How IRS Penalties and Interest Can Accumulate

The following information is a true story that comes from one of our cases. It demonstrates how expensive it gets when you fail to file and pay your taxes on time.

This taxpayer’s 2006 tax return was originally due by 04-15-2007, and they extended the filing date until 10-15-2007. They finally got around to filing that tax return on – well, they didn’t. The IRS got tired of waiting, filed a Substitute for Return on 01-12-2009, and sent them a big bill. That got their attention. The taxpayer finally filed their 2006 tax return on 07-09-2009; 21 months after the extended due date. Twenty-one months late.

The way the IRS gets the attention of a taxpayer who doesn’t file is by filing an Automated Substitute for Return (ASFR). They can do that when they know how much money was paid to the taxpayer; in this case they had the copies of their 1099’s. They put that gross income on their tax return but what they never know are the expenses and write-offs, so they leave those parts blank. The net income and the tax on any IRS Substitute for Return is always a lot more than if it the return had been prepared correctly. Once a taxpayer is faced with the prospect of paying more than they have to, now there is an extra incentive to file the correct return.

The taxpayer in this example was a sole proprietor and reported their business income and expenses on the Schedule C of their tax return. That makes filing late even worse because in addition to the income tax, they owed self-employment taxes; think of the Social Security and Medicare taxes taken out of your paycheck every week, except due in a lump sum. These penalties and interest were calculated on the amount of tax that was owed.

The total tax on the correct return was $16,039 and was officially was assessed on 08-24-2009.

The penalties and interest levied on 08-24-2009 were:

Penalty for not prepaying tax $343

Penalty for late payment of tax $2,303

Penalty for filing tax return after due date $3,573

Interest charged for late payment $2,840

On 10-22-2012, more than three years later, the IRS levied another penalty of $1,668 for late payment of tax. That brought the grand total the taxpayer owed to $26,766. The penalties and interest was now up to $10,727. That is an increase of 67% over the original tax amount had the taxpayer filed and paid on time.

They never were able to pay the $26,766. They had problems with other years as well. Eventually they owed the IRS more than $54,000 before they were forced to confront the fact that their business wasn’t going to make enough money to support itself. The filed an Offer in Compromise and most, but not all, of their IRS debts had to be written off.

If you have a problem like this you should contact us. We can stop the bleeding and put these problems behind you.

The IRS Is Not the Source of Your Tax Laws

Have you ever heard anybody complaining about the IRS and their IRS code? They might be angry. They might even be justified, but they don’t understand where their pain is really coming from. Our income tax represents a frequent and direct contact with our federal government, so why not understand something about the source of this interaction?

It begins with our constitution and the 16th amendment; The Congress shall have power to lay and collect taxes on income, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

From the Constitution comes the tax law. The U.S. Code is the collection of our laws and it is divided into 53 chapters called titles. The Internal Revenue Code (IRC), title 26, is one of the four largest. The IRC, being a collection of laws, can only come from our legislators in Congress. The IRS is administrative in nature and does not have the authority to write any laws or regulations. If you have a beef about your tax laws you will need to take it to the Congress via your legislators.

The IRC is further divided up into specific code sections. To make the code sections easier to use, the Treasury has authority to promulgate tax regulations, or what you might perceive as, “The rules.” Think of it like this; if the code allows a business to make an election to be taxed using a specific method, the regulations bring forth the forms and procedures that make the election take place.

The IRS works for the Treasury Department. It issues Proposed Treasury Regulations which are published for comments and revisions prior to the final regulations being passed. The IRS is an administrative agency with interpretive authority. The IRS will clarify particular factual situations by issuing Revenue Rulings, Revenue Procedures, Notices, and Announcements. The IRS helps taxpayers comply with the tax laws, and they enforce the laws, but they do not make the laws.

