Quick Guide to Late Filing, Amended Returns, and Late Payment Penalties

For taxpayers that end up owing taxes, April 15 is the deadline for most folks to file their return AND pay any taxes that are due on that return. If you don’t file on time, you potentially face one set of penalties. If you don’t pay by this date, there’s another set of penalties that applies.

If you weren’t able to pay your entire 2012 tax bill with your return or your extension, there’s good news: The late payment penalty isn’t nearly as stiff as the late filing penalty.

The reason for this is because the IRS is far more interested in knowing how much you owe rather than having you pay it on time. They rely heavily on people filing their tax returns in order to make the proper tax assessment (never let the IRS do your tax return for you!). Knowing how much you them starts a well define process, but when the IRS doesn’t know how much you owe, they can get pretty grumpy about it.

Of course, the more you pay with your tax return or extension, the lower your penalty and interest charges are going to be in the long run. This is because all of your penalties and interest are a percentage of the unpaid balance due after April 15th.

The penalty for not filing a tax return is typically 5% per month or part of a month. One day is considered “part of a month”. This penalty caps out at 25% of the unpaid balance. Do note that if you properly file an extension, and pay the balance with the extension, then there is no penalty. The extension form essentially gives the IRS the same bottom line “amount due” number that they are looking for, just without the math showing how you came up with it. With your extension, you must pay at least 90% of the balance due on the final return in order to avoid penalties.

As already mentioned, the penalty for not paying is far less than the penalty for not filing. This amount is one half of one percent per month (or part of a month).

If you are subject to both the non-filing AND non-payment penalty in the same month, the combination of the two penalties is capped at 5%. If you file your return more than 60 days after the April 15th deadline (or after the extension deadline), then the minimum penalty is the lesser of $135 or the entire balance due.

What should you do if you already filed your federal tax return and then discover a mistake? That’s where our friend 1040-X, Amended Return, comes in.

Amended returns allow you to correct errors, change filing status, add or remove income and deductions, and do all the other things you’d normally do on a tax return. In my tax representation practice, I’ve fixed countless tax returns that were prepared incorrectly, even by licensed tax professionals. So, if you have any doubt at all about the accuracy of your tax return, get a second opinion.

Like everything with the IRS, there are deadlines for filing an amended return. You must file 1040-X within three years of the date you filed the original return, or within two years of paying the tax if you owed. It is not uncommon for individuals to be owed a refund on an old return, but they can’t claim it because they caught it more than three years later. Don’t miss out on potential refunds by waiting too long to amend.

Amended returns must be printed and mailed — they cannot be electronically filed. As such, it can take two to three months for the IRS to process these returns. If you are working with a Revenue Officer on an existing tax debt situation, the Revenue Officer will usually request that you file original and amended tax returns directly with them for faster processing.

I hope that this quick primer on late filing, penalties, and amendments will help save you some money. In summary:

  1. File a return, or at least an extension, by April 15 every year.
  2. If you owe, or expect to owe, pay as much as you can by April 15th in order to minimize penalties.
  3. File amended returns within three years of the original due date in order to avoid losing potential refunds.

How the IRS views your cost of living

In general, the IRS appears to take a cynical view at people’s cost of living, and can be fairly judgmental about how we spend our money. This cynicism obviously increases dramatically the moment you have an outstanding tax debt.

Before delving into specifics, I’d like to make two points regarding the IRS personnel you’d normally be discussing your personal finances with. First, IRS field personnel such as Revenue Officers and Settlement (Appeals) Officers typically have higher salaries than the IRS National Standards for the areas in which they are assigned. In other words, even as public servants, they make more money than their own standards set for a middle class lifestyle.

Second, keep in mind that these people are public servants. In fact, most senior IRS personnel are lifetime bureaucrats, meaning that they have never had to work in the private sector. Some senior Revenue Officers, Revenue Agents (Auditors), and Settlement Officers have actually never worked a day in their lives outside of the government, and don’t even have finance or accounting backgrounds.

Combining these two things, you can see that it’s very possible that the IRS person you are explaining your finances to has an interesting view on the world: They’ve always made an above average salary, and lack any personal experience running a business or dealing with the reality of private sector employment. This skewed perspective becomes readily apparent in talking to senior IRS personnel if you’re a middle class taxpayer or “mom and pop” small business owner.

