Below you’ll find a Question and Answer session produced by the IRS which explains the tax settlement process used for Offers in Compromise and gives detailed information about who qualifies, why the program was setup, and what you should expect if you need to file an OIC.
Note: The IRS conducts presentations via Phone Forums. These presentations are archived on the IRSVideos.gov website for individuals, small businesses and tax professionals. The links to all IRS phone forums are shown at the end of this phone forum transcript.
Q1. I have been asked to file returns for a taxpayer who has no assets, little income, and owes many years of taxes. After all tax returns past due are filed, can an OIC immediately submitted or should the OIC be filed after the returns are processed and notices are received by the taxpayer? (more…)
In 2011 nearly half of all American tax filers will pay no federal income taxes this year, according to data released by the Tax Policy Center.
For all you taxpayers this is a sobering thought: 76 million tax filers, or 46.4 percent of the total, will be exempt from federal income tax in 2011.
A similar percentage of filers who are mostly among the bottom 40 percent of earners, legally avoided paying federal income tax for the past several years. (more…)
When people hire me as their tax attorney to fix their IRS tax problem one of my first steps is to research what caused the problem in the first place. You may be surprised to hear that it’s not the tax payer’s ignorance, negligence or fraud that are the top sources of my client’s tax problem.
Let me put it this way, if it wasn’t for popular tax return software, and other problem areas I’ll discuss later this week, I might not be able to make a living as a tax attorney.
Tax Return software
Most of the tax return preparation programs today use an interview format to make it easier on you to complete your taxes. Sounds great, but in practice this leads to one of my client’s biggest problem areas.
The interview based approach favored by tax software can lead to double counting in areas like your expenses. In other words, it looks like you owe less tax than you really do. The minute you submit this inaccurate return you’ve potentially triggered an IRS audit flag. Ultimately, you’ll also owe back taxes and interest on the tax amount you should have paid.
You’d think by the tone of my comments that I was selling tax return preparation but I’m not. I just fix the problems once they’ve already happened.
What’s the solution to avoiding tax problems with Tax Return Preparation software?
Every day I work with people who face tremendous tax problems: They owe taxes and are exploring what options they have to deal with it. It’s something I do every day so I was surprised to read an article that said the IRS is becoming “soft” on tax liens. You can read the article yourself here but I’ll summarize it for you:
The IRS can legally file tax liens any time a taxpayer owes money and has not fully paid it off. There are usually only limited circumstances when the IRS won’t file tax liens, including when the tax debt is for a small amount, or perhaps when the tax liability is for a deceased person who died without any assets, or when the taxpayer is in an active bankruptcy.
In the old days, the IRS would often not file a tax lien, but today, with the federal government needing revenue so badly, IRS collection folks are much more likely to file a tax lien and to to file it faster.
Of course this makes sense for the IRS: If someone owes tax money the IRS wants paid, and filing a tax lien is a a way to put pressure on the taxpayer. A tax lien also helps the IRS protect their position and increasing the odds that they will eventually get paid. Nowadays they try to file the lien as soon as they are legally allowed to do so.
We all know the IRS is a very large bureaucracy, and they make mistakes all the time, so it wasn’t a great surprise that when the IRS recently “audited” themselves that they discovered there were 210 files at two field offices that never had any contact or follow-up and accounted for a potential $6.4 million in collectible taxes. Basically, 210 files were just sitting there, being ignored. In addition to that, tax officers closed over 2,700 files and called them “uncollectable” but never gave a reason. In total, between 2002 and 2008, it was discovered that $1.4 billion in delinquent taxes were shelved rather than followed up on.
Are they getting lazy at the IRS offices? How are IRS officers deciding which files to pursue and which ones to ignore? How can we as taxpayers ever know if we are receiving fair treatment if we are hit with a tax lien while someone else who gets shelved?
The most likely answer is that there are so many “taxpayers” who are delinquent in paying their taxes or in filing their tax returns that the IRS doesn’t have the resources to deal with them all.
The IRS hasn’t gotten soft, in fact they’ve gotten much more aggressive, and busier. If you owe back taxes, you should still sleep with one eye open because the tax man will eventually come looking for you.
