Category: Tax Penalties

Negotiating With the IRS: What You Need To Know

Negotiating With the IRS: What You Need To Know

Posted by Kienitz Tax Law on with 0 Comment

Of the various types of financial debts, owing the IRS money for unpaid taxes is among the worst. Not only are most tax debts non-dischargeable in bankruptcy, but the IRS has powerful tax collection tools, such as tax liens and levies. 

Despite the upper hand the IRS often has when it comes to tax enforcement, there’s still room for negotiating with the IRS. These talks can arise when trying to settle a tax debt for less than the full amount, comply with an audit request, or appeal an IRS decision. No matter what you’re negotiating, keep the following tips in mind.

Tip #1: Follow IRS Instructions and Procedures

If there are special procedures or rules for something, such as filing an appeal or requesting tax relief, follow these explicitly outlined steps unless the IRS or a qualified tax professional says otherwise. The majority of people you might interact with at the IRS are overworked and probably under a lot of pressure to process cases and requests as quickly as possible. 

This is particularly true given the current political climate and how the IRS is an easy target for many politicians on both sides of the political aisle. So the last thing you want to do is ask the IRS for something without following instructions, as it gives the IRS an easy way to reject your request. 

If an IRS worker can undermine your negotiating position on a technicality in 30 seconds instead of taking five minutes to review the merits, you have to assume they’ll take the path of least resistance.

Tip #2: Have All Relevant Information Before Contacting the IRS

If you receive a tax notice or letter from the IRS informing you about an outstanding tax balance, there will probably be a phone number, fax number, and/or address for you to use to address the concern. Before reaching out, make sure you know the relevant facts to your case, as well as have any necessary documents.

For example, if you think you can lower your tax bill with First Time Abate penalty relief, it might be a good idea to confirm your history of good tax compliance by obtaining your tax transcripts and records from the IRS.

Tip #3: Be Polite and Considerate

Even if you believe the IRS is the most evil organization in the world, is an unconstitutional overreach of federal power, or all of the above, when you talk to an IRS employee, treat them with respect. Remember that they’re people too, so they have feelings and emotions, as well as families, personal struggles, and financial challenges.

Therefore, making them angry, mad, or offended is unlikely to help your case, and neither is deliberately trying to make their job more difficult. If the IRS employee sees you’re trying to be reasonable and accommodate their position, they’re far more likely to do so with you. 

This is especially true during audits, where you might need more time to respond to an IRS request for documents or information. If you’ve been prompt with prior responses or accommodating to the revenue agent’s busy schedule, they’ll be more willing to accommodate you if you need an extension or a meeting rescheduled.

Tip #4: “If Mom Says No, You Can Always Ask Dad”

IRS employees aren’t your parents (although it might feel that way sometimes, and not in a good way), but you can still follow the strategy of not giving up just because one parent says no to your request. Depending on your tax case, if you call the IRS to make a request, the first person you call might say no. Don’t accept this is the final decision from the IRS and instead try calling again to ask a different IRS employee.

IRS employees sometimes get things wrong and make incorrect decisions or make mistakes with the information they give taxpayers. Or, there’s a chance you reached out to someone when they were having a bad day. As a result, it’s a good idea to try speaking with someone else who might be more willing to hear your side and negotiate a resolution that’s more favorable to you.

Tip #5: “Trust, But Verify”

If the IRS makes a decision or gives a response you disagree with, ask for the legal basis for the decision. Whether it’s a court case, IRS regulation, federal statute, or internal policy that controls how the IRS is supposed to handle your situation, you want to know what it is so you can double-check what the IRS is telling you. This information will also come in handy if you decide to challenge the IRS’ decision, whether in court or through an informal appeals process.

Consider Talking to a Tax Resolution Professional

Negotiating with the IRS is a lot like any other negotiation. The problem is that not everyone likes to negotiate or feels confident doing so. Then there’s the time and effort required to negotiate with the IRS. Hiring a tax professional can help with these potential negotiating hurdles. To learn about what Kienitz Tax Law can do for you when negotiating with the IRS, contact us to schedule a free consultation. 

