Tax Defense for Employees

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.

The Problem

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.

The Solutions

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].”

Free Resources

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.”

Proposed Legislation Could Ease the Way for OIC

A recent bill could make it easier for taxpayers who owe the IRS significant amounts of money to make and Offers in Compromise (OIC). The bipartisan legislation would remove the requirement that taxpayers make a mandatory, nonrefundable payment as part of their OIC application. The Tax Compromise Improvement Act of 2009 was introduced by Ways and Means Oversight Subcommittee Chair John Lewis, D-Ga., and ranking member Charles W. Boustany Jr., R-La., on May 12.

In written testimony, Linda Stiff, Deputy Commissioner for Services and Enforcement at the IRS Shulman reminded the committee of IRS Commission Shulman’s commitment:

“We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today. We want to go the extra mile to help taxpayers, especially those who’ve done the right thing in the past and are facing unusual hardships.”

Current OIC Payment Requirements

Taxpayers can apply for an OIC agreement with the IRS to settle their unpaid taxes. Since 2006, taxpayers requesting a lump sum OIC had to submit a nonrefundable payment equal to 20% of the proposed offer amount. Taxpayers who opted for the installment plan had to submit the first proposed installment payment with the application. If the OIC is denied, the down payment is not refunded.

Many taxpayers seeking to enter into OIC agreements have recently lost jobs or are experiencing financial difficulties. The payments have made it more difficult for taxpayers to take advantage of the OIC program, which was designed to be a “safety valve” within the IRS process. Those who have relied on borrowed money to fund the initial payment have been hit especially hard.

OIC Applications Down

At the February meeting of the Ways and Means Subcommittee on Oversight. National Taxpayer Advocate Nina E. Olson testified that the number of OICs received by the IRS fell by 21% Fiscal Year 2006 to Fiscal Year 2007 as the down payment requirement took effect. Ms. Olson testified that the decline can be attributed in part to difficulty in obtaining funds to make the required payment. She also stated that less than one in four offers is actually accepted, resulting in federal taxes that could be collected left unpaid.

The program has been rendered ineffective by the partial payment requirement. Olson wrote:

As a result of the administrative and legislative obstacles that have been erected, I hear regularly from tax practitioners who say they have given up on the offer-in compromise program as essentially a dead letter. Moreover, tax professionals tell me that given the low possibility of the IRS accepting an offer, they are advising their clients to file for bankruptcy. When that happens, the IRS generally will collect less than through the offer-in-compromise.

Removing the partial payment requirement is thought to increase the usage of OIC agreements in situations of economic hardship and therefore help taxpayers, as well as the federal government.

You can read Nina Olson’s full testimony here.

A “Tax Mill” Horror Story

Yesterday, I met with the head of a local accounting firm.  He’s been a strong supporter of TaxLifeboat for over a year and in this conversation he was even more adamant about the need for our services.  The IRS is under pressure to raise more taxes and close the tax gap so they’re adding 26,000 new positions over the next 12 months.  As a response, the tax mills are stepping up their predatory practices. 

For example, he told the story of a client who the IRS said owed $60,000.  The accountant advised him that this could be negotiated down substantially by providing the proper documentation.  The taxpayer, however, heard the radio announcement of a prominent “tax mill” and borrowed $35,000 to pay this firm their retainer.  Now he’s paying interest on the $35,000, accruing interest on his tax debt, the tax attorney has yet to fix the problem, and the whole matter could have been responsibly handled for much less than $35,000. 

As the accountant concluded, that’s exactly why TaxLifeboat is needed so badly.

Top 10 Ways to Spot a Tax Mill Scam

As the demand for delinquent income tax solutions grows, so will the supply of illegitimate tax mill scams. Many firms will promise to solve any kind of IRS trouble with an offer in compromise (OIC). However, that’s not the answer to every income tax problem. Maryland tax attorney Jeffrey Rogyom recently provided a very informative list of ten surefire signs that a tax settlement company is unethical. Following is my summary.