Three tax takeaways for Monday, February 25, 2019

The gig economy is made up of online platforms like Uber, Etsy, Lyft, Handy, TaskRabbit, and Grubhub, or running a small business on E-bay, to name a few. A recent Treasury Inspector General for Tax Administration (TIGTA) audit to evaluate the reporting habits of gig economy taxpayers yielded numerous problems including; significant general income underreporting by taxpayers, differences between reported income on tax returns and the income reported by payers on form 1099-K, and tax returns “Riddled with mistakes.” On the IRS’ side, there were also problems with their Automated Underreporter Program (AUR) that is used to identify and evaluate potential violators. AUR employees evidently removed thousands of cases from inventory without proper justification or applied justification that was inaccurate. It is estimated that about 59% of suspected taxpayers were not selected to be worked. That means that out of the total sample, either the case was not worked or the account was deficient. That is big and the IRS knows it, so expect more scrutiny within this industry. 

In a related vein, let me remind everybody what Structuring is; when you deposit just under $10,000 of cash into your business account on a regular and recurring basis with the intention of avoiding the bank filing form 8300, Report of Cash Payments. The IRS is reminding banks and businesses required to report large cash transactions that they can do so online. They can file their transaction reports using the IRS’ e-file; “It’s fast, easy and free.” Cash businesses represent a special area of concern for the IRS and the audit techniques are interesting to say the least. 

The tax laws do not consider emotional distress to be a physical injury or sickness. If you receive damages from a lawsuit that are due to emotional distress, you must include them in your income unless they were to pay for medical care attributable to the emotional distress. If the damages for emotional distress are punitive only, then they are taxable.  

Choosing how your business will be taxed

Every now and then a new client comes in the door with IRS letters because they went to an attorney to have their small business incorporated before they understood the process. What happened was that the client thought that the articles of incorporation was all there was to it, they saw their bill, and when the attorney offered additional services they said no and left. Professionals are not your teachers. They provide a service. If you plan to own and operate a corporation there is a presumption that you are aware of the matters involved. Kind of like driving a car, if you are behind the wheel, it is presumed that you know how to drive. 

Filing articles of incorporation or articles of organization for an LLC is only the start. You will need an Employer Identification Number (EIN) and you need to file an IRS election as to how you choose to be taxed. Depending on your choice of entity classification there are other elections. Straightening out one of these messes will cost you about $750. To do it correctly the first time should cost about $300 assuming that your business is already incorporated or organized. 

Do you notice that I am not telling you exactly how to do this? That’s because firstly, you are not aware of such matters (legalese for “You don’t know what you are doing”), and secondly, for a $300 business expense why take the chance? When you pay a licensed tax professional to do it for you there are years of understanding and experience that go into the process. So if you want to have an S corporation or an LLC go see a licensed professional, understand that the service is not free, and take heed of their advice. Otherwise you will be paying for damage control later.  

The truth about IRS Offers in Compromise, Part 2

Besides not being easy, taking a long time and professional services being expensive, IRS Offer in Compromise are intended only for those who are truly unable to meet their obligations, and in most cases there are no easy deals.  

It’s not a way to beat the tax man. It is a program to help those who do not have the ability to pay their back taxes. I have had more than a few persons approach me with questions like, “I have some taxes I want to get out of paying and I heard you can take care of that.” Understand that this is not like TV where the crafty lawyer prevails by finding a loophole. That sort of thing is procedural. 

The Offer process follows a set of numerical standards that are reviewed by an IRS Qualifying Agent, before going to their Manager for final determination. There is some subjectivity, and there are Offers based on effective administration which are even more subjective (rare), but most offers follow a formula called the Reasonable Collection Potential (RCP) to determine if you can pay the tax.  If you can pay within the statutory collections period then you do not qualify for an Offer. If you don’t qualify now, you might qualify later, and there are other options available to you besides making an Offer in Compromise. 

Competent professionals can evaluate your RCP for between $600 and $800 of your retainer, and tell you with confidence whether or not you will qualify for an Offer at that time. If you don’t qualify they tell you and then it’s back to the drawing board. Anybody out there ever have your $4,000 retainer completely used up during discovery (besides one of my past clients), only to be told you don’t qualify – sorry, we can’t help you? Be careful who

 you choose. Ask about their RCP evaluation process. That should put them on notice. The RCP also contains a number of valuable allowances that are not widely published, but your competent representative will know about them. 

