Penalty Abatement Statements – A Humorous Example

Taxpayers have the right to request relief from penalties assessed by the Internal Revenue Service. The IRS sets very specific criteria for the granting of penalty abatements. It can be very difficult to demonstrate that a taxpayer’s circumstances meet the criteria for penalty relief. Most of the time, we will request a written statement from the taxpayer explaining the circumstances that lead to the accrual of their tax liability, and then use that to create our own penalty abatement request that fits to one of the IRS criterion, cites case law, etc.

Most of the time, taxpayer’s have some reason for not paying their taxes that ties back to not having the money to do so. Lack of funds does not meet IRS reasonable cause criteria, but the circumstances behind the lack of funds sometimes can be reasonable cause.

Occasionally, the taxpayer’s explanation for failing to pay their taxes doesn’t leave us with a lot to work with. On rare occasions, we receive an explanation that is quite humorous.

This example is from a taxpayer that elected to continue NOT paying his taxes because it was financially convenient. With a struggling business, a divorce, and alimony and child support to pay, the taxpayer was experiencing financial hardship. He wrote:

I financed [business] shortfalls with credit card advances and soon I had unsupportable credit card debts and many other expenses…

As things started to turn around for the taxpayer, he continues:

In early 2001 I noticed that I somehow had enough money to pay my bills. Later, I discovered that I had inadvertently neglected to call in the 941 payment [for fourth quarter], even though the check had been generated by the accounting program. I was consternated but simply didn’t have the money to make good.

This is a common reason as to why people miss a Federal Tax Deposit, often several in a row. They then try to make it up when they can. However, in this case:

I expected a notice from the IRS daily, but nothing happened and when it was time for the next 941 payment I thought, “This is the kind of tax relief I need right now.” As an expedience, I didn’t pay the 941’s for the next several months and used the respite to get back on my feet financially.

Doing this enabled the taxpayer to get current with his vendors, credit cards, etc. He skipped his payroll tax payments for 7 months, then started making them again. By this time, he was on a debt management plan for the rest of his debt, and the business was doing better. However, the taxpayer recognized that this course of action had consequences attached.

Again, the initial non-payment was an unintentional oversight. However, it was so useful in preventing bankruptcy, staying in business, and becoming solvent that I didn’t make another payment for 7 months. By that time I was in good shape and haven’t had serious problems since. I’m grateful to Uncle Sam for the loan, though it is a little like borrowing from the Mafia. However, I’m ready and able to make restitution.

Needless to say, this was an exceptionally difficult penalty abatement for us to craft, and we obviously did not submit this in the form submitted to us by the client. This is actually still an active case, and we are awaiting IRS review of our actual abatement request.

This example, while humorous, illustrates how taxpayers can get in further trouble with the IRS after an initially unintentional oversight. It also illustrates the choices that business owners are having to make in order to stay in business.

5 Simple Steps To Achieving Mitt Romney’s Tax Rate

Republican presidential candidate Mitt Romney has been getting blasted for months about the fact this effective tax rate is so incredibly low. As an Enrolled Agent, I find the discussion surrounding Romney’s tax situation to be particularly interesting, because there isn’t a single taxpayer on the face of the Earth that personally wants to pay more taxes than they have to. If such a strange person does exist, there is no government that won’t happily cash your check (in fact, the U.S. government happily accepts credit cards for donations).

I’d really like to get on the phone with all these reporters and news anchors blasting Romney for his tax reduction strategies. I’d bet $100 that you can’t find one that would, themselves, personally agree to pay more taxes than they need to. Yet, they will happily ridicule somebody else for doing so.

Actually, I need to back up, because there is actually one person I know of that voluntarily pays more taxes than he’s required to. Guess who that is? Mitt Romney.

That’s right. In order to keep a campaign promise earlier this year stating that he has paid at least 13% in taxes each of the past 10 years, Mitt Romney voluntarily failed to claim $1.75 million in charitable contributions on his 2011 Form 1040. In other words, he only deducted $2.25 million of the total $4 million he actually donated to non-profits. If he had claimed the full deduction, his 2011 effective tax rate would only have been 12%.

Mitt Romney’s strategy for only paying an effective tax rate in the low teens is perfectly legal.