1. Disinterest In the Facts

Unethical tax mills aren’t interested in the facts of your situation. They want your upfront payment. They could care less whether or not you actually have a chance of settling your debt with the IRS. They certainly aren’t going to let you know if your case can be simply resolved by submitting a few key documents.

2. Big Promises

The only guarantees in life are death and taxes. It’s not death and ‘resolving your tax issues amicably with IRS’. Beware of any company that promises the world. Acceptance of an OIC is not a guaranteed outcome.

3. Overadvertising

Think about it. Do you really want to get professional tax advice from a firm that advertises on television or radio? If you find a company you like via mass media, just make sure you ask around to make sure they on the up-and-up before plunking down your payment.

4. Promises of Quick Resolution

Here’s the thing – the IRS is a slow moving beast. Anyone who claims to have the ability to fast track your resolution is probably full of it.

5. High Turnover

You have enough to worry about with the IRS breathing down your neck. The last thing you want is to deal with a new customer representative every other week. If the person you’re dealing with doesn’t know the details of your case, move on.

6. The Deposit is Based on Your Net Worth

While most tax attorneys are going to want some money up front to take on your case, you should be skeptical if the company asks for a deposit that is eerily similar to the amount you disclose is in your bank account.  The deposit should be based on an estimate of how much your case will initially cost.

7. No Physical Location

You’re better off using a tax relief company that has a local presence. Make sure the address they give you is for an actual office and not just a shared conference room.

8. Unresponsiveness

Once they got your deposit did they stop answering the phone? Your initial payment may be a sunk cost, but don’t keep paying for poor service.

9. Complaints

The internet is a wonderful thing. Google to your heart’s desire and chances are you’ll find plenty of opinions on a scam company.

10. Listen to Your Gut

Don’t be afraid to start over. You know if something’s not quite right. You probably knew it the first time you stepped into their offices or spoke with someone on the phone. But you were desperate. It’s never too late to trust your instincts and move on from a scam tax mill.

For the full story, check out Rogyom’s post here.

Another One Bites the Dust

On May 29^th Bloomberg reported Elizabeth Garrett’s withdrawal as President Barack Obama’s pick for Assistant Treasury Secretary for Tax Policy. If he doesn’t find someone soon, he’s going to have a hard time pushing any of his ideas through.

Garrett turned down the job, citing “aspects of my personal family situation” for her decision. Failing to find a suitable candidate for this very important position isn’t helping Obama out his effort to persuade Congress to change US tax rules to allow companies to avoid taxes on their foreign profits.

From Bloomberg:

“This is a bad time not to have a point person inside the administration for tax policy,” said Alex Brill, a tax expert at the American Enterprise Institute. Obama “has proposed an aggressive and controversial series of tax increases on multinational corporations,” Brill said, adding that the president’s push for “health-care reform and energy policy reform are expected to have major tax components to them.”

Delinquent Taxes Plague Obama’s Picks

 While we have no reason to believe Garrett turned down this high profile position due to any delinquent tax situation, other of Obama’s cabinet picks have withdrawn due to IRS troubles. Tom Daschle was set to serve as the Health and Human Services secretary, and Nancy Killefer, was Obama’s choice for deputy director of the Office of Management and Budget. Both withdrew their nominations when questions about errors in their tax payments surfaced.

Who is Elizabeth Garrett?

Elizabeth Garrett is a lawyer and University of Southern California economist. She was nominated to the top tax-policy post in March with a background in academia. She also worked as a tax aide to former Senator David Boren, and served on former President George W. Bush’s 2005 tax overhaul advisory panel. And according to Mark Weinberger, Bush’s first assistant Treasury secretary for tax policy, Garrett is respected across the aisle. He says we’ve got to have someone in place:

“There are policy proposals on the table that fundamentally change the way we tax ourselves,” said Weinberger, now global tax vice chairman at accounting firm Ernst & Young LLP. “I don’t see how one can move forward without someone at the helm.” 