In today’s evolving business world, one of the ways that some small business owners are saving money and improving the competitiveness of their business is by hiring contractors instead of employees. Contractors take care of their own taxes and insurance, they (presumably) are good at their work, and business owners don’t have to keep them on if there isn’t work for them to do. All in all, contractors can make good business sense.
The IRS agrees… to a point. They believe that some business owners are circumventing their responsibilities by filling roles with contractors when they should be filled with employees. The result? A worker classification audit by the IRS to ensure that each business owner is correctly playing the taxes they should be paying (on employees) and not avoiding those taxes (by calling them “contractors” instead).
Moreover, the IRS may run this audit at the same time as a tax audit or it may choose to perform a tax audit afterward, if it feels that there are unpaid taxes to be found.
What is frustrating is the lack of clear rules around what the IRS considers a “legitimate” reason to have a contractor instead of an employee. The rules aren’t always clear. In fact, this Inc. Magazine article by Matt Quinn tries to outline the guidelines the IRS has in deciding whether or not the roles they are investigating should be filled by employees or contractors and it’s clear from the article that it’s not clear to the IRS! (Read the article here).
Check out Quinn’s step-by-step suggestions and make sure you’re ready because the IRS is coming. They’re randomly selecting 6,000 businesses to audit. I believe that if they find enough businesses that are breaking their poorly defined rules, we’ll see even more of these audits in the future.
This is just another way that current tax laws make life uncertain for business owners.
Taking control of your financial future and forging an entrepreneurial path seems like a great way to build wealth and get out from under the thumb of annoying bosses and even more annoying coworkers. It’s the American Dream. In the recent economic meltdown, many people were forced out of their jobs and used the opportunity to start businesses of their own. Now here’s something you may not expect me to say: It was the ones who failed at being self-employed and had to find a “normal” job who were better off.
Now, don’t get me wrong. I’m all for the entrepreneurial spirit. I think that initiative is one of the great things about this country. But we have a burdensome tax system that tends to punish those who start their own businesses!
You’d think that entrepreneurs would get tax breaks of all kinds simply for starting a business, taking financial risks, and keeping the economy going. It should be that way. However, many brand new entrepreneurs discover all too quickly that it’s the other way around.
When someone works for an employer, the employer splits the cost of Social Security and Medicare with the employee, each paying a portion. And, the employer takes off the employee’s taxes before the employee gets their check. So the paycheck might be lower but it all belongs to the employee.
Now consider the entrepreneur who needs every advantage he or she can get: They have to pay Social Security and Medicare entirely themselves, and the money they get in hand from customers still needs to be split into income and taxes.
On the website Chron.com, Associated Press writer Joyce M. Rosenberg recommends that entrepreneurs put 40% of all after-business-expense income into a bank account that they can give to the government in the form of taxes. (Read the article here).
It’s a disappointing reality that entrepreneurs who need a brief advantage to get their businesses running are expected to pay more than those who work for someone else.
So what are you waiting for? Start your own business today! The IRS needs to bolster its revenue stream.
Adam Smith wrote the book “The Wealth of Nations”, a massive work that set the tone for employment, economics, and industrialization in the US. Published in 1776, much of Smith’s work is as relevant today as it was back then.
Among his many insightful economic positions, he believed that taxes were a good thing but they should be “certain, and not arbitrary”.
No one here disputes that we shouldn’t have taxes. Taxes are necessary to pay for roads and police and the many other services that come with living in the US. But what we do have a problem with is that the tax code has become a tool to redistribute wealth, taking it from some and giving it to others, ultimately redefining the American Dream into something that looks more like a socialist economy.
Adam Smith believed that taxes should be “certain, not arbitrary” but our taxes right now are anything but certain! Filling out tax forms – accomplished by wading through an overwhelming number of forms and documents – is akin to pulling the lever on a slot machine… but a slot machine that punishes you instead of rewards you!
Smith proposed a flat tax. While I realize that there are many challenges to implementing a flat tax, and there are reasons why a flat tax might not work, it is the most equitable form of taxation because it is certain and knowable. In fact, a flat tax might actually decrease the amount of bureaucracy and expense incurred by the IRS every single year in trying to understand their own tax code and then trying to enforce it.