 

 

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How to Avoid an IRS Tax Audit

Posted by Kienitz Tax Law on with 0 Comment

Paying taxes to the IRS is bad enough, but getting audited might be worse. It’s one thing to get an
unexpected tax bill, but spending so much time gathering documents and complying with revenue agent
requests makes it feel like the IRS is adding insult to injury. While there’s no comprehensive list of IRS
audit triggers, the following is a discussion of red flags that could lead to an audit.

Underreporting Income

One of the biggest reasons for a tax audit is that the income reported on a tax return doesn’t match
income information that the IRS receives from third parties. Your employer, bank and any other
institutions where you generate reportable income usually report that income directly (or indirectly) to
the IRS with W-2s and 1099s.

Using Round Numbers

Whether it’s income or an itemized deduction, very few independent contractor taxpayers rarely make
exactly $70,000 annually or have deductible business expenses for travel and client lunches that add up
to a perfect $4,000 for the year. Using round numbers probably doesn’t automatically result in an audit,
but likely serves as one of several factors when deciding who to audit.

Unusual Tax Deductions

If you claim a large number of deductions or deductions that seem out-of-place for your profession,
then those could potentially raise audit red flags. For example, if you work from home, then a home-
office deduction is to be expected. But if this deduction is also claimed along with an energy-efficient
commercial building deduction, then that could seem a bit odd to the IRS.

Another example is one or more large charitable deductions when you earned a comparably small
income. Think about it, it’s not unusual to earn $50,000 in a year and claim a $300 deduction to a local
charity organization. But if you earned $20,000 and made a $8,000 charitable donation, that’s a bit
unusual and could trigger the IRS asking that you produce documents to substantiate the deduction
and/or your income.

Consistent Business Losses

The IRS is wary of individuals who try to claim business-related deductions and losses for activities that
are hobbies. You might enjoy fishing and think you can write off the cost of your fishing boat as a
business expense because you also claim you’re a professional angler.

One way for the IRS to see if you really use your fishing skills to pay your bills and feed your family is to
see if your business turns a profit. It’s common for businesses to have down years, but the IRS often
views several consecutive years of business losses as a possible sign that someone’s engaged in a hobby
and not a career. If the IRS has this suspicion, they sometimes conduct an audit to see if they’re right.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is often improperly claimed. This is usually the result of confusion
about credit eligibility. However, as a result of the high frequency of EITC errors, the IRS pays special
attention to tax returns that claim these credits.

Earning Too Much or Too Little

Generally speaking, taxpayers at the lower and higher-income scales are at higher risk of audit .
Specifically, the biggest risk of an audit came from those earning less than $50,000 or more than $1
million per year. This makes sense, as lower-income filers tend to be more likely to claim certain tax
credits, such as the EITC and higher-income filers have money to make an audit and other tax collection
activities worth the IRS’ time and effort. There’s also the fact that wealthier taxpayers often engage in
more aggressive tax avoidance strategies.

Inconsistent Income

Large swings in income can sometimes indicate that the income isn’t being properly reported to the IRS.
For instance, if you earned $145,000 per year for five years, then your income dropped to $65,000 for
the next few years, that probably won’t lead to an audit in and of itself. But change things around a bit
and you go from earning $145,000 for five years, then $65,000 for one year, then back up to $150,000 in
the next year. Now the IRS might suspect you underreported your income during the year you made
$65,000.

Worried About a Tax Audit?

The exact triggers for an IRS audit aren’t publicly known, but the above should give you a rough idea of
things you can try to reduce your chances of an audit. If you’re particularly worried about an audit, it
might be worth talking to a tax professional. They can help you identify potential risks and should you
get audited, assist you through the process.

 

 

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!

Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal
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What to Do if You Can’t Pay Your Taxes?

