Tax law: Handling issues and controversies

Taxpayers may run into a variety of different tax issues and controversies with the Internal Revenue Service and their respective state agencies. When taxpayers fail to pay their taxes, they may face severe civil and criminal penalties. It is possible to resolve tax controversies with the IRS in a variety of different ways. Getting the assistance of an experienced tax attorney may help taxpayers to resolve their tax problems so that they can have fresh starts.

When taxpayers owe taxes

If taxpayers have too little held out of their checks or if they are self-employed and fail to make quarterly estimated tax payments, they may end up with large tax bills at the end of the year. Taxpayers may also face unexpectedly high taxes when they negotiate settlements with their creditors. The IRS counts the money that people have forgiven from their settled debts as income, which may take people by surprise when tax time arrives. If taxpayers figure their taxes and determine that they are unable to pay, they may still be able to negotiate payment plans or settlement offers with the IRS to repay what they owe. People who have large tax amounts owed might benefit by getting help from an experienced tax attorney to negotiate with the IRS especially if the tax debt is substantial enough that it is unlikely that the taxpayers will be able to pay what they owe.

Back taxes

Owing back taxes is another major problem for taxpayers. Back taxes are unpaid amounts that are owed from prior years, and they are subject to continuously increasing fines and penalties when they are not paid. The IRS is limited to collecting tax debts from borrowers for 10 years from when the taxes first become due, meaning that it is possible to owe years’ worth of back taxes along with the associated penalties and fines.

If unpaid taxes arise because of the failure of taxpayers to file their taxes, the IRS may file the forms for them and assess the taxes or potentially pursue them criminally. It is very important to get past returns filed and to make arrangements for resolving unpaid tax debts. In most cases, back taxes are not dischargeable in bankruptcy, meaning that other options must be explored.

Offers in compromise

One available option for possibly resolving unpaid tax problems is by making an offer in compromise. This is a way for a taxpayer to settle his or her debt for less than what is owed. The taxpayers must submit an offer using the correct form to the IRS along with a payment of 20 percent down on the total amount of the offer. The IRS may take up to 12 months to process an offer in compromise, meaning that many months can pass before the taxpayer learns whether or not it has been accepted.

Many offers are rejected because taxpayers don’t understand how the IRS analyzes offers. Since the IRS has a 10-year statute of limitations, it will calculate the person’s available cash flow based on the number of months remaining for the IRS to collect the debt. The IRS calculates the cash flow by taking the taxpayer’s earnings minus his or her allowable living expenses and then multiplies that amount by the number of remaining months. If the result is less than the amount that the taxpayer owes, an offer is likely to be accepted.

While there are technically no income limits for making offers in compromise, the IRS does have spending limits that it uses to determine the amount of available disposable income from which it can collect the unpaid tax debt. National standards are used for such things as food, clothing, household supplies, personal care products and miscellaneous expenditures. Housing, utilities and transportation costs have standards applied that are location dependent.

In many cases, the taxpayers may pay far more each month for their housing and utility expenses than are allowed under the IRS rules. The category includes a broad range of expenses, including rent or mortgage payments, insurance, property taxes, gas, electric, cable, home telephones, cell phones, repairs and maintenance. For a single person who lives in Cook County, Illinois, the total allowable expenditures for everything in the housing and utilities category is only $1,781, demonstrating how low the IRS’s figures are. Even if a taxpayer’s housing and utility costs far exceed the guidelines used by the IRS, the IRS will count the amount that the taxpayer has to pay above the allowed amount as cash flow, meaning that it will be counted even though the money doesn’t exist.

Experienced tax attorneys can review their clients’ cash flows and their allowable expenses in order to determine the appropriate amounts to offer to the IRS in a settlement. In some cases, they may also be able to convince the IRS to vary from its guideline, depending on the circumstances of their clients. If an approval of an offer in compromise appears unlikely, the tax attorney may recommend that the taxpayer instead tries to negotiate a payment plan or may work to have the debt declared to be currently uncollectible.

Payment plans

The availability of payment plans might depend on the total amount owed. For people who owe less than $50,000, they are normally able to secure payment plans by asking for them. People who owe more than that amount will need to negotiate with the IRS in order to secure payment plan agreements. The key is that the taxpayers must be able to pay off the debt that is owed through monthly payments that are paid for up to 72 months until the debts are repaid. In order to qualify for installment plans, the taxpayers have to be current with their current year returns or quarterly taxes. People should calculate the affordable amount that they can pay when they try to request installment plans. They should make their payments even while the installment plan request is pending. One issue is that penalties and interest continue to accrue during the life of the installment plan and can be as high as 8 to 10 percent per year. If a taxpayer is facing a tax debt that he or she is simply unable to pay, an experienced tax attorney may work to get the tax debt to be deemed as currently uncollectible by the IRS.

Currently not collectible status

Taxpayers whose financial circumstances make it impossible to pay both their allowable living expenses and their tax debts may be able to negotiate with the IRS to have their tax debts deemed as currently not collectible. Taxpayers who are granted CNC statuses will not have the IRS tax further collection actions against them while they remain on their statuses, including liens and levies. The IRS may check the taxpayers’ income annually to see if they still are in financial positions that prevent them from paying. If they remain on the status for 10 years, the tax debts will not be collected by the IRS. A tax lawyer may analyze a taxpayer’s finances, and if it appears that the tax bill owed is simply beyond the person’s ability to pay, the lawyer may negotiate with the IRS to get it declared as currently not collectible so that the taxpayer can have a fresh start.

Tax problems should not be taken lightly. Failing to file or pay taxes can result in serious consequences. Fortunately, there are a variety of ways to resolve tax problems with the help of an experienced tax attorney. Call us today to schedule a consultation and to learn more about how we can help.