We all know that the IRS is the most powerful collection agency in the world. They can reach into your bank account and take whatever they think you owe them. Or through a wage levy, they can require your employer to surrender all but a small portion of your wages to them. And they can do this without going to court. This is the only area of law in the USA in which you have to prove yourself innocent. Here you have the full force of the U.S. Government coming down on you and you have to prove them wrong.
Let's say you make chairs. You're not an accountant, you're not a tax lawyer but if you make a mistake on your taxes or the IRS thinks you've made a mistake on a tax return, you have to defend yourself against a tax code that is more than 27,000 pages long.
Let me give you a real life example: Terry (not her real name) came to us owing the IRS $5,250,000, or at least that's what the letter said. But Terry has not worked a day in her life. It turned out that Terry and her husband had won a lottery way back in 1994. So what. The good folks at the lottery make sure to withhold any taxes, federal and state, and make those payments for you so you don't wind up in trouble. It took us eight months to figure what was going on and how to fix it.
Like too many lottery winners, Terry and her husband were not prepared to handle that much money. They would receive a check for $235,000 in March and by Christmas they couldn't afford presents for their children. After four years of this, they decide to divorce. Their divorce attorney's suggest that to move on with their lives, they should sell the remaining proportion of their lottery annuity and go their own ways.
Terry and her husband decide to take their attorneys advice and go forward with the plan. Terry collects her portion of the proceeds and they sell their home, splitting those proceeds.
Terry uses these funds to purchase a new home for herself and her children and expects to begin a new life. Then the IRS comes knocking. Seems there is a little known section of the IRS code that says (and I'm paraphrasing here) "... anyone that has gambling winning and does not file a tax return for the year in which they won those gambling winnings owes taxes on the entire amount of that was won." Terry and her husband had won $12 million. Now the taxes were paid but Terry, not knowing anything about taxes and tax returns, didn't file a return.
The IRS spent 10 years chasing her for taxes she didn't owe. Once we figured out what was going on, all we had to do was file her 1999 tax return for her, write a letter to the IRS explaining that she had no taxable income for that year and the problem went away. Want to know how we learned how to fix this? Most of it came from the IRS Agent that had been assigned to seize her home.
If you find that you're behind with your tax responsibility, there are six legal solutions available to you. They are:
1. Installment Agreement. This is an agreement between you and the IRS in which you pay all or a part of your delinquent taxes. The upside to this agreement is that you don't get your wages garnished and they won't attack your bank accounts as long as you make the agreed upon payments on time. The down side is that the IRS can review the agreement every two years to see if the payment you're making is still an amount that they consider proper. And if you don't follow all of the IRS rules you'll be defaulted and have to start all over again.
2. Offer In Compromise. This is the one that is promoted in the TV ads. It can work, but it is the most expensive, most difficult and most often rejected program. In this program the IRS agrees to accept something less that the full amount of the taxes due. Now stop and think for a minute, if someone owed you tens of thousands of dollars, why would you settle for something less than the full amount owed? Especially if you're the world's most powerful collection agency? You can garnish wages, levy bank accounts and all without even going to court. It is a mathematical formula that must be followed to the letter and then their decision will most probably have to be appealed.
3. Audit Reconsideration. If you've been selected for audit, you should first seek the advice and assistance of a competent practitioner with experience in reviewing audits. I'm not saying that the IRS is wrong or that you might be wrong. Just remember that the IRS is a collection agency and it's their job to get money from you. If nothing else, your practitioner may be able to get the penalties reduced or even eliminated for you.
4. Bankruptcy. This one is my favorite. Why? Because there are bankruptcy attorneys out there that don't know you can eliminate your personal tax liability in bankruptcy. There are several rules that apply to discharging your taxes in bankruptcy and for those people that meet all of those rules, it can be done.
5. Innocent Spouse. Has you ex dragged you into a tax situation that perhaps you don't even belong in? This is the program for you. However, it can be a long and trying progress to get you approved for Innocent Spouse so be prepared for at least a 2-year battle.
6. Penalty Abatement. Believe it or not, you may be able to get those penalties abated if you do it right. Since they can amount to an additional 25 percent of the taxes you owe, it might be a good idea to attempt to have them abated. Now the IRS isn't going to abate them for you so it would be a good idea to hire an experienced professional to assist you.
If you have any questions or would like assistance with any tax issue, whether it's this years return or you're already getting those friendly letters from the IRS, you can contact us at 720-985-2100.