Now, with that said, let’s talk about the IRS National Standards. The government uses national and local cost of living data to establish norms for the cost of living across various categories. Some cost of living standards are the same for everybody, while others, such as housing and transportation, are adjusted by region.

These standards are based entirely on the government’s definition of a middle class existence. In other words, for purposes of determining how much of your income the IRS expects you to fork over in monthly payments on a tax debt, they only allow you to claim a middle class lifestyle.

It is not uncommon for me to have a conversation with a client where I’m explaining this, and they get frustrated. When you’re in IRS collections, they don’t like seeing that you’re making $1500 per month car payments on a Hummer and a Corvette, or have two people living in a 4200 square foot home. If you are used to a certain lifestyle, you may not quite understand why these things would piss off the government when you owe back taxes.

The main thing to remember is that the IRS National Standards are calculated from a middle class lifestyle standard. While you may consider yourself middle class, statistically you may in fact be upper-middle or even upper class. Keep in mind that the median household income in the US is about $52,000 per year. This means half of households make more, half of households make less. This number, by definition, represents middle class America, and is what the IRS National Standards are based on.

If you owe the IRS a substantial amount of money, and are living above the IRS National Standards, it is possible to negotiate up to a 12-month “stay of execution” against you with IRS Collections. This time period is designed to allow you to reduce your lifestyle to a middle class existence. This would include downsizing to a smaller home, selling cars, boats, and recreational vehicles, etc.

It wasn’t until March 2012 that the IRS finally allowed taxpayers to claim their minimum credit card and student loan payments as allowable expenses. At the same time, the IRS made a major change in how an Offer in Compromise is calculated, drastically reducing the amount they expect you to fork over in a reduced settlement situation. These changes have made literally hundreds of thousands of tax debtors now eligible for the OIC program that previously were not, so it’s worth looking into.

When it comes to discussing your standard of living and associated expenses with an IRS field agent, understand that you are both going to be frustrated, and for very different reasons. If you live a higher than middle class lifestyle, I would definitely suggest having a representative work on your behalf with the IRS, not only to avoid you frustration with these types of conversations, but also because a representative is going to be more knowledgeable regarding what expenses can be negotiated for inclusion with the IRS.

[Free Book] Get the best-selling tax resolution book…free

A few hours ago, I learned that Amazon has a nifty little feature in their Kindle publishing system for authors that lets us offer our books for zero cost during any 5 day period once per quarter.

My book, Tax Resolution Secrets is both the #1 and #2 best-selling tax resolution book on Amazon (#2 is the Kindle ebook edition, #1 is the paperback). In order to celebrate this little achievement, I’d like to do this 5-day free offer that Amazon allows authors to do.

So, starting today and running through Sunday, you can download the Kindle edition of Tax Resolution Secrets at absolutely no cost. You don’t even need to own a Kindle device in order to read it — there are Kindle apps for most smartphones, and even a Mac and Windows application as well.

If you’re in a position where you still owe tax debt, and simply can’t afford to hire professional representation, then please take advantage of this. Even if you can afford representation, or already have hired representation — still read this book. It outlines step-by-step what you can do yourself to resolve your tax problem, and will guide in what your representative SHOULD be doing for you if you have one.

The only thing I ask is that you please write a review of the book for me on Amazon. I’ll be working on the second edition here in a few months, and your feedback can help improve the book for everybody else.

To download the book, as well as submit a review, just visit Amazon’s page for Tax Resolution Secrets Kindle Edition.

If you need to set up a payment plan, release a wage garnishment, apply for an Offer in Compromise, release a lien, reduce your penalties, or anything else having to do with IRS Collections, then this book has a chapter for you. Please check it out, and then let me know what you think by writing a review on the Amazon page.

Are you ready for IRS collections season?

June is an interesting month at the IRS. It’s the month that marks the transition every year for the IRS from tax return processing season to tax collecting season. If you filed your 2011 tax return on time and had a balance due that you didn’t pay, then you’re now entering (or re-entering) the collections process.

