All Things Taxes

Choosing the right tax resolution firm

If you are currently facing back tax problems, chances are you may be looking for professional help resolving them.  When you are faced with the stress and the financial burden of back tax debt, you want someone you feel comfortable with to help you through those troubling times.

Here are some of the things you want to be aware of when you choose a tax resolution firm:

• Avoid tax representation firms promising to reduce your taxes significantly or saying they are offering you the “once in a lifetime” opportunity to get straight with the IRS.  Tax representation firms represent you with the IRS, but cannot guarantee any particular out come in your case.  All final results are up to the IRS.  It is the firm’s job to analyze your situation and determine the best course of action for your particular case.
• Avoid a tax representation firm offering to settle your tax liability for “pennies on the dollar.”  This expression has been used to advertise, but again, a tax resolution firm cannot guarantee results when it comes to dealing with the IRS.
• Avoid any firm advertising they have an inside connection at the IRS.  Although many firms hire former IRS employees, these employees do not have an inside connection, nor can they negotiate on your behalf any differently than an Enrolled Agent, CPA or attorney can.
• Many national tax resolution firms conduct all business over the phone, rather than meeting in person.  JK Harris’ Sales Consultants meet with clients in over 325 locations, by appointment only, nationwide to get you started on the road to fixing your tax problems.
• Choose a firm who has longevity, and experience.  The tax resolution industry is a fast growing one and many firms do not have the required experience to ensure you feel comfortable hiring them.  Remember: the firm you hire will be representing you before the IRS.  You want a firm that is well-versed in taxes and IRS procedures. Choose a firm you are comfortable with.  The process of negotiating with the IRS can take months or more than a year.  Make sure you hire someone you trust.

Remember – the decision to hire a tax resolution team is an important one.  Don’t make an emotional decision.  Hire the right tax resolution firm for you.

What is an Innocent Spouse?
Generally speaking, when a tax return is filed “married filing jointly,” both taxpayers are individually liable for any taxes due. This is true even if the couple later divorces and the divorce decree states one spouse will be responsible for any amounts due on past income tax returns.

An innocent spouse is a taxpayer who unknowingly filed a joint return with his or her spouse, who had reported an understatement of tax due to errors on the tax return.  The unknowing, or innocent spouse, must prove at the time the return was signed, he/she did not know or have any reason to know, there was an understatement of tax.  The IRS will take into consideration the facts and circumstances and show it would be unfair to hold the unknowing (innocent) spouse liable for the understatement of tax.

There are three types of relief given to the innocent spouse.

• Innocent Spouse Relief - If a taxpayer qualifies for Innocent Spouse relief, he or she will not be held accountable for paying tax, interest and penalties if their spouse filed an erroneous tax return.
• Relief by Separation of Liability – The understatement of taxes, plus any interest and penalties due on a jointly filed return, is divided between the unknowing person and the spouse (or former spouse).
• Equitable Relief – If the unknowing party does not qualify for innocent spouse relief or separation of liability, he/she may still qualify for equitable relief.  For more information on equitable relief, visit the IRS site.

What is an Injured Spouse?
An injured spouse is different than an innocent spouse.   An injured spouse is someone who files a joint return, then all or part of the injured spouse’s share of the overpayment (tax refund) was kept and applied toward the spouse’s past due debts.  The injured spouse can get a refund for his/her share of the overpayment.

According to the IRS, to be considered an injured spouse, you must:

• Have made and reported tax payments (federal income tax withheld from wages or estimated tax payments), or claimed a refundable tax credit, such as the earned income credit or additional child tax credit on the joint return and
• Not be legally obligated to pay the past due amount.  (If the injured spouse’s permanent home is in a community property state, the injured spouse only has to meet condition 2.)

What is an abatement of IRS penalties?
When you owe the IRS back taxes, it can result in penalties and interest which can compound over the time you owe your back taxes.  This can balloon until you actually owe more in interest and/or penalties than you owe in back tax debt.

The IRS can apply penalties for filing your tax return late (if you owe money, not if you are owed a refund).  The penalty for filing late is generally 5 percent each month, or partial month, and can end up being up to 25 percent of the amount due on your tax return.

The IRS penalty for paying your taxes late is 0.5 percent per month, up to 25 percent of the unpaid amount due.

Fortunately, there are some situations where the IRS will abate or eradicate your IRS penalties, partially or in full, for one or more tax years.  To submit a request for abatement of penalties, a taxpayer must have a reasonable cause, specific to each tax year, to explain why penalties should be removed.