In a nutshell; if your financial condition is so bad that you have to choose between paying your taxes or paying your utility bill, then you likely qualify for an Offer. If the IRS is threatening to levy your bank account, the filing of the application will freeze any adverse collection actions until a final determination is made. Frivolous Offers made just to delay collections are penalized and you will still owe the tax, even more penalties, and even more interest. If your situation is this dire then you probably don’t have $4,000 to pay the retainer for an Offer. However, a $200 consultation at this point is worth the money because you have other options.     

There are no easy deals. Another misconception is that if you offer to pay a big amount right now, then the IRS might consider writing off the rest of your tax debt in exchange. The IRS is still going to use the RCP. They’ll be happy to take the big down payment, and then it will be even easier for you to pay what is left within collections statue, and you will be even less likely to qualify for an Offer.   

The truth about IRS Offers in Compromise, Part 1

An Offer in Compromise is when the office of the Commissioner of the IRS compromises your Federal tax debt in exchange for an acceptable offer of partial repayment based on your true ability to pay. 

Convincing the IRS that you are in a dire financial condition takes time, after all, you might be lying. To find your true ability to pay the IRS is going to subject you to an arduous process of evaluations; not once, but twice. The IRS has 12 months to respond to your application and ask for additional financial information; otherwise they are stuck with your initial paperwork. They will contact you just inside of 12 months to request a new and complete set of documents because the other ones are a year old and unsuitable for a current evaluation. You will comply and you’ll be nice about it because they have something you want. Statutorily the IRS has to accept or reject your offer within 2 years or your initial Offer stands. You can expect the formal determination in just under 2 years. 

If your Offer is rejected, this is where the skills of an experienced representative is well worth the money because a counter-offer needs to be made while direct contact with the IRS’ Qualifying Agents is still possible. 

You have to be in current compliance with all of the tax laws before you can file an Offer. You have to remain currently compliant with the tax laws during the entire Offer process, and for the 5 years following the acceptance of your Offer, otherwise the IRS will put your bill back to where it was before you started. Consider that you owed the Government $50,000, you fell on hard times, and the IRS eventually accepts your offer of $5,000. Two years after your Offer was accepted you fail to pay your full tax amount by April 15. You’ll get a letter giving you one last chance, and if you don’t pay those current taxes the $45,000 that was compromised will be put back into your account.   

Unless you go it alone the cost of filing an Offer is not cheap. Have you ever noticed those ads on the radio or television asking, “If you owe the IRS $10,000 or more call us?” Ever wondered why the magical number was $10,000? The average retainer for an Offer in Compromise is $4,000. Add to that the fees for filing two missing tax returns, and amending three others (necessary to bring you into current compliance), and the cost of representation just shot up to about $6,000. If you didn’t owe the IRS at least $10,000 it might not be worth the effort. On the up side, you can pay your accountant at the start of the process and that reduction to your bank account asset will not be considered to have been intentionally dissipated.   

Offers in Compromise are not easy, they take time and they can be expensive.  ‘

3 Quick Business Tax Takeaways for Friday, January 18, 2019

Businesses can still deduct 50% of Meals as a business expense for tax year 2018, but the new laws specifically deny expenses for entertainment, amusement, or recreation. 

Existing businesses that wish to convert to being taxed as an S corporation have no more than two months and 15 days from the beginning of the tax year to make the election. There are numerous pitfalls to avoid when changing tax treatment. Contact your licensed tax professional for help because that consultation can be well worth the money. 

A word on late filing penalties for S corporations and partnerships: If you are a partner in a partnership or a shareholder in an S corporation, the penalty for failing to file your tax return on time is $195 multiplied by the number of partners or shareholders, times the number of months the return is late not to exceed a total of 12 months. That means that if your partnership or s corporation completely failed to file it’s 2016 tax return and you just found out about it, and you have 8 shareholders or partners, the penalty for failing to file in time is $195 X 8 X 12 months = $18,720 plus interest. In some circumstances there may be relief from the penalties. Contact us for help.

Unpaid student loans and the Treasury Offset Program

If you don’t pay certain debts that are guaranteed by the federal government, like student loans, the government will seize your tax refunds and even a portion of your Social Security benefits to cover the unpaid balance(s). Keep in mind that refunds can include earned income tax credits and child tax credits intended to help your family, and you will lose those benefits. This is done under the Treasury Offset Program; a centralized offset program to collect delinquent debts owed to federal agencies and states. 