The Internal Revenue Code requires every American citizen, at home or abroad, to pay taxes on all income, from whatever source derived, whether that money is made in America, or overseas. The law requires everybody to pay their mandatory tax amount, and not a single penny more. The tax laws are the tax laws, and the law is the same for every citizen. Just because you are rich does not magically change the tax laws (just ask Wesley Snipes, serving three years for tax fraud).

Some people complain that the tax code favors the wealthy. This simply isn’t true. The tax code provides equal opportunity for all. Equal opportunity to minimize, but also equal opportunity to get screwed.

What does this mean, and and how can you take advantage of it?

First of all, realize that Congress typically makes thousands of changes to the Federal tax code each and every year. Just about every bill passed has some minor tweak to the tax code associated with it.

Second, understand that the tax code is used by the government as a tool for social engineering and economic stimulus. This isn’t a secret — it’s a well documented fact. Certain elements of the tax code exist for the sole purpose of wealth redistribution, such as the Child Tax Credit and Earned Income Credit, both of which are social welfare programs that the government simply chose to implement via the income tax system. Other elements of the tax code exist in order to encourage small business investment, such as tax credits for research and development and domestic production activities. Other pieces of the tax code are intended to attempt to create jobs, such as payroll tax credits for hiring veterans or displaced workers.

The secret behind Mitt Romney paying such a low effective tax rate has to do with his income sources. As I write this, I’m looking at Romney’s 2011 Form 1040, page 1. This return lists the following major income sources and amounts:

  • $4.1 million in taxable interest
  • $3.2 million in taxable dividends
  • $10.8 million in capital gains
  • $2.8 million partnership and trust income

Romney’s tax on all this income isn’t figured using the regular tax tables, and not just because the numbers don’t go that high. Currently, his interest and partnership/trust income is taxed at normal income tax rates, but the $14 million in dividends and capital gains are taxed at much lower rates, currently only 15%.

That 15% tax rate is scheduled to expire at the end of 2012, as part of the expiring Bush tax cuts. However, the U.S. has a long history of creating special reduced tax rates for dividends, capital gains, and other forms of investment income, and there is a perfectly valid reason for doing so: Investment income derives from putting your money to work within the company, which generally creates jobs.

Economic investment has long been the primary source of jobs within modern economies. Without investment, most economies would grind to a screeching halt (been to Greece lately?). In order to encourage people with money to put that money to work within the economy, rather than just saving it under a mattress, governments offer incentives for investment. One such incentive is a reduced tax rate on the investment earnings. Those investments stimulate the economy, create jobs, and keep the economic engine churning for the rest of us. It’s a very critical component of keeping a modern economy operating.

When I flip to page 2 of Romney’s 1040, I see $5.7 million in itemized deductions. Looking at his Schedule A, I can see $4 million in charitable donations alone, of which he only claimed $2.25 million. He paid $2.6 million in tithing to his church. He also deducted $1.5 million in state and local taxes he paid.

Romney could have claimed the entire $4 million in charitable donations. I also see that he claimed absolutely zero business expenses on his Schedule C, and thus paid income tax and self-employment taxes both on every dime of speaking fees he collected.

I’m not going to review every line of this 104 page tax return. What becomes readily apparent, however, is that a tax minimization strategy is possible for everybody, no matter how much or how little your income. I’ll recap the “Mitt Tax Reduction Strategy” in a short list of steps, in case you didn’t pick them up through the course of this article:

Step 1: Own and operate your own small business.
Step 2: Invest in dividend-generating securities.
Step 3: Invest in activities that will produce capital gains.
Step 4: Invest in tax-free investments, such as municipal bonds.
Step 5: Donate a large percentage of your income to non-profit organizations.

Not only does this strategy work for rich people, it works for working class stiffs like us, also. If you’re self-employed, you get to write off an amazing array of things that people that work for other companies can’t, including deductions for business use of your home and your vehicle. Everybody can invest in securities that provide tax-free interest income, generate dividends, and produce capital gains. And everybody can donate to their favorite worthy causes.

Even people earning $30,000 per year can make this sort of thing happen: I’ve not only seen it with clients, I’ve done in myself.