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For many, taxes are annoying. This is especially true when it comes to filing tax returns. Then some oppose taxes on moral grounds. 

Another reason to hate taxes is the difficulty in paying them. This can sometimes arise when an unexpected tax bill arrives in the mail.

So, what happens if you can’t afford to pay your taxes? This is a common problem, so the IRS has several options available. Most of these require paying your entire tax debt over time, plus any applicable penalties and interest. In rare cases, the IRS will “forgive” some or most of the tax debt. But before you get your hopes up, let’s look at how these tax resolution possibilities work.

Offer in Compromise (OIC)

This is one of the most talked-about tax relief options, and for good reason. It allows eligible taxpayers to settle their tax debts for less than the full amount. The IRS agrees to consider a tax debt as “fully paid” through the use of an OIC in three scenarios:

  • Doubt as to Liability: There’s a legitimate question as to whether you owe the tax debt in question or, if you do owe it, there’s uncertainty as to the total amount you owe.
  • Doubt as to Collectibility: You don’t have the financial resources to pay the full tax debt.
  • Effective Tax Administration: You can afford to pay the full tax debt, but doing so would create an unreasonable economic hardship or be inequitable.

Getting the IRS to accept your OIC request is difficult. Statistics vary each year, but acceptance rates typically range between 34% and 50%. The application process can be extensive, requiring significant effort to compile and complete the necessary paperwork. And it can take up to two years for the IRS to review your request and make a decision. 

Currently Not Collectible (CNC) Status

If you’re financially unable to make even partial payments to the IRS to pay off your tax debt over time, the IRS will place your tax account in “currently not collectible” status. While in CNC status, the IRS won’t take any tax collection efforts until your financial situation gets better. As nice as this sounds, there are several caveats to know about.

First, this doesn’t make the tax debt go away, and because the balance remains, any applicable penalties and interest continue to accrue. Second, it’s not easy to receive CNC status, as it often only applies to taxpayers who are in severe financial trouble. Third, the IRS may file a tax lien against your property while you have CNC status. Fourth, this temporary delay is just that—temporary. This means the IRS will periodically review your financial situation to reassess your ability to pay your unpaid taxes.

Payment Plans and Installment Agreements

This is probably the most popular option for taxpayers who can’t pay their entire tax bill all at once. With a payment plan (also called a short-term payment plan), you have an extra 180 days to fully pay your tax bill. Payment plans are only available if you owe less than $100,000 in taxes, penalties, and interest.

With an installment agreement (also called a long-term payment plan), you can take up to 72 months to pay off your tax debt. To be eligible for an installment agreement, your outstanding balance must be less than $50,000 in taxes, penalties, and interest.

In special situations, you might be eligible for a Partial Payment Installment Agreement (PPIA). This is an installment agreement where you agree to make monthly payments until the statute of limitations for the IRS to collect your tax debt expires (usually referred to as the CSED, or Collection Statute Expiration Date). At this point, any remaining balance you have with the IRS is wiped away or “forgiven.”

Penalty Relief

One of the easier ways to lower your tax bill so that you can settle it for less than the full amount is with penalty abatement. This is where the IRS agrees to remove some of the tax balance attributable to penalties in situations where you tried to do the right things with your taxes but were unable to do so for reasons beyond your control. Penalty relief is available for a wide variety of penalties, such as: 

  • Failure to File
  • Failure to Pay
  • Accuracy-Related
  • Dishonored Check
  • Underpayment of Estimated Tax

There are several types of penalty relief available:

  • First Time Penalty Abate
  • Administrative Waiver
  • Reasonable Cause
  • Statutory Exception

The penalty relief request process depends on which penalty you’re trying to reduce and your reasons for making the request. In some cases, a simple phone call to the IRS asking for penalty relief will suffice. In other cases, a more formal written request is needed.

Have a Tax Debt You Can’t Afford to Pay?

