How do Tax Professionals negotiate with the IRS? (And other items)

1. Are you currently making payments? The IRS will look at what you’re currently paying and try to capitalize the payment into one lump-sum, which is the amount you’re expected to pay out. For example, if you’re currently paying $200 per month and the IRS times that one month’s payment by 48 or 60 (depending), the taxpayer has to offer at least $9,600 ($200 x 48), or $12,000, or more, before the offer will be considered. There are a few situations that can avoid this.

2. On the payment application form, the IRS asks how you are going to pay the amount if the amount is accepted. They’re getting at whether you either have hidden funds or that you have a third source. Offers to be paid by a non-liable party, such as Mom, Brother, Sister-in-law, often receive more favorable treatment. The IRS does this because they’re getting access to funds not otherwise available.

3. Never never offer zero. It’s a plain negotiating tactic. Even if your tax professional finds that the total amount due is legally in doubt (doubt as to liability), if any offer is submitted offering “zero” dollars, the offer will not even be processed. Sounds crazy? It’s always the better course of action to offer some amount, even if it is believed nothing should be paid.

4. This is a big one: don’t lie about assets. Tell your tax professional the truth about all assets. A lie detected will nullify the agreement and could, in extreme cases, lead to criminal prosecution.

5. This is also a big one after the IRS has accepted your offer: all tax returns and payments have to be processed timely for the next five years or the offer, if accepted, is subsequently revoked, and you’re left paying the original amount.

6. This last tip goes with previous one: always make your scheduled payment. Once in a payment agreement accepted by the IRS, errant taxpayers frequently default (miss a payment) and often end up with forced collection efforts, levies and the like. The agreement is null and void and you’re back at square one, or in most cases, having to pay the original tax liability amount.

tax evasion and false filing and failing to file

Last post was a news clip of a man failing to disclose all his income in his tax returns, a charge that amounts to possible 5 years in jail and fees under Section 7201. Wesley Snipes has also been charged with evading tax by fraudulently claiming refunds, also an attempt to evade or defeat tax, under Section 7201. Snipes’ contention that he didn’t know of the fradulent claims seems questionable because the prosecutor should demonstrate proof that Snipes knew that his accountant was of the type to make fraudulent claims. Furthermore, Snipes, if he wants to claim innocence, should have always filed his return, or at least ask his accountant why a return was not filed. If you make money in any year (more than the minimum of that year), you must file your taxes. Filing taxes is like breathing, people just do it.

False Filing amounts to tax evasion. The United States works on a ‘volunteer return’ system. This doesn’t mean that the citizen gets to decide whether or not he or she wants to file a return. It should be more properly stated that the citizen must “volunteer up information about their income”.

Failing to File under Section 7203 can amount to 1 year in jail with fines. The IRS normally does not send the average late filer a letter indicating possible incarceration. However, this code section is available for any case the IRS deems necessary. Just because you think that you’re small fry, doesn’t mean that the IRS cannot act Section 7203 on you.

File your taxes.

The IRS allows the taxpayer to arrange his or her deals in the light most favorable to them, i.e. to lower tax liability, but only if the arrangement is legal.

Self-Employed? (i.e. own your own business?)

This is a good site on how to fill out your taxes if your self-employed. (Link) Pay close close attention to Step 17 in Determining expenses, the one that deals with self-employment tax. A little tax that currently amounts to 15.3% of your income. The problem is that you should be sending in your employment tax on a quarterly basis, not trying to figure out how much you owe at the end of the year. When you are self-employed, the entire burden for paying employment taxes and prepaying estimated income tax liability is left to you. That’s why you need to pay estimated taxes in quarterly installments to the U.S. Treasury; otherwise, you may be subject to underpayment penalties.

The question comes to, because SE tax is mandatory, how does one reduce it? By owning your own company, there are legal ways to incorporate or alter your business entity to reduce the SE tax owed. Contact us, if you’d like more info.

Here’s the thing when I hear individuals wanting to avoid the SE Tax: Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Caution: By not reporting all your self-employment income, you could cause your social security benefits to be lower when you retire.

So there’s a couple of issues to grapple with 1) Will Medicare and other SS benefits be there when you’re old?, and 2) Can you create your own little nest egg that you don’t need SS, i.e. can you save better than the SSI?

However much that you pay in SE tax, remember to take half of it as a deduction off of Form 1040, line 27.

Another Example of Tax Evasion: This time - Not paying employment taxes

The Edmonds-based Skipper’s seafood chain has filed for Chapter 11 bankruptcy protection — seeking to close five unprofitable restaurants, including one in Ballard, and resolve $1.9 million in unpaid employment taxes and IRS penalties.

Attributing the problems in part to efforts by the company’s finance director, Eric Li, to “cover up the accruing tax debt” through false financial reports to senior managers and owners.