If you had a 2011 tax balance, then you’ve probably already received a bill, and it’s about time that a lien gets filed if you haven’t paid the balance yet. If this is your first rodeo with the IRS, then you’re in for a not so fun ride. To learn what to expect, I suggest you read my article on How the IRS Works Collections Cases.

If 2011 brought you an increased balance on top of an existing tax debt, then you’ve already been through the drill. With return processing season finishing up, IRS personnel that were removed from other functions are now starting to be cycled back into their normal job functions. Many of these personnel are cycled from ACS, the IRS’ centralized collections agency. Now that they are going back to their normal jobs, the collections process will pick up.

I would highly encourage you to learn about your rights as a taxpayer (yes, you have rights), and to look at your options as soon as possible. DO NOT just ignore your tax debt, it doesn’t just go away. It is best to deal with it at the ACS level, and long before the IRS starts to consider enforced collections action against you, which could include levies and wage garnishments.

At TaxHelpHQ.com, we have many resources to help you resolve your tax debt situation. Be sure to look at the articles covering your specific situation, and take a look at our toolkits that may be applicable to your situation.

To fixing your tax issues,

Jassen Bowman, EA
TaxHelpHQ.com

Understanding the IRS Trust Fund Recovery Penalty

One of the most common points of confusion among business owners that I discuss tax problems with has to do with the Trust Fund Recovery Penalty. I’d like to explain what “trust fund” taxes are, where they come, how the IRS holds somebody personally responsible for them, and, most importantly, what you can do about them. This is probably going to be a long article, so you might want to get comfortable.

What Are “Trust Fund” Taxes?

“Trust fund” taxes are any tax that is collected by you, on behalf of somebody else. There are many different trust fund taxes, but the two most common are sales taxes and income withholding taxes.

Most states are very aggressive about collecting sales taxes (North Carolina will physically arrest you for not paying them). Technically speaking, sales taxes are owed by the person making the purchase. However, because they are collected at the point of sale, they are a trust fund tax. This is because the person paying them (e.g., your customer) is “trusting” you to hold that tax money and pay it on their behalf. When you receive sales tax money from your customers, you are supposed to hold it in a separate “trust” account, and then hand it over to the tax man when you it is due (usually monthly, in most states/counties).

Income withholding taxes are also “entrusted” to you by your employees. Specifically, these are income taxes you withhold from paychecks, and the employee’s half of Social Security and Medicare that you take out of their paycheck.

Even though the employee never sees the money that’s taken out of their paycheck, they expect it to exist, somewhere. That somewhere is a trust account (generally your payroll account) where you save that money up and then pay it to the government every two weeks or monthly.

Payroll taxes are the single biggest enforcement concern to the IRS. Part of running a business and having employees is “exercising ordinary business care and prudence”. This is fancy lingo enshrined within the tax code that basically means the IRS expects you to exercise common sense in regards to running your business. Part of this common sense is to understand that your employees cost you more than just the paycheck you actually write them, and if your business doesn’t have the revenue to support those extra costs of having employees, then you shouldn’t have the employee.

So, to recap, trust fund taxes are taxes that are owed by other people, such as your customers (sales tax) and employees (income tax, Social Security, and Medicare withholding), but are held by you for actual payment.

Trust Fund Recovery Penalty Personal Assessment

As mentioned above, the collection of payroll taxes is the single biggest enforcement priority for the IRS. Why? Because those taxes are the actual money that funds the Federal government on a day to day basis. Payroll taxes are the Federal government’s biweekly and monthly paychecks from all of us that are working.

Because this is such an important part of funding government operations, trust fund taxes are the only taxes subject to an extremely powerful collections tool. This tool is special to the IRS, because for them, it does not require going to court. This tool is commonly referred to as “piercing the corporate veil”, and means that the government can come after not just your corporation, LLC, or partnership to collect the tax, but can come after individual corporate officers and try to collect these taxes from them personally.

The IRS is required to follow a procedure before sticking you personally with this tax bill. The process is all administrative, meaning that it is done by your Revenue Officer, and does not go to court, never seen by a judge, and no lawyers are involved.

