Tax Controversy Lawyer Blog

The Internal Revenue Service (IRS) and to some extent the South Carolina Department of Revenue (SCDOR) understand that times are tough and people are having a hard time making ends meet. If you owe back taxes and are flat broke after you pay for necessities, then you may be able to get the IRS off your back until you get back on your feet.

The IRS has the ability to place your account in Currently Not Collectible (CNC) status. If they do then you will no longer receive threatening letters or phone calls about your past due taxes and YOU DO NOT HAVE TO MAKE ANY PAYMENTS. The IRS will not issue bank levies or wage garnishments while your account is in CNC status. However, the IRS will typically file a Federal Tax Lien to protect its interest in the past due taxes. In addition, you will continue to receive letters from time-to-time that inform you of your current balance. Interest and penalties continue to accrue while your account is in Currently Not Collectible status.

Currently Not Collectible status is temporary in nature and your case may be reviewed every two years or so to make sure you still qualify. If your situation improves and the IRS feels like you can afford to make payments, they will take your account out of CNC status and will request some type of payments, typically an Installment Agreement.

As for the South Carolina Department of Revenue (SCDOR), they have an administrative position that if you, or anyone in your household, is receiving a paycheck -- and get this -- even unemployment checks are considered paychecks -- then you will not qualify for Currently Not Collectible status. So if your unemployment has run out and no one in your household has a job, then you can get some relief with the South Carolina Department of Revenue. If not tough luck, you better be ready to cough up some money each month or face wage garnishments and bank levies.

Continue reading "Currently Not Collectible (CNC): The Times are Tough Collection Defense" »

Once the shock has worn off from being audited by the IRS or finding that the IRS wants to collect those back taxes you have not paid, you will want to know what your options are to resolve the tax debts. There are a number of tax solutions that a taxpayer may avail himself or herself of to finally get a good night's sleep. One such tax solution, the Installment Agreement, is key to paying down and eventually eliminating the tax debt. And, while it may not cause all memories of your dealings with the IRS to fade into oblivion, it sure will help.

The Installment Agreement is an agreement entered into between the IRS and the taxpayer to pay down the IRS-assessed liability, i.e., your tax debt, over time. If you qualify for an Installment Agreement, the IRS will establish a payment plan where the taxpayer agrees to make monthly payments and in return the IRS will not issue bank levies or wage garnishments. The Installment Agreement payments are usually applied toward the oldest debt first, and once that debt is paid the payments are applied to the next oldest debt and so on and so forth until all the tax debts are paid or are uncollectible.

Careful attention must be paid to structuring the Installment Agreement, because sometimes the IRS allows an Installment Agreement with a small monthly payment for the first year and after that the new payment amount is bumped up to a payment that many taxpayers cannot afford. I call these "teaser" Installment Agreements. This scenario typically applies to taxpayers with significant credit card or other unsecured debts. The IRS does this to allow taxpayers time to reduce these "non-allowable" expenses and otherwise get their finances in order so that they can afford to make heftier payments down the line. This is not to say that this practice does not have its benefits. Taxpayers just need to be aware of the "teaser" Installment Agreement.

While not perfect, the Installment Agreement can be extremely helpful in permitting the IRS to collect what it will, and still allowing the taxpayer to get a solid 8 hours of sleep...OK, maybe 6 at the very least...

Continue reading "Counting Sheep? Consider an Installment Agreement" »

For most taxpayers, the amount that they owe in taxes is pre-paid to the IRS through employee withholdings, amounts deducted by employers from each paycheck throughout the year. These withholdings are required to be paid to the US Treasury by the employer periodically throughout the year. But, for those persons who are self-employed, independent contractors and the like, paying federal income taxes to the US Treasury can often get put to the side.

Because the self-employed individual receives compensation directly from its customers, rather than the periodic paycheck that most people receive, the IRS requires self-employed persons to make estimated tax payments on April 15th, June 15th, September 15th and January 15th of the following year. Quarterly estimated tax payments must be made by a self-employed individual if he or she expects to owe at least $1,000 in tax for the current tax year.

A self-employed taxpayer is required to make the quarterly estimated tax payments in amounts which equal either 25% of 90% of the amount of tax due for the current year; or, in amounts equal to 25% of 100% of the amount of tax due for the prior year. As a result, many tax return preparers and tax return preparation software compute and provide quarterly estimated tax payment vouchers based on 100% of the previous years taxes. Taxpayers should use these vouchers to make their estimated tax payments.

For many reasons, taxpayers do not make proper estimated tax payments. Generally, the end result is a large tax bill on April 15. Some taxpayers will have the resources to pay the bill in full, many others will not. Either set of taxpayers will be charged an estimated tax penalty to compensate the government for the time value of money it lost when the estimated tax payments were not made.

Continue reading "Self-Employed? Just Do It...Four Times a Year!" »

A relatively common occurrence with many businesses, is a failure to pay over withheld income and employment taxes. Often cash-strapped businesses hope that conditions will improve and decide to use the withheld taxes as working capital to fund operations. The Internal Revenue Service and other taxing authorities HATE being an "unwilling participant in a floundering business".

In response to all too often finding itself as a unwitting lender, the Internal Revenue Service received authority from Congress in 1954 to assess personal liability against "responsible persons that willfully fail to pay over" withheld income and employment taxes.