Obama’s Tax Agenda 

• Tax changes reportedly on the agenda from Obama’s crew:
• More than $1 trillion in higher taxes on upper-income individuals and corporations
• Of the above $1 trillions, $190 billion to be recouped by outlawing offshore tax-avoidance schemes entrenched in the corporate tax code.
• New taxes on life insurers, securities brokers and private equity executives.
• Increase in tax rates for households earning more than $200,000 in 2011.

Source: Bloomberg

Debt Forgiveness and Insolvency: Documentation is Everything

If you’re making a deal with your credit card company to reduce the balance you owe, don’t forget about the other side of that transaction. The IRS considers debt forgiveness to be income – taxable income. The bigger your credit card debt, the bigger the tax bill. Just ask Angela Bibb-Merritt.

What Happens When a Debt is Forgiven?

The unfortunate entrepreneur charged over $112,000 on her credit card to finance a business only to have it fail. With some help, she was able to negotiate a reduction of more than $10,000 in the balance she owed the credit card company. That amount was reported to her on IRS Form 1099-C and was subject to income tax.

If Bibb-Merritt’s debt had been forgiven in a bankruptcy proceeding, it wouldn’t have been taxable, but because it was forgiven as part of a private negotiation, it was. The only other way to get out of paying tax on the forgiven amount is to claim insolvency. This requires proving that your debts exceed the fair market value of your assets. Key word: proving.

According to the Tax Court, this taxpayer failed to prove insolvency:

Petitioner testified that she was insolvent in 2005 when these debts were canceled. The Court advised petitioner that consideration of whether she was insolvent required a review of her assets and liabilities at the time of the discharge. Petitioner provided some information about her debts in 2005, as described above, but she did not introduce documentary evidence or testimony sufficient to determine the fair market value of her assets.

The record does not demonstrate that petitioner was insolvent before the debt cancellation. Thus, petitioner failed to prove that she was insolvent at the time the debt was canceled.

When Dealing With the IRS, Documentation is Key

This illustrates the importance of obtaining solid professional advice any time you deal with the IRS. It’s possible Bibb-Merrit really was insolvent, but she simply didn’t know what was required to prove it. If she’d assembled the proper documentation, she might have easily proven her case and had the forgiven debt amount excluded from income.

The rules can be complex, but help is available. Sometimes the rules aren’t even that complicated, but if you don’t know what they are, you’re dead before your start. Bottom line: there’s no reason to wing it with the IRS.

Want to read the full Tax Court opinion?
See Bibb-Merritt v. Commissioner; T.C. Summ. Op. 2009-78

Navigating the Swamp

I was explaining to my daughter last night what we’re creating at TaxLifeboat.com.  Tax professionals, I said, are excellent at advising and preparing taxes for their clients.  Once a client gets in trouble with the IRS, however, the client falls into what I call the ‘swamp.’  Lots of books and articles have been written by tax pros about different parts of this swamp but not many people know it well.  As a consequence, both delinquent taxpayers and advisors trying to help them end up stumbling around in the dark.

What we’ve done at TaxLifeboat.com is organize the voluminous amount of information on this subject and identify the possible solutions.  Staying with our ‘swamp’ analogy think of these possible solutions as the goals you want to reach on the other side of the swamp.  In creating the website, we were surprised to discover approximately 350,000 possible paths through the swamp to get to the desired result.  Which path is best depends on a taxpayer’s situation and the number of available solutions. 

Lastly, we provide all the tools needed to navigate the swamp with the least amount of effort.  These resources include sample letters, applications, and other materials; documentation creation software; assess to experts; research libraries and background sources; and even reminder emails about upcoming deadlines.  We’ve basically provided all the workflow management resources you’d want and put them at your disposal.  These aids come together in convenient, individual workspaces on our website which makes it much easier to organize and resolve even difficult cases.  The goals, paths and tools are continually updated for changing tax laws and regulations. 

As one tax professional recently exclaimed when told about TaxLifeboat.com, “Where have you been?!”