In order to assess the trust fund against you as an individual, the IRS must determine two things:

  1. That you were the person within the company responsible for paying over the trust fund taxes.
  2. That you were willful in not paying them.

The responsible person is generally considered to be the person in the business that manages the finances, calculates payroll, and signs the paychecks. Even if another employee, such as an office manager or bookkeeper, actually does the physical work of crunching payroll and printing the checks, the responsible person is generally the corporate officer, LLC member, or manager that delegated that task to the employee. For most small businesses, the responsible person tends to be the owner. Also, keep in mind that multiple people can be held responsible.

The IRS must also demonstrate that the responsible person willfully failed to pay the trust fund taxes. What this means is that the person made a conscious decision to use that money for another purpose OR failed to make sure the money existed in the first place. In general, the IRS will look at what other bills got paid instead of the payroll taxes, and use that as sufficient evidence that “willful failure to pay” occurred.

The IRS uses a 4-page interview form to ask all the questions to determine who is “willfull” and “responsible”. This is called a Form 4180, and must be filled out by the IRS employee by telephone or in person. Your representative may use industry lingo and refer to this as a “4180 interview” for short — this is what he is talking about.

After a 4180 interview is conducted, the Revenue Officer will make a determination, and issue an IRS form called a Letter 1153, which is usually accompanied by a Form 2751. The Letter 1153 is the document proposing the assessment of the trust fund against you personally, and the Form 2751 is the form you would sign to skip the appeals process and simply accept the assessment.

In some cases, part of the resolution plan worked out by your representative will include simply accepting the assessment, in exchange for something else, such as a payment plan. However, unless your representative explains that it’s part of the plan, NEVER SIGN A FORM 2751!!!

If you did not file an Appeal, the Letter 1153 goes into force, and the trust fund is assessed against you after 60 days. Appeals will be discussed below.

If the Trust Fund Recovery Penalty (the term for the individual assessment) is tacked onto your personal taxes, then you owe it just like you would personal income taxes. At this point, the IRS can come after your personal paychecks, personal assets, personal bank accounts, etc.

Resolving Trust Fund Recovery Penalty Cases

Resolving Trust Fund Recovery Penalty cases can be complicated. The first route usually taken by a tax professional that you hire to help you with this is to fight the “responsible” and “willful” determination. In a larger company, there is often one person responsible, and another willful, but neither is both.

An example of this is a company with a CFO or comptroller that makes financial decisions for the company, and might make the decision to pay rent, utility bills, paychecks, etc., instead of the taxes. However, this person is not the individual that is actually responsible for calculating payroll, signing paychecks, and performing other payroll related functions. In this case, there might be nobody that fits both the “responsible” and “willful” criteria.

Unfortunately, in most small companies, the person that is responsible and willful is generally the same person, usually the business owner. In the case of a small business owned by a married couple, it is fairly common for both spouses to be involved in the financial decision making for the business, which usually makes both of them responsible and willful.

Basically, the smaller the business, the more likely it is that one person, and only person (the owner), is going to get whacked with the Trust Fund Recovery Penalty.

In some cases, the IRS may be willing to delay the assessment of the trust fund against a person. In order to do this, you’re going to need to agree to an extension of the maximum legal length of time that the IRS has for making the personal assessment, which is done by signing a Form 2750 (do not confuse this with Form 2751!). In exchange, the IRS will often accelerate the granting of a payment plan to the business itself, based on the theory that the business will pay off the trust fund over time, and therefore make it pointless to hold you personally responsible.

If the assessment can’t be avoided, then it becomes a personal tax matter. At this point, the other resolution options normally available for personal tax matters come into play, such as payment plans, reduced settlements (Offer in Compromise), and uncollectible status. One thing to keep in mind is that trust fund taxes CAN NOT be eliminated in bankruptcy.

Conclusion

This has been a long article, and probably a lot to digest. However, it explains the entire process of trust fund recovery penalty assessment, where it comes from, and what you can do about it. Hopefully, if you are facing this particular IRS demon, you now have a better understanding of how you can fight it.

While most tax problems really can be resolved on your own, Trust Fund Recovery Penalty cases are one of the few situations where I highly encourage people to obtain professional representation. If you are in this situation, please get in touch with me to to discuss your case.