No matter how much or how little money you make, the tax code can either work for you, or against you – the choice is really up to you. Prudent investment management, careful personal financial management, and proactive tax planning can all work together together to drastically reduce your effective tax rate, also.

To schedule a tax planning appointment, feel free to contact me.

Where did your tax debt come from?

When I look back on how I ended up nearly 100 pounds overweight a few years ago, I really can’t identify how it happened. I definitely remember hitting 180 lbs and thinking, “Hmmm, I’ve gained a little since I left the Navy.” But when did that become 260 pounds? I honestly don’t remember.

Tax debt can be very similar, especially payroll tax liabilities for small business owners. For individuals, it’s a bit more shocking, since tax time is generally only once per year, rather than four (or even more). The reality, however, is that your tax liabilities didn’t just suddenly appear out of nowhere, just like all my extra weight didn’t suddenly appear while I slept one night.

For the vast majority of taxpayers, both individuals and businesses alike, their very first tax bill stems from a series of events.

For individuals, it can be that you simply don’t pay attention to your tax situation throughout the year (hint: you should!). You think of your taxes as a once a year affair, rather than taking a proactive approach to regular tax planning. Perhaps you got a bonus, a raise, or a gambling win at some point in the year that boosted your overall income for the year into a higher tax bracket, and didn’t adjust your withholding at that time to compensate. Or perhaps you had a large debt forgiven or took money out of an IRA early, and didn’t plan for the tax consequences. Failing to take into consideration a significant life change, such as no longer being a homeowner or losing an exemption and tax credits because of a child growing too old to claim, can also have a major impact on your tax situation.

For businesses, it can start with a rough month, and simply not having the cash laying around on the 15th to make the payroll tax deposit for last month’s payroll. Essentially, it becomes a matter of convenience to skip that Federal Tax Deposit one time. Well, in my experience, that one time becomes an expedience for the entire quarter, then two quarters, with no warning or anything from the IRS. Then, suddenly 8 straight quarters have gone by and you get a tax lien notice and a call from IRS Collections, not to mention you are suddenly informed of the massive penalties, which can double the size of your initial tax debt.

Whenever you have a “life event”, be sure to take into consideration the potential tax consequences. What is a life event? Anything to do with large asset acquisition or disposal (such as a home), anything to do with children, marriage, divorce, bankruptcy, foreclosure, job change, moving, or anything that drastically changes your bank account balance. If you are self-employed, there are even more definitions for a “life event”.

For business owners, don’t fall into the “it’s easier not to pay this month” trap, especially with payroll taxes. The long term consequences simply aren’t worth it. In fact, it’s cheaper to raid your personal retirement plan and pay the 10% early withdrawal penalty than it is to pay the penalties that add up for not paying payroll tax deposits. If you have a short-term cash crunch, it’s also better to put off paying OTHER bills, rather than the IRS. It’s simply cheaper to catch up on rent, utilities, vendors, and other business bills, rather than paying the IRS’ extortion-level penalties.

If your business is experiencing a longer term cash crunch than just one month, than you need to take a serious examination of your business. Cut costs wherever you can. If you have insufficient revenue coming in to cover the complete costs of maintaining an employee (their salary, benefits, worker’s comp, payroll taxes, etc.), then you need to start cutting hours, considering temporary layoffs, and letting some employees go entirely. Yes, it sucks to cut somebody’s hours or lay them off, but you’re running a business, so run it like one.

You should also look at ways to increase revenue. I do not discuss business growth and marketing on this particular blog, as it is not the place for it, but I do substantial marketing consulting and coaching for a number of businesses in various industries, and the most fundamental thing I tell each and every business I work with is this: As a business owner, you are first and foremost a marketing and sales professional, and a contractor, trucker, baker, childcare provider, or chef second. If you don’t embrace this concept, your business won’t survive, pure and simple, so invest the time and money into better marketing your products and services, and you will make more money.

If you take a proactive approach to tax planning, you will never have an unexpected tax liability. Discuss with your professional tax advisor any potential consequences of a life event. Business owners, keep your books up to date and be sure to review your financial statements every month. The vast majority of businesses that I have helped resolve tax problems for over the past four years kept their business records in a drawer, if at all, and failed to properly maintain accounting records (which is required by law, just for the record).