In addition to taking your tax refunds, the government can also take up to 15% of your Social Security benefits but they have to leave you with at least $750 a month. If your income supports the ability to repay your student loan debt but you refuse to pay, or avoid their attempts at contacting you, they can sue you. If you keep thumbing your nose at them they might even arrest you – it happens. 


If you receive mailings do not procrastinate; open them. If you owe delinquent student loans the best thing you can do is to contact your lender and make arrangements for payments that you can afford. If your Social Security benefits are being garnished you have rights before the Department of Education to negotiate affordable repayment options. 

The Zapper Program

The most prevalent method of under-reporting business income is by skimming cash from gross income. This method omits an amount of sales from ever being entered it into the accounting system. Now comes modernization and Revenue Suppression Software (RSS), commonly referred to as a Zapper program. Zappers automatically skim off a set percentage of cash transactions from Point of Sale (POS) systems like the ones used in restaurants. 

In late 2016 the U.S. Justice Department announced criminal charges against Jon Yin for selling Zapper programs. He was working as a software salesman for a Canadian company called Profitek. Profitek sold an add-on RSS program that could only be used with its POS software. The Zapper software could only be ordered from a supplier in China. 

Yin plead guilty to a scheme estimated at costing federal and state taxing authorities more than $3.4 million in tax revenues. The IRS now trains its revenue agents to test for Zapper software in restaurants and all other cash intensive businesses. 

Do not interview with tax collectors without help

If you are called in to an IRS field office for an interview your first indication of how serious the matter is should be when you are buzzed through the steel door by security. When you are sitting across the desk from the IRS agent in a room that already feels too warm, accused of something that you do not understand, that is not the time to think about asking somebody for help. Get help when you first get the notices because the clock is ticking. 

If the IRS or your state’s Department of Revenue wants to interview you in person, don’t go without competent representation. Often times the interview process and the forms they use contain traps. You need somebody who knows where those traps are and how to work around them. Those agents work for the government. We work for you. It is that simple.  

What if you start getting IRS letters related to an old job where the company went out of business? If this happens you need to call us right away because the amounts the government is after in cases like this typically run into the hundreds of thousands of dollars. Do not assume that you are automatically safe because you, “Just worked there.” That may be the case, but you will need to prove it in a legally competent manner. 

Were you a bookkeeper, manager, vice president or maybe controller? Did your job title fit your duties? What were your legal responsibilities to third parties? Did your old employer lie to you about why you were paying some bills but ignoring others? Those are critical questions that can prove guilt or support innocence. Before you are left holding the bag for people you don’t even know anymore, contact our firm because we can help.  

5 Quick Tax Takeaways for Friday, December 21, 2018

First: the Foreign Earned Income Exclusion increases from $102,100 in 2017 to $103,900 for 2018. See IRS Publication 54 for more information. 

Second: the 2018 business mileage rate is 54.5 cents per mile, and the 2019 rate will be 58 cents per mile.  

Third: the medical expense floor was 7.5% of adjusted gross income for 2018. It is 10% of adjusted gross income for 2019. 

Fourth: the contribution limit for a 401K went from $18,500 in 2018 to $19,000 for 2019. If you are 50 years of age or older, you can add another $6,000 under the catch-up rules.

Fifth: the contribution limit for an IRA goes from $5,500 for 2018 to $6,000 for 2019. If you are 50 years of age or older, you can add another $1,000 under the catch-up provisions. 

Michigan seizes property for unpaid taxes

For the small cost of $8.41, an 83 year old Michigan man lost his property. If he had sought out professional advice he should have been able to avoid this catastrophe.  

Last year a Michigan court of appeals allowed for the seizure of a rental property purchased for $60,000 in order to satisfy a delinquent property tax debt of $8.41. The owner forgot to pay his $496 in 2011 property taxes, discovered the error, and in 2013 paid the amount in full. He did however fail to properly account for interest and ultimately underpaid by $8.41. The County foreclosed on the property and sold it at auction for $24,500 to satisfy the $8.41 along with $277 in additional penalties and interest. The county refused to refund any of the surplus from the sale. 

