10 tax troubles you can avoid
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When Richard Hatch bared it all on “Survivor,” he took home a million bucks. But when he was less revealing about his windfall with the Internal Revenue Service, he wound up facing possible prison time as a tax evader.
Steve Kassel, a former IRS revenue officer who now represents taxpayers in trouble as president and founder of eTaxes.com, sees such blatant blunders on a daily basis.
“What the hell was he thinking?” Kassel asks. “How did he think he was going to get away with not disclosing income that the whole world knew about? Even if you can’t pay, disclose it and you’ll have a relatively simple problem. To not disclose it just defies all logic. Everybody knows you made it. It’s reported to the IRS.”
Getting nailed for back taxes is tough enough. But many taxpayers make a bad situation even worse by fumbling one of life’s most delicate situations: a tax tango with the IRS.
Tax troubles come in many forms. We read about the high-profile cases involving celebrities such as Willie Nelson, John Travolta and the hapless Hatch, but busy professionals such as doctors and lawyers often run afoul by losing track of their books. The self-employed also are easy targets, as are those thousands of Americans who get caught up in tax scams every year.
“The IRS is never on your side”
James Rome of Travelers Tax Group says the blunders people make when flagged by the IRS tend to cost them dearly in time and money.
“First and foremost, the IRS is never, never on your side,” says Rome. “Here’s just one example: The IRS will tell a taxpayer to go ahead and file an offer in compromise. The taxpayer thinks great, I can negotiate a settlement myself. Well, one of the reasons they do that is so you will divulge all of your financial information. It essentially gives them a road map to all of your assets.”
The fact is, the offer in compromise, a negotiated cents-on-the-dollar settlement of a tax debt that has long been considered the errant taxpayer’s ace in the hole, is fast disappearing, in part because of a flood of what the IRS considers “nonprocessible” offers submitted by unsavory “offer mills” that promise relief but deliver bupkis.
“The acceptance rate is down to approximately 15 percent. It has gotten much, much more difficult,” says Kassel. “There is no doubt whatsoever that [IRS] Commissioner Mark Everson has zero interest in the offer program; his desire, without any doubt, is to kill it. Our numbers used to be extremely high, but today, the same offer that would have been accepted three or four years ago is being denied, for a whole host of reasons. Even if you hire a professional, chances are today that it’s going to be rejected.”
OK, now you know about the perils of handling an offer in compromise. Make sure you also avoid these 10 other costly mistakes that taxpayers make when nailed by the IRS
- Fail to hire an attorney
- Fail to hire effective counsel
- Ignore letters and collection notices from the IRS
- Fail to contest a tax levy
- Fail to file a return
- Fail to pay payroll taxes
- Pay your full bill
- File bankruptcy
- Allow the IRS to file your tax return for you
- Fail to remove a federal tax lien from your record
1. Fail to hire an attorney:An experienced tax attorney has ready access to the IRS guidelines used in negotiating a settlement. Hiring an experienced tax team is viewed very favorably as a sign of good faith and resolve by the IRS.
2. Fail to hire effective counsel:As comfortable as you may be with your family lawyer or accountant, they probably don’t have the qualifications and experience to negotiate effectively on your behalf before the collection arm of the IRS. Tip: Look for the designation “EA,” which stands for Enrolled Agent. Kassel is one, and he and his peers have earned the privilege of representing clients before the IRS by either passing a written test or, in Kassel’s case, having worked for the agency for more than five years.
3. Ignore letters and collection notices from the IRS:A notice from the IRS is the first step in a legal procedure to secure the right to seize your assets. An effective tax team can halt the collection process until a permanent solution can be found. “The most costly mistake you can make is to ignore the IRS,” says Kassel.
4. Fail to contest a tax levy:The IRS has become more aggressive in wage garnishment and seizure of bank accounts, IRAs and even residences. These can be legally contested, or even better, prevented. “If you lock up a person’s bank account, they can’t do business, they can’t pay their employees and they are forced to shut down,” says Rome. “That’s not in anyone’s interest.”
5. Fail to file a return:It is a crime if you fail to file a tax return when tax is owed. It is not a crime, however, to file your taxes and not pay them.
6. Fail to pay payroll taxes:The IRS views very seriously employers who fail to file or pay employee withholding taxes. It’s not just the tax money that the employer pocketed; the IRS has in turn already paid returns on that money to employees. Penalties and interest in these cases are very steep, and there is no relief, not even in bankruptcy.
7. Pay your full bill:Taxpayers who pay their tax liability without demanding relief from penalties and interest may overpay by thousands of dollars. You may qualify to have these charges reduced, removed, or even refunded. Rome says his group of accountants, lawyers and enrolled agents use the IRS guidelines for pre-settlement planning to get the client’s disposable income as low as possible in order to obtain a settlement the taxpayer can uphold.
8. File bankruptcy:Bankruptcy won’t apply to any tax liability owed for the past three years, and may even extend collection time and add penalties and interest. But if your back taxes are more than three years old, you may want to consider bankruptcy.
9. Allow the IRS to file your tax return for you:Yes, it is an option, through a process called Substitute for Return, or SFR. Is it a good option? Hardly. The IRS will disallow any deductions and tax you at the highest possible rate, says Rome.
10. Fail to remove a federal tax lien from your record:When the IRS does accept an offer in compromise, it is generally required to remove all tax liens within 30 days. Make sure that happens.
Look out for late-night ads
Kassel also cautions against succumbing to the high-pressure ads on late-night television and the Internet that promise an instant end to your tax troubles.
“A huge number, I would say at least half of the companies that advertise on the Internet, are not actually looking to represent you, they just collect your information and sell it as leads. When you do that, God knows who you’re going to be contacted by,” he says.
Believe their guarantees and promises at your own risk, says Kassel.
“You’re already in a vulnerable situation, and people know that, so it’s very easy to sit down with you or talk with you on the telephone and say, ‘Oh, we’re going to get all of the penalties wiped out. We’re going to get an offer accepted for a couple of pennies on the dollar.’
“Well, that does happen in some cases, but in the vast majority, that’s not going to be the outcome. So now you’ve put out more money, there has still been no contact with the IRS at all, and all you are is deeper in the hole and further along in the process. It’s a never-ending cycle.”
Jay MacDonald is a contributing editor based in Mississippi.