If you need assistance getting your books in order, setting up QuickBooks, selecting a payroll service, or need advice about the tax consequences of a personal life event, please contact me.

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.

Attention Truckers: Don’t forget to file Form 2290 this week

If you are a tractor-trailer operator or run other heavy highway equipment, you are probably already familiar with IRS Form 2290 and the payment of heavy vehicle highway use taxes. In general, this return is due on August 31st, along with payment for your vehicles that are taxed as heavy vehicls.

The deadline generally applies to Form 2290 and the accompanying tax payment for the tax year that begins on July 1, 2012, and ends on June 30, 2013. Returns must be filed and tax payments made by Aug. 31 for vehicles used on the road during July. If you put a new vehicle into service after July 2012, you will need to file another return and pay the tax on that vehicle by the end of next month after placing the vehicle in service. So, if you put a new rig into service in November, the return and the tax are both due on December 31.

The highway use tax applies to highway motor vehicles with a taxable gross weight of 55,000 pounds or more, which generally includes trucks, truck tractors, and buses. Ordinarily, vans, pick-ups, and panel trucks are not taxable because they fall below the 55,000-pound threshold. The tax of up to $550 per vehicle is based on weight, and a variety of special rules apply, which are explained in the instructions to Form 2290.

If you have not yet filed and paid these particular taxes, they are eligible for electronic filing and electronic payment through EFTPS. If you need help with the return, or getting the payment made, feel free to contact me.

How To Deal With An IRS Notice

Most people tend to panic when they receive a notice from the IRS. Many, many people think that by stuffing that notice under the mattress, the problem will go away. Unfortunately, it doesn’t work like that. The best way to address a notice from the IRS is to deal with it immediately and head on. Here are some tips for what to do when you receive an IRS notice.

1. Don’t panic, and don’t shred it. Most IRS notices can be dealt with pretty simply. Not quickly, but simply.

2. Be sure you understand WHAT the notice is for. The IRS sends all sorts of notices — bills for overdue taxes, requests for you to file a missing tax return, to request additional information about something, notify you of pending deadline, etc. The notice will ALWAYS thoroughly explain why you are receiving it. READ IT.

3. Every notice from the IRS will explain what you need to do with it. If they want extra information from you, it will explain what information they need. If it’s a bill, well, then they just want your money.

4. If you receive a notice about a correction to your tax return, you should review the correspondence and compare it with the information on your return.

5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.

6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Respond to the IRS in writing to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days for a response from the IRS.

7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the correspondence available.

8. Keep copies of any correspondence with your tax records. Also keep record of who you talk to, including their IRS employee ID number (they’re required to give it to you), and detailed notes of your conversation.

If you receive a notice that you don’t understand or don’t agree with, then obviously consider speaking to a professional. Feel free to email me back with a copy of your IRS notice attached and I’ll tell you what it means and what you need to do about it, in simple terms.

Tips for Avoiding a 2012 Tax Bill

With the summer of 2012 coming to a close, it’s a good time to look at your tax payments you’ve made this year and see if you’re likely to accrue a tax liability for this year or not.

You should act soon to adjust yor tax withholding to bring the taxes you must pay closer to what you actually owe. If you’re ahead of schedule in terms of payments for the year, then you can reduce your withholding and actually keep more of your paycheck for the rest of the year.

Most people have taxes withheld from each paycheck or pay taxes on a quarterly basis through estimated tax payments. Each year millions of American workers have far more taxes withheld from their pay than is required. Many people anxiously wait for their tax refunds to make major purchases or pay their financial obligations. It is best, however, to not tie major financial decisions to your anticipated refund — especially if you owe back taxes for previous years, because the IRS is simply going to keep that refund, even if you filed an Offer in Compromise this year.

Here is some information to help bring the taxes you pay during the year closer to what you will actually owe when you file your tax return.

Employees

New Job? When you start a new job your employer will ask you to complete Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use this form to figure the amount of federal income tax to withhold from your paychecks. Be sure to complete the Form W-4 accurately.

Life Event? You may want to change your Form W-4 when certain life events happen to you during the year. Examples of events in your life that can change the amount of taxes you owe include a change in your marital status, the birth of a child, getting or losing a job, and purchasing a home. Keep your Form W-4 up-to-date.