States like Michigan, Massachusetts, Minnesota, North Dakota and Oregon have aggressive property seizure laws intended to deprive criminals of their spoils and means of continuing their nefarious behavior. The underpayment of property taxes is not a crime in Michigan but a law intended for criminals seems to have been perverted for no other reason than to add to the state’s general fund. Other states will at least return any surplus after the tax debt has been satisfied. 

If you have unpaid taxes, either federal or state, you need to at least consult with a licensed tax practitioner. Experienced tax pros know how to make sure that your payoff is correct and binding. You also have rights in the face of tax seizures and we know how to protect those rights. Contact Weiss & Associates for help.  

Late S Corporation Elections

If you are having trouble with any S corporation elections you need to know that there are ways to fix late or incomplete elections. This goes for the S corporation election, Electing Small Business Trust (ESBT) elections, Qualified Subchapter S Trust (QSST) elections, and Qualified Subchapter S Subsidiary (QSub) elections. 

Eligibility to be classified as an S corporation goes further than just filing a form. Pertinent factors that need to be considered include but are not limited to; entity eligibility, shareholder eligibility, legal requirements, capital structure, election process, LLC’s as eligible entities, Q-sub elections, association status, trust structures, and converting from an existing C corporation. 

If you failed to make the proper elections, the elections were late, or the elections contained flaws, you need to consult with a licensed tax practitioner to avoid mistakes. Maybe the IRS sent you a letter that your S election has been rejected. Or you’ve been in business a while, filed the tax return for an S corporation and the IRS sends you a letter stating that your corporation has not been granted S status and that you need to re-file using form 1120 for your C corporation. Contact our firm because we can help. Remember that your first attempt failed and your chances to fix this are going to run out.  


Do I Need A Tax Attorney For My Tax Problems?

The answer is maybe. If you owe tens of millions of dollars and have complex situations like international corporate reporting, or you have so many investments that you loose track of them, you may already know a tax attorney.

If you need a lien released, can’t pay the full amount, are behind in filing, have an IRS letter you don’t understand, or are just stressed at the mention of the IRS, pick up the phone and call a CPA firm like ours that specializes in taxpayer representation. If it turns out that you need to go to tax court, or need an attorney rest assured that we will tell you. Don’t wait because if you miss key deadlines you will loose some of your rights and that can cost you. Start at www.taxhelpsource.com and we can help you.

 

Tax Fraud

IRS examinations can take different forms; from a computer algorithm, a letter audit asking for information, or a full-blown in-person audit. During the process the IRS will be keenly aware that fraud may exist. When indicators (badges) of fraud are uncovered, the matter is serious enough to immediately involve management and technical advisors as the case for fraud is developed. The taxpayer now has the full attention of the most powerful collection agency in the United States.

Allegations of fraud by the IRS could not be more serious. The penalty for civil fraud is 75% of the tax that was not paid (plus interest), and in cases of criminal fraud, the penalty is 100% of unpaid taxes, interest, and possibly jail time. Criminal fraud is often referred to as tax evasion, especially when the fraud involves the willful and intentional concealment of income.  

Most cases of fraud are smaller civil cases because proving willful and intentional criminal fraud is difficult. A typical example of civil fraud might be something like a construction contractor who fails to report 1099 income; we had a case like this once. His payer issued a form 1099-MISC reporting about $110,000 of gross income. The IRS got their carbon-copy of the 1099, but because the contractor had moved, and failed to forward his mail, he didn’t get his copy. Since he did not get a 1099 he must not be responsible to report that income, right? The answer is that, 1099 or not, you are responsible for reporting all of your worldwide income.

In this case the IRS re-computed the tax and added the 75% civil fraud penalty with interest. Because he was basically caught red-handed, the only thing we could do was amend the original tax return to at least include business expenses, and protect his rights. The tax owed was about $22,000, add the 75% penalty at $16,500, other smaller penalties, and interest that started at April 15, and the liability was about $44,000.