Stop Hitting Yourself: The Conundrum of IRS Collections

Note: This is a guest post written by an attorney friend of mine that formerly worked in the tax resolution industry. He has asked to remain anonymous for the time being, but wanted to share some personal insights about the IRS Collections process.
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For those that don’t work much with the Collections Division of the Internal Revenue Service, there is a stigma attached to both the methods and people involved. On one side, the IRS is seen as bullying taxpayers, especially the “little old ladies” and the “working men.” On the other side, the taxpayers are seen as being inadequate business people and as “stealing” from the government. Is the IRS an evil organization created by bureaucrats to systematically take the wealth of it’s citizens? Are the individuals caught up in the system evildoers needing to brought to justice? Both statements are a little extreme.

In all reality, the Collections Division of the IRS does not care where the money goes. Sometimes, it does not even care if it gets it. It, like many administrative agencies, seems more caught up it’s own procedures. Anyone having worked with the IRS might wonder if they are on a fool’s errand, considering how many of the installment agreements entered into by the IRS default.

The Collections Division is concerned primarily about getting taxes that should have been paid, but were not (a.k.a. “the tax gap”). These can be personal income taxes, employment taxes, trust fund recovery penalties, corporate income taxes, etc… The majority of this collections is done in a civil (i.e. non-criminal) setting. Within this context, there are common dilemmas that rear their heads every day, especially with regards to employment (withholding and FICA) taxes.

Although there are many reasons for a business to fall behind on its employment taxes, a common scenario is as follows: Small business owner falls on hard times; bills must be paid, but there is not enough to go around. The IRS relies exclusively on voluntary compliance (at least at the outset), as do most creditors. However, the IRS probably has more debtors than any other creditor in the country. As such, they cannot detect and move fast enough to put the strong arm down on the taxpayers. Because there is only so much to go around for the taxpayer, they pay the bills that need immediate attention (i.e. payroll, rent, utilities) and the employment taxes go unpaid. They do this because their business is their only livelihood and paying the necessary bills is the only way to keep it a going concern and have a possibility of paying the back taxes.

After first missing a payroll tax payment, an amazing thing happens…nothing. The sky does not fall, the business is not overrun by men in black suits; there is not so much as a phone call or notice in the mail. However, of course, there a penalties and interest looming on the loan that that the taxpayer is taking from the federal government.

As always, these scenarios do not happen in a bubble and there are many other stresses and concerns for business owners going through a difficult time. To make matters worse, many small business owners are not sophisticated enough to run their companies from a “business” standpoint. They were simply good at what they did (e.g., plumbing, auto work, etc) and decided to start a business for themselves and their family. After missing a tax deposit and having no immediate repercussion, the taxpayer, many times, will continue on with their lives, trying to ignore the failure. If times are still tough, they will continue to miss tax deposits. Before they know it, they are operating the business at a loss and are racking up a massive tax debt (with both business and personal consequences). All of this happens without any word from the IRS.

At some point, oftentimes up to two years later, the taxpayer may begin to receive correspondence. Like a jilted ex-romance, the IRS starts to demand attention. At this point, it is only in writing. Having witnessed this first hand on many occasions, the taxpayer may read the first couple of notices and may even call the IRS with questions, but many times the problem goes unsolved, usually because the taxpayer does not have the money to handle it (especially with the penalties and interests that have been and will continue to be assessed). Sometimes, they are unable to reach anyone at the IRS who might be able to help them. Sometimes they do not even receive the notices. For any number of reasons, there are millions of cases that do not get handled by the notices mailed to taxpayers and, eventually, the cases end up “in the field” with a Revenue Officer.

If the taxpayer can catch the case in the “ACS” (Automated Collection System), they may be able to get on an installment agreement by providing a minimal amount of information. This is, of course, assuming that the IRS employee on the other end of the phone knows what they are doing, is friendly, and knows how to properly work the IRS’ proprietary computer system. More often than not, though, the people on the other end of the line are unhelpful, unknowledgeable and downright rude. To get into a repayment plan, the taxpayer must be current with all of their tax returns and tax deposits and must be able to prove that they are capable of repaying the debt while remaining current (there are some exceptions to this depending on the type of tax and amount owed). Many times, the IRS contact on the phone does not want to deal with the taxpayer (who can be surly and argumentative) and the phone conversation ends with both parties frustrated and no resolution intact. All of this is assuming that the taxpayer was able to get through to somebody before hanging up because they were on hold for longer than half an hour. Keep in mind that these people are small business owners and do not have the time necessary to deal with the IRS.

