Finance Tax Time

One of an American citizen’s worst fears is an audit by the IRS. The unlucky individual who is the target of an audit begins to conjure up images of penalties, fines, levies, or worst of all, jail time. Even the most honest of taxpayers, under the scrutiny of an audit, begins to think back in their mind, “Did I calculate my return correctly?”, “Did I save all my receipts for the deductions I claimed?” This is a most stressful and challenging time in a taxpayer’s life. Nevertheless, before one loses sleep over the impending audit, there is a law which protects the American taxpayer in an IRS audit situation.

To be more specific, in 1998 the IRS passed the third installment of the Taxpayer Bill of Rights (TaBOR). The bill was passed as a byproduct of numerous complaints to Congress concerning the abusive behavior by IRS auditors. The Taxpayer Bill of Rights also requires the IRS to inform a taxpayer of his rights and what effect of the tax action the IRS is pursuing. The audit itself is traditionally thought as a meeting between an agent of the IRS and the taxpayer. However a good percentage of tax audits come in the form of a letter asking for clarification or substantiation of items on the tax return. Careful and organized record keeping usually make these types of audits resolve rather smoothly.

The IRS may choose to audit a portion of the filed return, or on some occasions an agent may request a closer examination of the entire return. If the auditor merely asks for documentation for a specific part of your return, it would be a good idea to give the auditor only that piece of information that is requested. Bringing additional documentation or information not requested could subject the taxpayer to wider scope audit, that is if something else on the return looks irregular. In other words, only bring what is requested. Do not volunteer any information to the tax auditor, and answer their questions with simple, direct answers.

Since most people are not experts at tax law, it is highly recommended that a CPA, tax lawyer, or tax advisor represent them in a meeting with the IRS. Contact the person who prepared the return. They will have specific advice on how to prepare for the audit. In most cases they can attend the audit in place of you to gather information from the field agent. This puts the taxpayer at an advantage and may buy valuable time to prepare the necessary documentation.

The audit will conclude with the IRS agent citing any irregularities noted with the return. They will then formally notify the taxpayer of any monetary adjustments that need to be made. In some cases some lucky citizens have received additional refunds after an audit. Unfortunately, in most cases, the IRS will be asking for a check. An agent’s decision can be appealed to a supervisor, or the Appeals Division of the IRS. If the Appeals Division decision is still unsatisfactory, a final appeal can be made to the US Tax Court.

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“Settle for Pennies on the Dollar! IRS debts settled for $20
Wipe out the Penalties with an Offer”-such is the language of Offer-in-Compromise promoters. What they fail to tell you is that one has to qualify for an Offer and few taxpayers will be able to meet the tough standards for an OIC.

The Offer-in-Compromise (OIC) has been around for a long time, but it wasn’t until 1992 that IRS started really using the program in good faith. After the Revenue Reform Act of 1998, IRS became even more liberal with the OIC. At one point almost half of all Offers were being accepted. Unfortunately, in 2002, the IRS started getting tough on Offers and now only about 20% of all Offers are accepted. The main reason for the decline was the centralization of Offers at two IRS locations instead of them being worked locally at the district offices.

An Offer can be made for “Doubt as to Liability” or “Doubt as to Collectability.” Submitting a proper OIC is more than just filling out an IRS Form 656. A good offer must have 3 recent months of supporting documentation attached with the Form 656 (if the OIC is for doubt as to collectability). Failure to fill out the Form 656 properly, failure to include all liabilities, or failure to provide the documentation required results in an Offer that is dead on arrival. Even if the forms are complete and the data provided; the Offer is now just “processable” and 6-9 months may go by before a decision is reached on the merits of the OIC.

Unscrupulous Offer Promoters often don’t qualify people for the Offer, they just sell them a bill of goods. Folks can pay thousands of dollars and not have a chance at an OIC to begin with! Many of the so called “tax resolution” companies that you see on the internet or on TV have salesmen who call themselves “Tax Consultants.” They may take your financials over the phone but they are not the ones who will be doing the actual work. It may be contracted out to a third party. If the owner of the company is not a licensed professional, what does he have to lose if you don’t get serviced? Don’t do business with anybody that is not a CPA, Enrolled Agent, or Attorney. If the matter is Doubt as to Liability, no financial is required, but there needs to be a solid basis for the claim in law and policy.

The main items that often sink an Offer when someone does qualify based on income and expenses are assets such as IRAs, 401Ks and home equity. If you owe the IRS 25K but you have an IRA worth 50K and home equity of 50K, forget about an OIC. There would have to be a horrible circumstance in your life to get past the equity in assets. In very rare cases of health or old age, exceptions can be made. Just because you can’t pay your bills on time doesn’t make you an Offer candidate. You must not be able to full pay based on income and expenses plus the “quick sale” value of your assets. Only then is a Doubt at to Collectability Offer an option.

If you qualify, you really can settle for “pennies on the dollar,” but it might be 90% of your debt based on the math. To settle for $500 you would have to be broke with no assets at all and no prospects for near term improvement of your financial situation. Recent changes to the law on Offers also now require a non-refundable down-payment with the OIC. You can get the forms you need for an Offer from the IRS for free. If you don’t want to do it yourself, see a CPA, Tax Attorney, or Enrolled Agent that has IRS Representation experience. They can go over all of your options.

You can learn more about Offers at these websites:

www.irs.gov
www.aicpa.org
www.naea.org
www.nsacct.org
www.etaxes.com
www.exirsman.com

James Robert Coleman, E.A., A.T.A.
Enrolled Agent, Accredited Tax Advisor, former IRS Revenue Officer. Member-National Association of Enrolled Agents & National Society of Accountants.
http://www.exirsman.com

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