Assuming that your business and family survive this blow, it can take as long as 10 years to recover from a pitfall like this. If something like this happens to you, or the IRS is proposing a charge of fraud, this is the time to seek out professional help and it needs to come from a licensed tax professional. In many instances where the IRS proposes assessing fraud penalties, there are options, such as reasonable cause. We can help.

Never co-mingle bank accounts

If you have a business then that business needs its own bank account. Often times, when I meet a new business owner, I have to explain the importance of having a separate bank account. Not only does it make your bookkeeping easier, it creates a legal distinction between you and the operations of the business. Once you have separate accounts you need to insure that they are never co-mingled. What belongs to the business stays in the business and only legal distributions and wages end up in your personal account. If you have your own corporation, which is an individual person in the eyes of the law, don’t you thing that person would want their own bank account?

In a recent tax court memo an S corporation with one owner was skewered by the IRS because they co-mingled business income with personal funds by making deposits of gross receipts into their corporate account as well as their two personal bank accounts. That is called co-mingling and is not allowed. The IRS takes a very dim view of co-mingling because it is a tactic used by people who are trying to hide nefarious activities.   

To make things worse, the owner substantially omitted greater than 25% of his corporate gross earnings from his business return. This omission gave the IRS the legal authority to use the six year look-back period for audits instead of the usual three years. Normally the IRS has three years after a tax return has been filed to open up the books for an audit, but if you break certain rules, they can go back an additional three, which is what they did in this case.

The owner gave three separate sets of bank statements to their accountant; the corporate account and two personal accounts. The owner had deposited business income to all three accounts effectively co-mingling gross receipts. The accountant only reported the gross receipts from the business bank account in their bookkeeping calculations. One might deduce that willful blindness played a part but the IRS tends to focus on facts it can prove; that the business owner failed to report the correct amount of gross income to his corporation. Chasing a charge of fraud is difficult because proving intent is an uphill battle. So the IRS appears to have taken the bird in the hand and ignored what may have been lurking in the bush.

Keep your business activities separate from your personal dealings and never co-mingle the two. A first step for any new businesses is to get a separate bank account. If you do not fully understand these concepts then seek out a consultation from your friendly licensed tax practitioner. Using a licensed practitioner is important as it is unlawful for an unlicensed tax preparer to advise in any matter that is not directly connected to the tax returns they work on.

When the IRS files a tax return for you

When the IRS prepares a return for you they call that an Automated Substitute for Return (ASFR). It is an assessment tool intended to enforce compliance for those who are delinquent in filing their tax returns. Generally it is used to systematically calculate tax liabilities so that the IRS can commence with collections actions.

I have met people who never file their tax returns but they also never hear from the IRS. They are wrong in thinking that the Government is not paying attention to them. The reality is that if they never hear from the IRS it is because they are due a refund. For the record, the IRS also gets copies of any payee statements that you get; so they know.

If the only record the IRS has for you is a copy of your W-2, calculating tax based only on the W-2 is easy enough that it is done by machine. You don’t hear from the IRS because the IRS has made the calculation and they know that you are due a refund. The IRS has no reason to send you a notice because you don’t owe any tax. A refund for a tax return can not happen until the tax return is filed.

Conversely, after the IRS has your W-2s, 1099s, or other payee statements, and it turns out that you owe taxes, they will want to collect. They will start with reminder notices and go from there. If you fail to respond to the reminders and proposals, the IRS will eventually file a Substitute tax return (ASFR) for you so that they can commence with collecting that tax due for that return. Your tax return then goes to the IRS Collections department, and subsequently the Balance Due department, and those actions represent escalations in enforcement. But is the tax they are after the right amount?

You are not on this earth to unjustly enrich the Government. Yes – you can still file your back tax return(s). You need to get that tax return filed because the IRS may not have all of the adjustments and deductions that you are entitled to. After a seasoned tax pro sorts things out, you may even be entitled to a refund. Under certain circumstances you may be entitled to apply for abatement of the related penalties. Or, you can just roll over and pay the tax.

If you are behind in filing your tax returns contact our firm for help because there is a good chance that you may be due some refund money. 

The IRS Streamlined Installment Agreement

That means having your installment agreement processed in a streamlined manner compared to providing a stack of financial information going back three months.