If the taxpayer is unable or unwilling to call the IRS, and even if they do but receive erroneous verbal advice, they may start trying to pay the back taxes without any sort of installment agreement. While this is in the spirit of what the IRS is hoping, many times it is done improperly and with money that should be being used to stay current. When the taxpayer does not remain current because they are paying off old debt, they simply create new quarters of debt that then get kicked into collections. The taxpayer who was hoping to climb out of the hole has only dug it deeper. (At this point, you should start to realize that this process is filled with pot holes and ways to make the situation worse).

If things continue to go unsettled, the taxpayer’s case is then sent to into the “field” and is assigned to a Revenue Officer. The Revenue Officer’s job is somewhat confusing. He or she must attempt to bring the taxpayer into compliance, get the debt repaid, follow due process procedures, protect the government’s interest, inform the taxpayers of their rights, please their group manager, withstand venom and vitriol, show sympathy where it is needed, climb the GS ladder, only work 40 hours a week, and represent an organization whose purpose may be, at some point, to close down the business of the taxpayer. They also might want to be pretty knowledgeable of the Internal Revenue Manual in case they run into a tax attorney along the way.

So, the Revenue Officer receives the case file and is set to make a visit to the taxpayer. If the taxpayer is not current and compliant, the conversation might not be a pleasant one. Many of the Revenue Officers (not all) use intimidation, lies, exaggerations, unreasonable deadlines and anything else that may brings results. On the flip side, some Revenue Officers are professional, reasonable and accommodating.

Let’s say the taxpayer wants to pay the debt back. However, the business is losing money and they are not current. The business is automatically not eligible for an official installment agreement (there may even be some tax returns outstanding). The Revenue Officer is put in a difficult position. The Revenue Officer will put the taxpayer on a deadline to get the missing returns in, for potential collections information, and make a demand that the taxpayer get current with its tax deposits.

As stated earlier, these situations do not happen in a bubble. As such, the massive amount of information that has just been requested by the Revenue Officer dauntingly hangs over the taxpayer’s head along with everything else that has been causing the business to fail. Even further, the taxpayer does not realize the deadline that has been set comes with very real consequences if it is missed (they have been told about this, but for some reason many taxpayer’s seem to call the government’s bluff).

So, the Revenue Officer has the case, has visited the taxpayer, has put them under a deadline for information, and has demanded that they get current. If the taxpayer cannot get current or if they miss the deadline for information, the Revenue Officer may move forward with “enforced collections action.” This can include bank levies, accounts receivable levies, etc… If the due process procedures have been followed (the notices mentioned earlier), these levies are legal. However, if the levy hits an operating account for the business, the government has just taken away any hope of the business being current. On top of that, the money taken does not get applied to the most recent quarter of taxes, but the oldest. Even further, the money is applied in the government’s best interest. Not only does the business lose hope of getting current, it loses its operating capital.

Any professional who has worked with taxpayers and Revenue Officers knows that, at this point in collections, the blame shifting begins. The Revenue Officer will not take any responsibility other than stating that it was within their right and that it was their job. It was the taxpayer’s fault for not following the rules of a game they did not understand in the first place. By levying, the Revenue Officer has sought to protect the government’s interest and to punish the taxpayer.

If the taxpayer is lucky enough to survive this, they may get hit again, depending on what information is outstanding and how much contact they have with the Revenue Officer. If things do continue in this manner, the IRS ends up kicking a taxpayer while they are down and the Revenue Officer begins assessing the taxpayer personally for the “Trust Fund” portion of the business debt (which may happen even if the taxpayer does attempt to pay the tax debt back).