If you’re having trouble paying a tax bill from the IRS (or the California FTB), there are tax relief options available. They may not be perfect, but they can help. To learn more, contact a tax professional.

 

 

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!

Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal
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Foreign Bank Accounts and Your Taxes

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If you have substantial wealth, spend a lot of time overseas, or both, there’s a fair chance that you have one or more foreign bank accounts. Whether it’s due to convenience or investing opportunities, you may have a legal obligation to report those accounts to the United States government.

The most well-known duty is often referred to as FBAR, or the Report of Foreign Bank and Financial Accounts. The Bank Secrecy Act requires eligible individuals and institutions to file an FBAR with the Treasury Department using Financial Crimes Enforcement Network Form 114. If you’re required to file an FBAR, you might also have to file a special form with the IRS, specifically Form 8938, Statement of Specified Foreign Financial Assets. Let’s take a brief look at this form and what it requires.

What is Form 8938?

This IRS form allows eligible taxpayers who have an interest in certain foreign financial assets to report those assets to the IRS. Often, but not always, if a taxpayer is required to file an FBAR, they’ll also need to file Form 8938.

When to File Form 8938

Form 8938 is usually filed along with the annual income tax return, typically due on April 15 each year. However, if a taxpayer isn’t required to file an income tax return for a particular tax year, then they don’t need to file Form 8938 for that year, either.

Who Must File Form 8938?

A covered individual or entity must file Form 8938 if they have an interest in a specified foreign financial asset and the value of that asset exceeds a certain threshold. There’s a lot of information here, so let’s break it down to better understand these requirements.

A covered individual or entity includes U.S. citizens, resident aliens of the United States, nonresident aliens who choose to be treated as resident aliens so they can file joint income tax returns, nonresident aliens who are bona fide residents of American Samoa or Puerto Rico, and specified domestic entities.

Specified domestic entities are closely held domestic corporations and partnerships with at least 50% of their gross income coming from passive income (or at least 50% of their assets producing or being held to create passive income) and certain domestic trusts with one or more specified persons or domestic entities as a current beneficiary.

Assuming a taxpayer is covered by Form 8938’s requirements, they must also have an interest in a specified foreign financial asset. In this context, “interest” means holding or disposing of a foreign account or asset that results in any income, gains, losses, deductions, credits, gross proceeds, or distributions that would normally need to be reported on an income tax return.

In addition to the above two requirements, there’s also a dollar value threshold for the foreign accounts and assets that must be reported. For individual filers (unmarried or married filing individually), the reportable assets or accounts for taxpayers living in the United States must have a total asset value of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. These thresholds rise to $100,000 and $150,000 respectively for married taxpayers filing joint returns.

Taxpayers living outside the United States have thresholds that are quadruple in amount. So, individual filers (unmarried or married filing individually) must have a total asset value of more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year. Married taxpayers filing joint returns have thresholds of more than $400,000 on the last day of the tax year and more than $600,000 at any time during the year.

Only after all three of these requirements have been met will a taxpayer usually need to file Form 8938.

Are There Any Other Tax Filing Requirements in Addition to Form 8938?

Possibly. Depending on the type of tax return that taxpayer is required to file, they may need to answer questions relating to their foreign bank accounts and other overseas financial assets. Examples of other tax forms that may ask for information about foreign financial accounts include Form 1041, U.S. Income Tax Return for Estates and Trusts; Schedule B (Form 1040), Interest and Ordinary Dividends; Form 1065, U.S. Return of Partnership Income; and Schedule N (Form 1120), Foreign Operations of U.S. Corporations.

All of this can be quite complicated, and the above discussion is only an overview of Form 8938 and the IRS tax reporting requirements for foreign assets and bank accounts. Failing to comply can result in penalties of up to $60,000 and even criminal charges. Therefore, it’s strongly recommended that if you think you might be subject to Form 8938’s reporting and filing requirements, you should consult with a tax professional.

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!

Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal.

Get a FREE Case Evaluation