If you owe taxes to the Government and can not pay right away, the Internal Revenue Service will generally allow you to enter into an agreement to pay in installments over time. You will incur interest and penalty expenses. There is a setup fee and that can vary. Short term plans are for 120 days or less, and the longest you can go is 72 months (although the IRS is testing terms that go out to 84 months). Sometimes a tax lien is filed against the taxpayer to protect the Government’s interest. Tax liens, depending on the taxpayer’s history, can be filed for any amounts. The payment amounts generally must be enough to pay the entire debt within the time frame agreed upon, but there are exceptions.

There are general categories for installment agreements (IA) based on how much money you owe; less than $10,000, less than $25,000, between $25,000 and $50,000, and over $50,000. Generally an IA for an individual (no businesses or trusts) who owe $10,000 or less is guaranteed; it is there for the asking. Taxpayer’s who owe less than $25,000 generally qualify for an automatic streamlined agreement. Taxpayer’s who owe between $25,000 and $50,000 may qualify for an automatic streamlined agreement but if they have had problems in the past, the IRS may insist on either partial financial information, or complete financial information with a financial statement. If you owe more than $50,000 expect to produce a financial statement and three months of bill copies representing necessary living expenses.

A complete discussion of these matters is well beyond the scope of this blog. There are very many laws that pertain to collecting taxes, and for every law there is generally an exception. As such, collections matters can be mind-boggling. If you find yourself in trouble, don’t go it alone because you need competent and licensed professional representation.   

Can the IRS put me in jail?

Yes, but never for owing taxes. The IRS can criminally prosecute you and possibly put you in jail if you voluntarily and deliberately violate a known legal duty in order to avoid paying taxes. That would be tax fraud (sometimes called evasion). However, if you do everything right, and find yourself in a bind because you can not pay a tax, you will have collections problems but you will not go to jail.

Tax fraud is the deliberate and willful attempt to evade tax law or defraud the IRS. Fraud, as defined by the IRS, “Is the deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it. Simply stated, is the obtaining something of value from someone else through deceit,” IRM 25.1.1.2.

The criminal fraud penalty requires the IRS to prove intent and this penalty is 100% of the tax owed plus interest. Because intent can be difficult to prove, in many smaller cases the IRS will often opt to assess a Civil Fraud Penalty instead. The Civil Fraud Penalty is 75% of the tax owed, plus interest. Imposing a penalty for Civil Fraud is much easier for the IRS to impose and generally results in the same outcome; to punish an infraction and encourage future compliance.

If you are threatened by the IRS with these sorts of allegations, contact us because we can help. 

Did you know that the IRS generally has 10 years to collect taxes?

It is called the Collection Statute Expiration Date (CSED). That is the expiration of time period established by law that the IRS has to collect a given tax. Once a CSED expires the IRS will write it off.

Assume that you filed your 2017 form 1040 on time on April 18, 2018. You owed taxes for that return that you did not pay. All things being equal, after April 19, 2028 the IRS can no longer lawfully collect that tax and you are off the hook.

A CSED starts only after a tax return has been filed. The CSED does not start automatically on the due date. If a taxpayer filed their 2017 tax return on June 1 of 2020 that is when their 2017 CSED will start. If there are no tolls on the CSED, on June 2 of 2030 the IRS can no longer legally come after that 2017 tax.

The CSED can be tolled, or stopped, by different collections and legal actions, so it is not always easily defined. Because a serious IRS collections matter will take years to resolve, and the taxpayer and their representatives will try different strategies for relief, it is typical for a CSED to be tolled and re-computed. Some actions that toll a CSED are: Collection Due Process Cases, being in a Disaster Area, Military Postponement, Bankruptcy, Offer-in-Compromise, Installment Payment Agreement, Summons Enforcement, Taxpayer Assistance Order, and Innocent Spouse. When a taxpayer is in any of these situations, the CSED changes and will need to be re-computed.

Sometimes a taxpayer owes more than one type of tax, and for more than one period; businesses have multiple due dates throughout a given year. You can imagine how complicated calculating any CSED can get when a taxpayer falls a couple of years behind. You will need the help of a licensed professional if you plan to use the CSED as part of a larger strategy.