The Trust Fund Recovery Penalty results in personal liability for 100% of the withheld income and employment taxes ("Trust Fund" taxes) for every "responsible person" assessed. While deemed a penalty, the Trust Fund Recovery Penalty is a collection device used by the Internal Revenue Service to recoup those taxes it has credited to other taxpayers. As such, the Service typically assesses the penalty against as many taxpayers as possible, to increase the odds of repayment. While this may seem to be unfair, it depends on who you ask.

Example: ABC, Inc. owes federal payroll taxes of $1,000,000.00, of which $750,000.00 are "Trust Fund" taxes. ABC, Inc.'s President, Vice President, Chief Financial Officer and Treasurer were all assessed the Trust Fund Recovery Penalty. As a result, each person assessed the TFRP owes the US Treasury $750,000.00, which accrues interest until paid. The IRS is prohibited from collecting more than $750,000.00 (excluding interest) no matter the source. So let's say ABC, Inc.'s President pays $500,000.00, Vice-President pays $225,000.00, and Treasurer pays $25,000.00. According to ABC, Inc.'s CFO, it seems like a good deal. All he owes is the interest.

Of course, the best course of action is not to count on luck. The best way to avoid this conundrum is to make sure the withholdings are deposited in the correct manner and on schedule. Don't make the mistake of failing to deposit: it can cost you more than just your business.

Continue reading "Employers Beware: Failure to Pay Employee Withholdings Can Result in Personal Liability" »

As a rule, spouses who file their income taxes under the status of Married Filing Jointly are jointly and severally liable for any income tax liability shown on the return as well as any additional income tax liability which may arise as the result of an audit. In other words, if your spouse makes a mistake on your jointly filed income tax return, you may be held both jointly liable (both you and your spouse) and severally liable (just you) for the amount of the underpayment caused by your spouse's error. And, to add to the fun, the amount of income earned by either spouse is irrelevant in determining joint and several liability. So, even if you report zero income for a given tax year, you could be held personally liable for the entire amount of the tax liability that results from any underpayment or your spouse's error on your jointly filed return.

However, the IRS and certain states provide "innocent spouse" relief from joint and several liability when the appropriate circumstances exist. Typically, there are three types of innocent spouse relief. A common theme of the relief provisions is lack of knowledge on the part of the "innocent spouse". If a spouse can show that he or she neither knew nor should have known of the error on the jointly filed income tax return, that spouse may not be held liable for any portion of the underpaid tax and penalties associated with such error. In this instance, a failure to communicate may not save a marriage but it might just save some taxes.

Continue reading "Is a Failure to Communicate Just Too Taxing? Get the Innocent Spouse Relief You Deserve" »

The average American's wallet has probably felt quite a bit lighter in the past few years. And so has the IRS'. Like much of the American public, the years-long recession has the IRS lodged firmly between an economic rock-and-a-hard-spot. But, unlike most Americans, the IRS' vast network of resources, both monetary and from a personnel standpoint, pretty much guarantees that it won't go hungry.

Due to the economic downturn, the amount of tax that the IRS has collected has decreased 3.3 percent, while government spending continues to increase. Although about 84 percent of all taxes are paid on time by taxpayers, the other 16 percent who either under-report income or overstate deductions results in about a $300 billion per year loss to the IRS. In order to combat these substantial losses, the IRS has ramped up its tax collections efforts through the addition of thousands of new IRS employees and smarter, more powerful computers designed to sniff-out taxpayers who aren't paying. These efforts are aimed principally at the individual taxpayer because the underreporting of individual income tax is the single greatest component to the annual tax gap, i.e., the missing $300 billion per year.

Those taxpayers who should be most concerned with the IRS' heightened collection efforts are high-income taxpayers, self-employed individuals and taxpayers who received pass-through income from partnerships, S-corporations or LLCs, or those persons who claim deductions which are well in excess of reported income. Also on the chopping block are those individuals who fail to file tax returns entirely. It is suspected that increased examinations, quicker assessments and stronger collections efforts will be seen in connection with these non-filers.

So, although times continue to be tough for pretty much everybody, the IRS is taking a hard line on the soft economy. Taxpayers are well-advised to carefully and timely report and pay over all income tax owed because if they don't, the IRS WILL come knocking.

Continue reading "Taxpayers Beware! The IRS Shifts Its Collections Efforts Into Overdrive" »

If you are reading this, chances are you are looking for a tax professional to assist you in your dealings with the Internal Revenue Service or a state taxing authority. The best advice when hiring a tax professional is to do your homework. Do not be fooled by slick advertisements and sales pitches. Doing a little research before you hire someone can save you lots of time and frustration down the line, not to mention saving your hard earned money from going down the drain.

Unfortunately, there are outfits that prey on unwitting consumers looking to resolve their tax debts. These companies often promise the world and never deliver, all the while charging you for services you may not receive in a timely manner. Many of our clients have come to us seeking help which they thought they had previously obtained, only to discover that nothing had been done on their case for months on end.

So to help you find the right tax professional, we provide a few tips for you to consider:

Step 1: Online Research

This step is very cost effective. It does not take very much time or money to type some words in a search engine and review the results. You may be surprised at what you find.

• Are there formal or informal complaints filed against the company?

• Is the company a party to a lawsuit which alleges bad business practices?

Continue reading "Don't Be A Victim: How to Hire a Tax Representative" »