Below is an article I wrote for the Employee Assistance Professionals Association has been posted on their website (click on http://www.eapassn.org/i4a/pages/index.cfm?pageid=1).
What Every EA Professional Should Know About Client Tax Problems
By Thomas M. Evans, President of TaxLifeboat.com
In the wake of the recession, EAPs across the country are faced with providing emotional support and resources to clients struggling with financial woes, including trouble with taxes and the IRS. To best help their clients, what is the basic information every EA professional should understand and be able to share about tax problems?
Over 25 million Americans are behind in their federal income taxes or delinquent in filling back tax returns. That excludes millions who are audited ever year. Currently, taxpayers are caught between a weak economy and the IRS, which is under pressure to raise more tax dollars. The IRS is getting much tougher and, on top of that, the agency will add 26,000 more employees over the next 12 months. Employees whose wages are being garnished by IRS are just the tip of the iceberg. In addition to losing their peace of mind, many taxpayers soon come to realize that tax levies can take nearly everything they own. This includes their income, savings, investments, home, Social Security, and other benefits.
Often, troubled taxpayers have nowhere to turn for help. Tax professionals typically decline IRS representation cases because of the time and expertise required. They find it difficult to charge enough for the hours needed to research and implement a tax strategy. Tax attorneys can be hired, but at $250 an hour or more they are out of the reach of most taxpayers. “Tax mills” advertise to settle IRS debt for “pennies on the dollar” but consumers complain of grossly inflated fees, poor (if any) results, and having to waive important appeal rights.
Predatory practices by tax mills are worse than people realize. The head of a CPA firm cited a recent example. The IRS claimed his client owed $60,000 but the accountant said that supplying the proper documentation would greatly cut the liability. Instead, the client believed a tax mill’s ad to negotiate a reduced settlement and borrowed $35,000 to pay their retainer. Now he’s paying interest on the $35,000, accruing interest on his unpaid tax debt, and the tax attorney has yet to fix the problem. Finally, the CPA estimates the whole issue could have been resolved with the IRS for less than $35,000.
There are a number of issues and potential remedies to this common problem that EA professionals should be aware of. These include the following:
- Preventative Counseling If you under withhold $200 per month; you will owe $2,400 in taxes by year’s end. The next year you are faced with both repaying this debt and increasing your withholding. Thus, your standard of living will be reduced by $450 per month in tax payments: $250 for past taxes (including penalties and interest) plus $200 more for the current year. The lesson is don’t get behind in paying your taxes.
- Don’t Delay in Responding to IRS Notices The IRS has a quick and smooth process to “prove” you owe the taxes. Simply stated, the procedure (known as a “default” process) is the IRS notifies you that taxes are owed and explains why. If you fail to respond with counter proof or an explanation within a short time frame, then the IRS wins by default and your case goes to Collections.
- If You Owe and Can Pay, Do So Save time, stress, and money by paying your taxes—even if you have to borrow the money. Penalties and interest paid to the IRS are not tax deductable and these fees can double what you owe over time. Also, there are practical and logical reasons why you do not want the IRS to place you in the “tax protester” category. The bottom line is the likelihood of coming out ahead monetarily is very low.
- IRS Safety-Valve Programs If you have valid financial and/or personal reasons that have prevented you from paying your taxes, the IRS and the courts take these into consideration. You will have to satisfactorily document these hardships, however. For instance, personal problems (called “special circumstances” by the IRS) can include addictions, advanced age, bankruptcy, casualty losses, death, disability, divorce, unemployment, financial problems, incarceration, military service or veteran status, new business issues, number of dependents, dependents’ health issues, pregnancy or child raising, and retirement. Some of the most beneficial IRS safety-valve programs are: Offer in Compromise (see below), Audit Reconsideration, Collection Due Process Hearing, Collection Appeals Program Hearing, Fast Track Mediation, and Hardship Status. There are numerous additional strategies but these are beyond the scope of this article.
- Offer in Compromise OIC is one of the most popular (and misunderstood) IRS safety-value programs. Tax mills tout this strategy when they claim to cut your tax debt to “pennies on the dollar.” What they don’t mention is that you must clearly demonstrate your inability to pay the full amount and you give up some important taxpayer rights just by applying. The IRS acceptance rate is 20% or less so evaluate your case before submitting an OIC application. To review the OIC process, download IRS Form 656, Offer in Compromise from the IRS website (http://www.irs.gov). Be aware that there are two other allowable pleadings under the OIC program besides “I owe but don’t have the money to pay.” You can also apply under the rational “I owe and can pay but it would be a hardship to do so.” and “I don’t owe the taxes [for some very good reason].”
Links to tax clinics for low income individuals and seniors are also available on the IRS website as well as forms and publications. Particularly useful are:
- IRS Publication 1, Your Rights as a Taxpayer
- Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree
- Publication 566, Examination of Returns, Appeal Rights, and Claims for Refund
- Publication 594, The IRS Collection Process
- Publication 1546, Taxpayer Advocate, Your Voice at the IRS
- Publication 1660, Collection Appeal Rights.
In addition there are two IRS departments that can prove helpful: the Office of Appeals and the Taxpayer Advocate Service. The TAS assists those who are having trouble with agency red tape and unresponsiveness. The Office of Appeals handles a number of programs for taxpayers to dispute IRS decisions and rulings.
Thomas M. Evans, is President of TaxLifeboat, http://www.TaxLifeboat.com, an expert-knowledge website that has automated “tax defense” for taxpayers in trouble with the IRS. Mr. Evans is the author of “Happy About Tax Relief, The Offer in Compromise Solution.”