The Washington Times has a fascinating article that starts by talking about the IRS and how IRS employees are receiving a growing number of threats for trying to enforce Congress’ tax laws but then, on page 2 of the article, it launches into a scathing examination of IRS employee culpability and ultimately concludes with other great thoughts by Adam Smith. Read the full article here.
Although most of us don’t take this into consideration, some people choose their citizenship based on tax exposure. They may live in the US because taxes are cheaper here (than elsewhere) or they may move from the US to a location with even cheaper taxes.
In a Forbes.com article entitled “Ten Facts about Tax Expatriation”, Robert W. Wood lists important information that you should know if you are thinking about moving to or from the US in order to modify your tax exposure. I’ll summarize the ten items here but you should read them in greater detail in Wood’s article.
And his ten tax expatriation facts are:
The government taxes all income worldwide. So the money you made elsewhere? The IRS wants some of it.
If you’re going to leave for tax reasons, you need to really leave. You can’t fake it. If you’re here more than 30 days in a year, you are considered a citizen or resident of the US.
There was a loophole that allowed you to get out of some taxes if you left for a reason other than tax avoidance. It comes as no shock to anyone that this loophole was closed.
In 1996, Congress just assumed that anyone with a net worth greater than $500,000 was leaving the US to avoid taxes. Nice!
In 2004, the US decided to stop guessing and just impose a tax on all US-based income for ten years after someone moved away.
There are special rules for long term residents (as if the tax law isn’t already complicated enough).
There’s an exit tax (or, as I like to call it, a “slap in the face” tax) for anyone leaving after June 17, 2008: Essentially everything you own in the world is considered to have been sold at market value and you have to pay a capital gains tax on it…
… unless the income is less than $600,000. So this is a “slap wealthy people in the face” tax. And it shouldn’t surprise you that Woods spends another 2 paragraphs going into detail about the complex calculations surrounding this.
You can defer this tax but it’s complicated.
Woods says it perfectly: “You’ll need professional help.”
Entry and exit is an interesting situation: Various agencies (like Homeland Security and the US Citizenship and Immigration Service) do a thorough job of making sure that it’s not easy to get into the US… and the IRS makes sure it’s not easy to get out of the US.
“Welcome to the USA… now that you’re here, you’ll pay taxes and you won’t be able to leave.”
When people hear about other people with tax problems, they may often think that it was intentional, but those with tax problems can frequently report that it was not. A common cause of tax problems is not intent but complexity!
There are thousands of pages of IRS tax documentation and the IRS themselves require an army of experts who spend every waking hour navigating this documentation. They package it up into forms and guides and ask millions of Americans to be completely accurate… or else. Minor errors and tiny oversights can trigger invasive and disruptive tax audits.
How bad is it? Here’s an info-graphic about the tax system that we love. For those of you who prefer text instead of images, I’ve interpreted it below.
There are about 138 million taxpayers in the United States and these taxpayers pay a whopping $2.3 trillion (yes, with a “t”) in taxes each year. (Who can afford college tuition at that rate?). Even though that 2.3 trillion is such an unbelievably gigantic number, it’s worse knowing that 92 million taxpayers (more than half of all taxpayers!) make less than $50,000 per year and pay between 10% and 15% of their income in taxes. Meanwhile, 5 million taxpayers make more than $200,000 and pay 20% to 25% in taxes each year.
Ready for some more shocking numbers? Some say that over 16% of Americans evade taxes each year while 78% of those who file taxes get $2,700 back in their returns. That results in over $345 billion dollars of lost revenue (worth 2.6% of our national GDP).
Worse yet: The tax code in 1913 was 400 pages but now it’s over 70,000 pages long, so it’s not surprising that the IRS themselves estimate that it will take you more than 24 hours of straight calculations to do your own tax returns! It’s no wonder that more than 60% of Americans pay someone else to do their taxes.
The more government tries to “help” us, they more they complicate our lives and suck up our time.
From the new healthcare bill: businesses will have to issue 1099s whenever they do more than $600 of business with another entity in a
year. For the $14 trillion U.S. economy, that’s a load of 1099s that could fill Air Force One.
Read more here about the costly IRS mandate slipped into the new healthcare bill.
In exchange for “helping” us, Big Brother always seems to want to know more, and more, and more about us. Especially about how we use our money and who we pay.