Now, there are procedures in place to stop the IRS from causing a “hardship” for taxpayers and even a separate office within the IRS (“the Taxpayer Advocate”) to help with these situations, but they often move slow and many taxpayer’s do not know that they should contact them or what arguments to make. Oftentimes, proving a hardship with documentation is difficult and time consuming. In fact, the Taxpayer Advocate can only make “recommendations” to the IRS and does not have any real power. Even further, it seems to many that forcibly taking money from a business is, in and of itself, something that causes a hardship. If the taxpayer does know to file an appeal on the enforcement action, these appeals are only heard from a procedural perspective and rarely include equitable actions.

As may be clear from this summary of a collections case, the process is filled with many opportunities for the taxpayer to fall on bad terms with the IRS, including the method of paying taxes in the first place.

Although many flaws are going to be inherent in an administrative agency, it seems that the IRS has caused many of its problems (and, therefore, taxpayers’) by handling the issue of taxpayer delinquency in an inappropriate way. It is the hopes of many practitioners that the speed and efficiency of the IRS will be improved by moving employers on to the Electronic Federal Tax Payment System.

The consistent argument by any person who works for the IRS is that it is the taxpayer’s responsibility to pay taxes, and that, if they don’t, they deserve everything that comes at them. This may be true, but, to a certain extent, taxes are very different than any other governmental obligation. On top of that, the penalties and interest that accrue on an account (which are, conceivably, meant to prevent and punish late payment of taxes, although taxpayers rarely know the penalties exist to the extent that they do), are astronomical in many cases. The notice/penalty system currently in place to prevent and punish delinquency, in many ways, encourages the very thing it seeks to eliminate, and also wastes the very resources that taxes provide.

As can be seen by the proliferation of “Tax Representation” firms across the country, the problem with IRS collections is very real. The fact that there are businesses and professionals using the fear of the IRS to profit from the taxpayers means that they taxpayers now have to face attack from multiple sides. Oddly enough, the IRS controls the licenses held by Enrolled Agents and the Central Authorization Numbers of Attorneys and CPA’s. This, however, is a whole other issue.

Top 5 IRS Enforcement Priorities For 2012

Every year, the IRS rolls out new initiatives to make sure everybody is complying with the tax laws. While certain things, such as frivolous tax arguments, are always enforced, the IRS shuffles personnel around to enforce compliance with certain parts of the tax code based on the trends they identify. Five of those trends are discussed here.

1. Foreign accounts and assets. If you have money or assets overseas, the IRS wants to know about it. If you have more than $10,000 in a foreign bank account, you’re required to file an annual disclosure statement with the Treasury Department. In addition, the IRS is now requiring foreign banks to enter into information sharing agreements, or else have 30% of payments transferred to them from the U.S. withheld to pay potential tax bills. The failure to disclose your overseas assets can result in significant penalties, and potentially criminal prosecution.

2. Payroll taxes. The majority of my clients over the past four years have been small businesses that owe back payroll taxes to the IRS. The single biggest emphasis of enforcement within the employment tax arena has to do with taxpayers that pyramid their employment tax liabilities, meaning that they owe money, and continue to accrue new liabilities each quarter. The IRS is also heavily targeting the owners of S-corporations that don’t pay corporate officers a fair wage (and thus payroll taxes0, but rather take nothing but distributions (which are not subject to payroll taxes).

3. Gift tax audits. Many people don’t realize that giving cash gifts to their friends and family can have tax consequences. Every person has a lifetime cumulative exemption from gift taxes, and there are also annual limits. The IRS has actually started to electronically examine property transfers based on public records in order to ferret out people that may owe gift taxes.

4. Automated Substitute for Return Program. Section 6020(b) of the Internal Revenue Code allows the IRS to file a tax return for you if you fail to do so. They prepare this Substitute for Return (SFR) based on information they have on file, such as W-2 and 1099 information sent to the IRS by your employer. A computerized system now prepares these returns, and the IRS has asked Congress for the past several sessions to make it a felony when you fail to file a tax return for three out of five straight years and the tax exceeds $50,000. This hasn’t made it’s way through Congress yes, but expect it to after the election year is past.

