Howard's IRS and the Law Blog

Here is a reason to always file your tax returns

I just resolved a case where my clients did not file their 2000 and 2001 returns. This resulted in the IRS making an estimate of their liability by what is known as a “Substitute for Return.”  These estimated returns are most always incorrect and usually overstate the amount owed.  They can turn what should be a refund into a balance due.

The IRS had my clients owing $25,000 even though my clients really did not owe anything.  To make matters worse, an IRS levy was placed on wages to collect the liability, taking $720 per month, an amount my client could not afford.

I prepared original returns for my client, which showed they were actually entitled to refunds.  The returns were personally hand-filed at an IRS walk-in center, and the levy was promptly released as there were refunds due.   A $25,000 liability turned into about $1,000 in refunds (my clients will not receive the refunds – the returns were filed too late).

Substitute returns can wreck havoc.  They usually have the wrong filing status. There are no dependency exemptions.  There are no deductions for mortgage interest and charitable contributions.  If a business is operated, the tax is calculated on the total gross income – no allowance for business operating expenses.

I have seen well-intentioned clients with no income other than stock sales get tangled up in IRS substitute returns.  Since their stock was sold at losses, they believed that they did not have to file.  But the IRS did not know that – all they know is the gross sales price.  The IRS calculated a significant liability, and a tax levy was issued.  After I was retained, original returns were filed, with the stock losses calculated and reported. The returns had a refund, and a levy release was secured.

If you have not filed, the damage done by IRS substitute return can be significant – incorrect balances owed, tax levies, and lost refunds. Try not to ignore IRS warning notices that they are considering filing substitute returns.  It can be fixed, but it is best to be addressed sooner rather than later.

For taxpayers seeking to contact the IRS on their own, what follows is a reason not to go at it alone but through a tax professional.

Professionals can access the IRS Automated Collection Service by first dialing in through the IRS Practitioner Priority Line.  This phone line is exclusively for the use of tax professionals.  It offers significant benefits over the number made available to the general public on IRS collection notices.

First, calling the IRS Practitioner Priority Line saves time by avoiding the longer public holding queue of calling ACS directly.

But more importantly, when connected to the IRS Practitioner Priority Line, the call can be transferred to the IRS Practitioner Priority service line employees that work within Automated Collection Service.

The IRS employees staffing the ACS Practitioner Priority line tend to offer a significant advantage to you over the IRS representatives handling calls on general line.

ACS Practitioner Priority line employees tend to be better trained, fairer, more open to listening and more sophisticated in their resolution of a case then other ACS staffers.

This is a great way to get a leg up when negotiating with the IRS Automated Collection Service, who are notoriously difficult to deal with.

I received this question from a reader about a closed business that owes employment taxes to the IRS, and her personal liability for the taxes:

The IRS is trying to collect on employment taxes from a company that has been out of business for several years. As an officer, I have already been held liable.  Can the IRS continue to go after a company that has no assets even though it has already filed for the same tax liability against an officer?

First, it is unlikely the IRS has much interest in the business.  It is closed, and in the world of the IRS, the account is probably deemed not collectible.  If the business closed in an orderly fashion and did not transfer any of its assets to nominees to continue its operations as a sham, there is probably little interest from the IRS.  If the IRS is sending notices, they are probably computer generated.

The IRS has assessed a trust fund recovery penalty against you the employment taxes that were withheld from employee paychecks.  The IRS can come after those that were in charge of the decisions not to pay the IRS employment taxes – the IRS had some belief that included you.

Read More

Has the time arrived for IRS amnesty for non-filers?

by Howard S. Levy, Esq. on February 9, 2009

in Unfiled returns

Today’s Cincinnati Enquirer published an editorial of mine about offering IRS amnesty to non-filers.

There are 6.1 million non-filers – to find out how to bring them back into the system with a fresh start and stimulate the economy, read the article here.

The powers of an IRS Revenue Officer…

by Howard S. Levy, Esq. on February 4, 2009

in IRS Collection Problems, Revenue Officers

When negotiating with IRS Revenue Officers, it is important to remember the many enforcement tools they have at their disposal.  These powers include:

1.     Filing a Federal tax lien securing the IRS’s interest in a taxpayer’s property.

2.     Issuing a levy to seize bank accounts, wages and subcontractor income.

3.     Seizure of “hard assets” that have equity, such as real estate, automobiles and business equipment.

4.     Using a summons to compel a taxpayer to appear at the Revenue Officer’s office and complete a financial statement (subsequently used to enforce #1, #2 and #3, above).

5.     Investigate owners and managers of a business for liabilty for the trust fund recovery penalty.

6.     Prepare “substitute returns” to put a liability on the IRS’s books when there is a refusal to voluntarily file returns.

7.     Make referrals to the IRS Criminal Investigation Division.

8.     Grant installment agreements and uncollectible status.  Field Revenue Officers do not directly investigate and make determinations on offers in compromises and innocent spouse claims.

9.     Pursue recovery of transfers of property to third persons intended to defeat the IRS’s interest, including via transferee liability and nominee liens.

10.   Make personal visits to a taxpayer’s house or business.  If you are not home, expect a card in the door.  Best times for the visit:  before long weekends.

Always respect an IRS Revenue Officer and their powers.

Internal Revenue Code section 6334(a) shields certain taxpayer assets from the IRS collection powers.  As these assets are beyond the reach of the IRS, it is important to remember to always exclude their value from IRS financial statement Form 433A.

Claim as “exempt” the following:

1.     Tools of the trade or profession up to $3,950 in value.  At Page 6, Item 59a (“Business Assets”) of the Form 433A, the IRS requests itemization and valuation of business assets; provide it, but write in “exempt” as to the net equity value available to the IRS pursuant to IRC 6334(a)(3).

2.     Household goods and furniture up to $7,900 in value.  At Page 3, Item 19a (“Personal Assets”) of the Form 433A, the IRS requests itemization and valuation of personal assets; provide it, but write in “exempt” as to the equity value available to the IRS pursuant to IRS 6334(a)(2).

3.     Also, be sure to reduce asset values of other assets (cars, houses) at 80% of fair market value, pursuant to Internal Revenue Manual 5.15.1.16(2). This reduction is to arrive at quick sale value, which is what the IRS uses to estimate the price for the asset if it were to be sold in a short period of time under financial pressure.

It is important to always claim these exemptions and reductions when submitting an offer in compromise to ensure the value offered is not overstated.

Keep an eye out for future posts on income sources that could be excluded from an IRS financial calculation and compromise calculation.

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