You typically can submit a new Form W–4 at anytime you wish to change the number of your withholding allowances. However, if your life event results in the need to decrease your withholding allowances or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days of that life event.

If you need help determining how many exemptions to claim on your new W-4, feel free to get in touch with me.

Self-Employed

Form 1040-ES: If you are self-employed and expect to owe a thousand dollars or more in taxes for the year, then you normally must make estimated tax payments to pay your income tax, Social Security and Medicare taxes. You can use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you are required to pay estimated tax on a quarterly basis. Remember to make estimated payments to avoid owing taxes at tax time.

Again, if you need help determining the estimated tax payments you should be making in order to avoid a big tax bill, along with penalties and interest in 2013, please get in touch with me and I’ll help you with that.

[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.

Let’s talk credit card debt

I realize that this is a blog about tax debt, but if you have tax debt, I assume that you have other debts as well. It has only been within the last few months that the IRS has softened their stance on allowing you to claim your minimum credit card payments as an allowable expense, so it’s a topic worth addressing.

Credit card debt in general is one of the biggest problems in our society. If you rack up a lot of it, and can’t pay it, life starts to suck when the creditors start calling. Five years ago, when I was heading into bankruptcy, one of my favorite days was the day that Qwest cut off my phone service because I couldn’t pay the bill. That was when the credit collection calls finally stopped!

If you’re looking to address your credit card debt, and other consumer debts as well, there is a simple and often repeated formula for paying down and eliminating those debts. You’ve probably heard two variations of this before, but I think they’re worth hearing again now and then.

The process is pretty simple: Make a list of all your debts, and rank them by priority based on either interest rate from highest to lowest, or by debt amount from lowest to highest. Then, take any extra money you have each month and put it towards the first item on the list.

Mathematically speaking, it’s best to rank them by interest rate. Most of the time, if you owe the IRS money, they’re going to be at the very tippy top because the combined interest and penalty rate can exceed 60% APR. However, many personal finance experts suggest doing it a little different, and paying off your smallest balances first. The rationale behind this is largely psychological, because paying off a smaller debt and being able to say, “It’s paid off!” gives a mental boost to the whole process.

After debt #1 is paid off, the money that was going towards it every month is now applied to debt #2. This accelerates payoff of that debt. Once debt #2 is paid off, the entire monthly amount from that goes to debt #3 until it’s paid off, etc. Eventually, everything is paid off.

While you’re making this debt paydown process, you’re generally making your minimum payments on your other credit cards. If you’re in a situation where money is extremely tight and you’re already several months behind on some bills, it may be worth considering stopping paying on them. If your credit score is already destroyed by being 90 days behind, being 9 MONTHS behind isn’t really going to make it much worse.

This is the strategy that I ultimately went to before my personal bankruptcy. Barely able to pay the mortgage and put food on the table, I started by no longer paying on my credit cards and unsecured lines of credit. It was more important to keep a roof over my head, the lights on, and food in my belly than to worry about my credit score and credit cards. The simple reality was that I didn’t have enough money coming in to pay everything, so I had to start making decisions about what was NOT going to get paid.

Hopefully, you aren’t or won’t get to that point, but it’s nice to know that it’s an option. Remember, debtors prison no longer exists in America, and sometimes you’ve gotta do what you’ve gotta do.

The Truth About Tax Resolution Fees

Within the tax resolution industry, there are a variety of fee models that you should be aware of. Different fee models have different potentials for abuse by the firm offering the services, and it is important to do your due diligence and fully understand what you are paying for, how much, and when, before ever paying a single dime to a tax resolution firm.

One of the most common fee models is a retainer model, which is a carryover from the world of legal and CPA firms from which many tax practitioners come. Under this model, you pay an up front amount, which the firm holds on to and then bills against on an hourly basis. Close to the time when the retainer is all used up, you will (or, actually, SHOULD) get a bill showing what was done, how long it took, and the hourly rate it was billed at. This bill will usually also include a request for additional retainer. The key thing to remember here is that if you don’t keep paying, they don’t keep working.