5. Schedule C audits. The IRS just spent several years and millions of dollars to analyze the tax returns of small businesses that file a Schedule C (sole proprietors and self-employed individuals). Based on this analysis, they have developed a set of criteria for attempting to determine who is either under reporting self-employment income, or overstating their expenses. The IRS believes that the biggest piece of the “tax gap” comes from the self-employed, and they’re probably correct in that assumption. They are now heavily scrutinizing Schedule C’s attached to personal income tax returns and increasing audits against self-employed folks that raise any red flags.

Knowing what the IRS is focusing on can help you make decisions about how to handle your own tax situation. After reading this, perhaps you’ll consider forming a corporation, partnership, or LLC in order to run your business, rather than operating as a sole proprietorship. Or perhaps you will give consideration to paying yourself a salary out of your S-corp, or think twice about how you send money to an overseas account.

Never forget that, no matter what, the tax code doesn’t require you to pay one single penny more to the IRS than you have to. Even if you are the subject of one of these increased enforcement measures, you still have rights, and if you did everything right, then you have nothing to worry about. If something somehow did fall through the cracks, you still have rights, and their are ways to get things straightened out — never forget that!

Until next time,

Jassen Bowman, EA

How The IRS Works Collections Cases

When a taxpayer owes money to the IRS, they enter the IRS Collections system. The IRS has a very detailed process that they are required by law to follow when it comes to collecting tax debts. Knowing a little bit about how this system works and how IRS collections personnel are required to act can be very beneficial to you.

There are two distinct collections units within the IRS. The first is the Automated Collection System (ACS), which consists of computerized lien filings, automated send out of bills and notices on set intervals, and the call center agents that perform basic collections functions. It is important to understand that the people you’re talking to on the phone at ACS are generally not very highly trained individuals, and have very limited authority. They are trained to do their jobs, and that’s really about it. In fact, speaking with ACS representatives is on par with speaking to a customer service representative at your cell phone provider, and can be equally as frustrating if you get somebody that just can’t wait to go home for the day.

The other distinct collection unit within the IRS is the Collection Field function. Field agents, called Revenue Officers, are located in cities and towns across the country. Rural Revenue Officers may actually work from home and have a field territory covering hundreds of miles, while thousands of agents in big cities have extremely small territories and may hardly ever leave their Federal Building.

Revenue Officers are required to do many things in order to “resolve” a tax liability placed under their control. They are required, by law and regulation, to collection certain information, verify things through whatever means available, and close out cases. Over the course of the past year and a half or so, I have personally noticed a significantly reduced emphasis on simply reducing the number of open cases, and instead increasing cash collections through whatever means necessary.

In order to demonstrate to IRS management that they are doing their jobs properly, here are some of the biggest actions that Revenue Officers are required to perform (and document in their files):

  • Make sure you’ve filed every past tax return you should have (and if not, make you do so)
  • Verify that you are making payments on time and in full for any new taxes you have come up, such as employment taxes or estimated tax payments (and if you’re not, making sure that you do)
  • Collect detailed financial information from you concerning your income, expenses, assets, and other debts
  • Based on that financial information, determine sources of money from which the government can collect on the tax debt (this can include forcing you to apply for loans against property with equity or tapping into retirement accounts)
  • Place you into whatever program you qualify for in order to address the tax liability, such as a monthly payment plan, reduced settlement, or even giving you a grace period of a year or two in which they close your case (but you still owe the debt, and it grows)
  • Make sure you don’t accumulate any new tax debts
  • Physically visit your home or business at least once in order to determine if you’re hiding anything (free and clear Hummer sitting in the barn — it’s happened)
  • If you are a business and owe employment taxes, determine whom to assess the Trust Fund Recovery Penalty against on a personal level, and do so
  • If you are not meeting deadlines or they believe you are stalling, hiding money, or have an ability to make payments and you’re simply not, then to issue levies and take money from your bank account, paycheck, customers, etc.

All IRS collections employees keep meticulous notes whenever they talk to anybody (hint: so should you!). It’s not uncommon for an IRS Collections file to be hundreds of pages of material, even for what might seem like a relatively small case.

All in all, don’t forget that the IRS Collections division has one priority: To collect money. Hopefully, having a little bit better understanding of how they work cases will help you in resolving your own IRS matters.