not important to them. After all, the penalties for late filing are all based on the amount owed to the IRS. Late filing turns into a habit and many times that delay turns into years.

Here is the catch. You only have three years from the due date of the return to file and claim your refund. Once the three years are up, too bad. I know of cases where this has happened to the tune of tens of thousands of dollars.  Many times, somebody will have a big year and find out they owe, but it is too late to use the prior year’s refunds to offset that liability.

Unless your intention is to make a voluntary contribution to the US Treasury, file the return. The IRS does not have the power to fix this, once the three years are gone.

Are you required to Correct a Substitute for Return?

The taxpayer refuses to file a return. The IRS records of 1099s and W-2s show that the taxpayer probably owes taxes, so they file a return for the taxpayer. This is called a ‘Substitute for Return’ and it is a legitimate tax return for all legal purposes.

Eventually, as the pressure from the IRS grows, the taxpayer realizes that the easiest path in life is to get into compliance. They prepare the missing returns and discover that their calculations show a higher tax than the IRS’s assessment. Are they required to correct the IRS? If they fail to do so, are they open to a fraud charge?

The answer is NO! The IRS has made a legal assessment. If the lower amount is what the government wants to use, the taxpayer’s only legal requirement is to pay the tax assessed.  You are only in trouble if you provide false information to the government. The fact that 3rd parties did not report all of your income is not your problem.

Substitute for Return Basics

The IRS cannot assess a tax on you without a filed return. This puts them in a difficult spot. If the taxpayer does not file a return, what can they do to get a balance due on their books? The answer is the “Substitute for Return”. Basically, they file one for the taxpayer using the information on hand as to what the income was likely to be. This is where all those 1099s and W-2s come into play. Once the IRS computers have officially filed a Substitute for Return, tax due notices can start.

Here are a few things to understand about the Substitute for Return:

    • The IRS is not out to minimize your taxes. They will file the return using single or married filing separate along with the standard deduction. No credits, no additional deductions.
    • You can still file your return voluntarily and correct any errors in the tax accessed.
    • You are not required to file any additional returns if say the IRS calculations of the tax were lower than your own calculations.
    • The big disadvantage to not filing and letting the IRS do the work is that taxes due from an assessment from a Substitute for Return are never dischargeable in bankruptcy.
    • Finally, the IRS only files a Substitute for Return when they think there are taxes due. Non-filers who have a refund due will eventually lose that claim once the 3 years have run out.

Haven’t filed forever! How many years to catch up?

The IRS currently has identified some 7 million potential non-filer cases. Getting caught up with them before they lower the ax is something that a lot of these people would like to do. But how do you go about that?

Do you have to go back to the beginning of time if you haven’t filed in decades? The answer is No. IRS Policy Statement 5-133 defines ‘Compliance’ as having the last 6 years of tax returns filed. File the last 6 years and the IRS will let you come in from the cold.

Compliance is an important issue for the IRS. They do not want to make a deal with someone who is compounding his or her tax problems. No payment plan, no Offer-in-Compromise, no relief from collection activities if your current returns are not being filed and your current year taxes are not being paid.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Who is a fault for the IRS’s Incredible Incompetence?

Millions of calls from taxpayers to Taxpayer Service never get answered. After spending hours on hold, you might hear a click and then a dial tone. This is the IRS’s ‘curtesy hang-up’ because their computer has calculated they will not get to your call today.

Millions of IRS notices have gone out asking “Where is your 2020 Tax Return?”.  Recently they admitted to more than 8 million unprocessed returns sitting in stacks somewhere. Their computers show nothing filed as a result, and the taxpayers are left with two bad options. One – ignore the notice on the assumption that sooner or later the IRS will get their return processed, or Two – send in another copy and further add to the backlog.

Who is responsible for this incredible mess? Interestingly enough – it’s not the IRS people. It’s Congress.  I recently heard on a podcast by some very credible tax attorneys on just how the IRS budget works. Now bear in mind that the Federal Government spends a lot of time and money on hiring a competent Commissioner to oversee the IRS. However, that person has his or her hands tied behind their back from the get-go. The IRS does not get a lump sum authorization of money to run its operations. Instead, the budget is allocated to various functions. Some for answering phones, some for processing returns, some for audits, etc. If the demand for answers on the phones goes up, the commissioner cannot simply reassign auditors to help with the shift in demand. This is ludicrous. Why bother hiring high-end people to run the joint, if you are not going to give them the authorization to actually do the job?

The latest government budget bumps the IRS share by more than 12 billion dollars. Maybe it will help them get their act together with answering the phones and processing. I don’t think I will take that bet.

Innocent Spouse Claims are Hard to Win

The IRS will let an “Innocent Spouse” off the hook for unreported taxes created by their not-so-innocent spouse. To qualify the innocent spouse must prove that they:

  1. had no actual knowledge of the understatement, or
  2. had no reason to know of the understatement, and
  3. they received no significant benefit from the under-reported taxes.

As you can guess, proving that you “had no reason to know” can be very subjective. Factors that the IRS will consider include:

  • Educational background and business experience.
  • The extent to which the spouse participated in the business.
  • Whether or not the spouse asked reasonable questions at the time the return was prepared.
  • Whether there was a departure from the trends of prior tax returns.

Showing that the innocent spouse received no significant benefit is also problematic.  The IRS looks for evidence that the under-reported taxes were transferred to the innocent spouse in some manner. This could be cash or it could be payment of country club dues that were beyond the normal support needed for the spouse.

All these factors are hard to prove definitively, one way or the other. The result is that you need to plan on a trip to Appeals whenever you make this claim.

Are Crypto Currencies Safe from the IRS

I represent taxpayers in Gainesville and the state of Florida who has tax issues with the IRS.

IRS Levies

At this point in time, I don’t see how the IRS could levy a cryptocurrency account. The owner has the key codes. Absent these codes, it’s not likely the IRS could break the encryption. But there is a much bigger danger to crypto owners.

The Real Danger

That danger is JAIL TIME. Signing a tax return means you understand that the information is to the best of your knowledge under the penalty of perjury. The first question on the form 1040 for the last few years has been “did you receive, sell, exchange, or otherwise dispose of any financial interest in a virtual currency?” Answer no when you have one of these accounts makes it an easy referral for criminal prosecution when the IRS later determines that you do have such an account.

How it Works

The IRS successfully summoned the records of Coinbase for 2013-2015. The summons was upheld in court. Subsequently, the IRS has been negotiating with other virtual currency companies to gather more information about their users.

Here is the kicker to keep in mind. You sign a form 1040 in the current year and deny that you have any virtual currency. Three years later the IRS is finally able to crack the management of the company that provides you with access to your account. They feed the new data into their computers and then do a search for unreported transactions along with the negative answer on question number 1. Outcomes your name and the computer’s guess at the underreported tax. There is no statute of limitations on fraud. Worse, your defense attorney has next to nothing to work with other than some lame excuse about forgetfulness.

How Big a Risk?

Think this unlikely? The 2021 New England Tax Representation Conference included IRS statistics. Criminal referrals are up over 80% and most of that is related to the Coinbase summons. The idea that in the world of connected data servers that your information cannot be obtained by some government entity forever and ever is a pipe dream.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.