If you’ve been researching particular companies online, you may already have come across BBB, forum, Attorney General, and other complaints against some firms that aggressively bill down retainers, and are constantly asking their clients for more money, without making much significant progress on a client’s actual tax case. It is important that you thoroughly vet a company before giving them money, in order to avoid becoming another victim of a devious company.

Another common fee model is a flat fee-for-service model. This fee model has a large number of variations, from a flat fee for a specific package of quoted services, to a “menu of services” model where each service you can order off the menu has a specific fee. This latter method is very akin to the most common pricing model used in tax return preparation, where each specific tax form has a particular fee for preparing it. You’ll see this fee model used at just about any CPA firm or retail tax preparation outfit (including Jackson Hewitt, H&R Block, etc.).

When you are speaking with a sales person regarding a package of services, it is very, very important that you understand exactly what services you are being quoted for, and what the company’s policy is regarding fees for additional services. When it comes to tax matters, it is not uncommon for additional services to be required, which will require additional fees if they are not covered in the quotation you are already working under. Ideally, the sales person you speak with will have conducted a thorough analysis of your situation and will have included everything in the proposal sent to you.

When comparing proposals between multiple companies, keep in mind that you probably aren’t comparing apples and apples, but rather apples and oranges. Here are things to consider when comparing proposals between firms that are competing for your business:

  • Is any tax return preparation included in the quote?
  • Does the fee include all appeals necessary for handling your case?
  • For business owners, is Trust Fund Recovery Penalty representation included?
  • How many quarters or years of tax issues are covered by the fee quote?
  • Is a penalty abatement application included, or is that extra?
  • What specific resolution option does the fee cover, and what happens if the resolution strategy changes?

This last question is particularly important. There are some tax resolution firms that will try to sell everybody an Offer in Compromise, because they charge a higher fee for this service. However, it is critical for anybody and everybody to understand that most individuals and small businesses DO NOT QUALIFY for an Offer in Compromise. In fact, the IRS accepts less than 20% of all Offers that are ever submitted, and the only reason this number is so low is because of the high number of ineligible offers that get submitted in the first place. It is also important to understand that the average processing time for an Offer in Compromise exceeds 10 months.

What does this mean for your fee? Well, a reputable firm will conduct a thorough financial analysis, and tell you whether or not you are an Offer candidate. If you are not, then they will negotiate another resolution option for you within the same fee. If a firm tells you they will charge an additional fee for negotiating an Installment Agreement (monthly payment plan) after you’ve already paid a higher fee for an Offer in Compromise, then you should seriously question this.

You should also beware the firm that tells you that, yes, you are an Offer candidate, even when you own assets in excess of your tax liability. Simply put, if you have assets that exceed your tax debt, then the IRS will never accept your Offer. There is an incredibly rare exception to this rule, but it’s so rare that it only happens once or twice per year (literally). This exception is called the “Effective Tax Administration” rule, and if a firm tells you that you can qualify under this rule, then chances are you are being straight up lied to. You practically have to be on your death bed in order to qualify for this exception.

Another big thing to consider when discussing fees is the issue of what’s an appropriate fee, and what is too much. The cost of a service obviously varies based on geographical location, but in general fees for tax resolution services across the country do fall into a line of what’s appropriate and what’s not. Here are some examples of what would be considered standard fee ranges for certain services:

  • Negotiating an IRS Installment Agreement, penalty abatement, and all appeals on a $40,000 personal income tax debt: $2500
  • Same as above, but on a $200,000 business employment tax debt: $5,000 to $7,000
  • Trust Fund Recovery Penalty representation: from $1,000 to $2,500, depending on the nature of the case
  • Preparing a basic personal income tax return, married filing jointly, a home, two jobs, couple kids: $300-$500
  • Preparing a small corporate income tax return with less than $250,000 per year in revenue and no significant assets: $500-$800
  • Preparing a more advanced corporate tax return with multiple shareholders, assets, high revenues, etc: $1,200-$2,500
  • Negotiating an Offer in Compromise on a $150,000 personal tax debt: $3500 to $5000
  • Negotiating the release of a wage garnishment, and nothing else: $400 to $1,000

These are just examples of the types of fees you may see when it comes to working out tax problems. There are numerous factors that go into properly quoting a tax resolution fee, but when comparing proposals, these numbers can give you a good idea of what is considered reasonable.