There are six main reasons the IRS will accept for an abatement of penalties.  They include:

• Death or serious illness of the taxpayer or a member of his/her immediate family.  In the case of a corporation, estate, trust, etc., the death or serious illness must have been of an individual having sole authority to execute the return or make the deposit or payment, or a member of such an individual’s immediate family.
• In the case of the unavoidable absence of the taxpayer, a corporation, estate, trust, etc., the absence must have been that of an individual having sole authority to execute the return or make the deposit or payment.
• Destruction by fire or other casualty of the taxpayer’s place of business or business records.
• The taxpayer was unable to determine the amount of deposit or tax due for reasons beyond the taxpayer’s control.  However, this cause will be acceptable for taxpayer’s required to make deposits or payments of trust fund taxes only when the taxpayer was unable to have access to his/her own records.
• The facts indicate the taxpayer’s ability to make deposits or payments has been materially impaired by civil disturbances.
• Lack of funds is an acceptable reasonable cause for failure to pay any tax or make a deposit under the Federal Tax Deposit System only when a taxpayer can demonstrate the lack of funds occurred despite the exercise of ordinary business care and prudence.

What is an Installment Agreement?
One repayment option the IRS offers taxpayers who owe back taxes is an Installment Agreement.  An Installment Agreement is exactly what it sounds like.  It offers taxpayers a way to repay their tax liability to the IRS over time at a reasonable payment amount.  While you will still pay interest and penalties on your tax debt, the Installment Agreement makes it more manageable for most taxpayers to pay off their owed back taxes and get back into compliance with the IRS.

It is important to note payments on an Installment Agreement must be made on time.  It is important for taxpayers to contact the IRS immediately if there is a change in their financial situation.  Failure to pay an Installment Agreement could trigger the filing of a Notice of Federal Tax Lien and/or an IRS levy. These types of enforced collection actions can cause a negative rating on your credit report and/or a strain on finances.

What is Currently Not Collectible Status?
If a taxpayer finds himself in the position of being unable to pay his tax liability, and if the IRS trying to enforce collection of the tax liability would create a financial hardship, the IRS may place the taxpayer into Currently Not Collectible status.  In the eyes of the IRS, a hardship can be financial, medical, or an unpredictable life event, such as a natural disaster or unemployment.

Currently Not Collectible or CNC status is also sometimes referred to as a “Status 53.”  The IRS has guidelines the taxpayer must fall within to be considered for CNC status.  The IRS will consider the taxpayer’s income against allowable monthly expenses, which include the national averages for food, clothing, miscellaneous expenses, housing, transportation, medical expenses and insurance, proper tax withholding and payments.  The amounts allowed can vary depending on household size and local standards.

In order to be considered for Currently Not Collectible Status, the taxpayer must fill out Form 433F and supply the IRS with financial information and supporting documentation.  Generally, a CNC can be pursued if the taxpayer has income that is below his allowable expenses and his income is not likely to improve in the future, or if, due to high equity, the taxpayer does not qualify for an Offer in Compromise and the statute of limitations is getting close to expiring.

While a taxpayer is in Currently Not Collectible Status, he does not have to make any payments on his delinquent tax liability due to a lack of adequate income.  This allows the taxpayer to have money to provide for themselves of their family.

The IRS will continue to monitor taxpayers under a CNC.  If the taxpayer’s income rises sufficiently, they will be changed back to a “collectible” status.  Penalties and interest do continue to accrue during the period the taxpayer is under the Status 53.

What is an Offer in Compromise?
An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax debt. The IRS has the authority to settle, or “compromise,” federal tax liabilities by accepting less than full payment under certain circumstances. A tax debt can be legally compromised for one of the following reasons:

• Doubt as to liability – Doubt exists that the assessed tax is correct.
• Doubt as to collectibility – Doubt exists that the taxpayer could ever pay the full amount of tax owed.
• Effective Tax Administration – There is no doubt the tax is correct and could be collected but an exceptional circumstance exists that allows the IRS to consider a taxpayer’s OIC. To be eligible for a compromise on this basis, the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable.

As the result of the issuance of the revised Form 656, Offer in Compromise (2/2007 revision), a taxpayer is now required to file a Form 656 – L, Offer in Compromise (Doubt as to Liability) when it is believed that the tax liability is incorrect, while Form 656, Offer in Compromise should be filed only when there is doubt as to collectibility that the tax liability could ever be paid in full, or under the basis of Effective Tax Administration (ETA). A taxpayer is no longer able to file offers concurrently claiming both that the tax liability is incorrect along with an inability to pay it.

Form 656, Offer in Compromise (2/2007 revision) also incorporates changes in the processing guidelines as the IRS will no longer investigate an offer for a tax year or tax period that has not been assessed. The IRS will return the offer back to the taxpayer if it is submitted solely for an unassessed tax year or tax period.

“A big thank you to JK Harris and Company and your magnificent staff for your wonderful assistance in resolving my problems with the IRS. As a single parent without much support, I found it financially overwhelming and thus made mistakes that I never seemed able to resolve by myself. I also found it extremely stressful dealing with the IRS by myself…After all these years, I can finally feel a sense of relief…” J.S. of Kingston, NY