The Five Cardinal Rules of Dealing with the IRS
Without a doubt, the IRS is everybody’s favorite government agency to hate. The very thought of getting even a single letter from the IRS makes most people break out in a cold sweat. The over-riding purpose of this article is to show that there really is a light at the end of the tunnel in dealing with the IRS and that – surprisingly – the IRS can be approachable in reaching a livable solution to most prior-year tax problems.
I’ll give some real life examples – cases that we have actually had in our office – along with real life solutions. In the process, I’ll try to provide a sense of what drives us to help taxpayers this way – what gives us our passion. If you or someone you know are nagged with either a minor or serious IRS issue, our goal is to help you sleep tonight knowing that there are options for your specific situation.
We are driven by the desire to help our clients get from where they are to where they want to be. Sometimes that consists of helping a taxpayer get out of severe trouble with the IRS. Sometimes it’s by cutting someone’s tax debt from $100,000 down to $14,000.
Tax law can sometimes be a daunting subject for even the most seasoned attorney or CPA. For that reason, I’m going to try to keep our discussion as non-technical as possible. The guidance that I want to provide for you is less about giving you the specific solution for your situation than it is to provide a measure of hope for you in knowing that there are numerous options available, regardless of your circumstances.
In the realm of tax litigation and IRS problem resolution, there is little that we haven’t seen. We deal with relatively minor situations that can be “fixed” in a day. And we also deal with very severe situations that may require months before we reading the desired outcome, or at least an acceptable one.
Today, I want to pass along to you just five simple principles that guide us in seeking relief for taxpayers throughout the country. These same principles can guide you in reaching a livable solution to your IRS problem:
1. Don’t Wait ‘til the Last Minute.
Let’s face it – we’re all human and we tend to put off the stuff that’s unpleasant. The only problem is, in dealing with the IRS, the longer you wait to deal with your matter, the more unpleasant it will be. If you’re over 40, you may remember the Fram Oil Filter commercial from years ago where the mechanic says, “Pay me now, or…pay me later.” The clear message is, you can pay a small price now to keep your engine in good shape, or you can pay a big price later on. The same rule applies to dealing with the IRS. Sadly, we had a case where our client had procrastinated to the point where the IRS showed up at his house with sheriff’s deputies and a moving truck fully prepared to conduct a seizure of property. There was no need for their tax problems to ever go that far downhill.
We were able to get the seizure halted and worked out an arrangement acceptable to both sides. The Agent in charge, an acquaintance of mine, told me later that she actually felt sorry for the husband because it was very clear from the moment the IRS and deputies arrived that the husband was in much more trouble with his wife than with the IRS!
2. Be Prepared! One of the most common solutions to deal with a prior – year IRS problem is a monthly installment agreement. While there are several different types of agreements, the most common is a standard agreement where the taxpayer enters into an arrangement to pay the IRS an amount roughly equal to the household discretionary income, i.e., “bring-home pay” less reasonable household expenses. Whether you choose to deal with the IRS directly or retain a professional to represent you, you will come out well ahead by having a good fix on your monthly income and expense picture.
3. Everything is Negotiable (Well, almost) Part of what scares people about dealing with the IRS is their seeming authority to make people owe money out of thin air. The following three examples will hopefully give taxpayers a bit of comfort that liabilities of different kinds can be reduced:
- Audits - If you’ve been through a tax audit, even if it’s already “closed”, you have the right to appeal the IRS’ proposed adjustments or re-open the case with a process known as audit reconsideration. We’ve represented taxpayers in numerous cases throughout the country where we didn’t even prepare the original returns, and were able to reach a more pleasant result by either re-constructing records or pointing out an error on the part of the examiner.
- Collections cases – If you owe prior-year balances to the IRS, whether for income tax or payroll taxes, the IRS is more negotiable than ever. For the first time in modern history, the IRS is being run by an individual from the world of private enterprise, i.e., a past business owner, rather than a career government employee. And guess what – he’s actually starting to run the IRS like a business! For example, the IRS will now allow what we call a stair-step installment agreement, where the IRS agrees to accept a lower monthly payment initially, in order to allow time for the taxpayer to get his or her finances in order.
- Amended Returns – Many taxpayers are already aware that prior-year returns can be amended for a couple of years. Actually, previous tax returns can be amended for any year where there is still an open balance. (The taxpayer that I mentioned earlier where we were able to reduce their balance from $100,000 down to $13,000 we did largely by amending his returns over a six-year period for business expenses that had been overlooked by his original preparer.).
4. Choose the right representative. If you are seeking professional representation to assist in the resolution of your tax matter, choose carefully. Most importantly, find a firm or individual that knows their stuff, but also someone you can connect with. If the IRS has filed a Federal Tax Lien against you, you have probably started getting a mailbox full of solicitations from firms all over the country disguised as official mail or coming from the IRS. If possible, ask for a referral from either your accountant or attorney. If nothing else, call at least three or four firms and compare them. Regardless of what you do for a living, you are not a cow and you shouldn’t feel like a number or like you are being herded through a “one-size-fits-all” process.
If your funds are severely limited and you are simply unable to pay for professional guidance, contact the IRS’ Taxpayer Advocate Office in your area. While they are indeed a part of the IRS, they have a degree of independence and one of their purposes is to deal with hardship cases. If your current situation is severe enough that you are considering bankruptcy, do yourself a favor and seek out a bankruptcy attorney that is experienced in dealing with IRS issues in bankruptcy. There are actually instances where income taxes may be dischargeable (wiped out) in the bankruptcy process. (Section S507(a) and 523(a) of the U.S. Bankruptcy Code deal with the conditions under which income taxes are dischargeable. Again, check with your attorney.).
5. Remember “The Golden Rule”. You know, the one that says, “Treat other people the way you’d want to be treated yourself”. I realize this is easier said than done, particularly when you know that the person on the phone (or on your front porch) is trying to take money from you that you’d much rather spend on fun or family. Believe it or not, the IRS is approachable, particularly if you can try to be civil during your phone or personal contact with them. In our office we have IRS conferences at least three days a week. For each call or contact, we start off with a desired result. I can tell you without fear of error that maintaining a pleasant demeanor has been our “secret weapon” in many borderline cases or issues.
At the same time, I appreciate the honesty of many taxpayers who call our office saying they would feel much better entrusting their IRS problem to us, even if it is relatively minor. If you should find yourself on the phone with the IRS and you either feel that you’re getting “railroaded” or simply don’t sense that things are going in a comfortable direction, simply ask the representative for his or her name and badge number, and tell the representative that you’d like to call back at another time. The IRS has also become more negotiable in the options that are available and in flexibility with those options. Doubtless you have heard of one of their popular options known as an “Offer in Compromise”. This is a negotiated settlement with the desired result of the IRS agreeing to settle for hopefully a substantially lower amount than what is owed. While this option is still available, we rarely use it simply because there are other options that are far superior and yield a significantly better result, very often at a significantly lower cost to the taxpayer.
Part of the reward for us in assisting taxpayers in resolving IRS issues is in the process of determining the very best result for a given situation, and even in creating a “Plan B” just in case.
As I said earlier, we are driven by the desire to help our clients get from where they are to where they want to be. If we can help a family or a business out of a severe situation with the IRS, help them get into compliance and even show them how to legally lower their taxes for the future, then we’ve done our job and achieved our mission.
Dennis strives to bring the maximum value to every client relationship, whether income is measured in six figures or nine figures. He is best known for reaching innovative solutions to tax and business problems.
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