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If You Have Unreported Income You May Get a Letter from the IRS

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Understanding The IRS “Soft Notice” Pilot Program to Encourage Income Reporting Compliance

In 2007, the IRS launched a pilot program designed to decrease the tax gap by identifying unreported income. Under this pilot program, which is still in effect, IRS notices are issued to taxpayers when there is a discrepancy between the income reported on their tax returns and the income reported directly to the IRS by various financial institutions and employers. These “soft notices” do not identify specific discrepancies or calculate amounts due. They simply ask taxpayers to review their returns and to file amended returns if errors are found. 

In spite of the fact that these “soft notices” do not require any specific response or action on the part of the taxpayers who receive them, they should be taken seriously. The IRS designed these letters to encourage compliance through self-correction and should be considered as advanced notification that IRS software has picked up a disparity in reported income.

Although the “soft notice” pilot program collected more than one million dollars in its first year and it can be expected to continue for many more to come, the IRS has not collected enough data to determine its long term benefits.

If you received a letter from the IRS or an IRS Notice and are seeking guidance, call us toll free at (877) 889- 6527 for a free, no obligation consultation with a CPA.  Professional Tax Resolution Inc., is an honest firm with strong values. We want our clients to understand all of the options they have and never promise that we can do something we can’t.

Tax Settlement can be achieved though many methods but often the most effective way is by reducing how the liabilities were incurred at the time and avoiding them in the future.

IRS Offer in Compromise – A Review of Eligibility Guidelines

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We get a number of calls inquiring about the IRS Offer in Compromise Program. While an IRS Offer in Compromise is a very effective tax settlement option for a very well defined group of taxpayers, it is definitely not the optimum solution for anyone with an unresolved tax debt. The acceptance criteria for an Offer in Compromise are very specific, the application process is lengthy and the rejection rate can be high. Amazingly the IRS can also take up to two years from the date it receives the initial application to accept or reject an Offer in Compromise. With this timeframe in mind, it is often advantageous to enlist professional help when considering this tax settlement option. An experienced tax settlement professional will be able to determine whether the taxpayer meets the strict IRS qualification criteria and, following that determination, will ensure that the Offer in Compromise application is submitted according to published IRS guidelines. Utilizing a qualified CPA or tax professional can drastically reduce the rejection rate because the preliminary work to qualify you as an applicant and to appropriately complete the forms is done for you.

Not sure if you qualify? The primary components necessary to obtain a successful Offer in Compromise tax settlement are outlined below:

  • The taxpayer must meet one of the three eligibility criteria specified by the IRS. Those three criteria are

1) doubt as to whether the taxpayer is liable for the tax debt

2) doubt as to whether the taxpayer has the means to pay the tax debt

3) a determination that settling the tax debt would promote effective tax resolution.

Since the Offer in Compromise allows a taxpayer to settle a tax debt for less than the full amount owed, the IRS only accepts applications that adhere strictly to theses acceptance criteria.

  • The taxpayer’s eligibility must be adequately documented. Sufficient documentation to support one of the three eligibility criteria is required. This documentation may include tax returns and other financial records, disability claims and records of medical treatment and hospitalization, among other things
  • The total amount of the tax debt must be accurate. This means that the taxpayer must be current in submitting tax returns. All previously submitted returns must be checked for accuracy and refiled when necessary.
  • The Offer in Compromise application must have been submitted according to specific IRS guidelines. All of the necessary forms included with the application must be complete and all required fees and supporting documentation must be included.

Once an Offer in Compromise application is submitted, the IRS will begin its review process. During this time additional information and supporting documentation will be requested when necessary. The review process usually takes anywhere from six to twelve months but can take a maximum of two years. If the application is not officially accepted or rejected within two years, the IRS is required to accept the offer.

If you have an unresolved tax debt, visit us today at www.professionaltaxresolution.com for more information about our customized tax settlement assistance. With over 16 years of experience working with the IRS, our experienced professionals will help you determine which available tax settlement option best meets your specific needs. Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to learn more about our services and to receive a free, no obligation consultation

 

Can the IRS Take my Home Because I Owe Unpaid Taxes?

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A common fear is that the IRS may take your valuable assets to pay off unpaid taxes. The fact is, if you owe the IRS money they have a legal right to seize your possessions, including your home but the reality is, you have the ability stop or resolve the problem before it gets to that point.

But wait, how can the IRS take your home?  Relax – there are a number of steps that have to happen first. Here is a quick review:

The first step in the process if you owe money to the IRS is that they must notify you. Believe us – they are going to make every effort to make sure you know that you have an unpaid tax debt.

Of course owing tax debt does not imply you did something illegal or ill intended. Often a simple taxpayer misunderstanding causes a tax debt. For instance, perhaps this is the first time you ever paid taxes. Perhaps you just filed an extension. You can incur a tax debt in either of these scenarios.  New taxpayers may not know that they need to pay their tax liability at the time they file their taxes and taxpayers who have never filed an extension may not realize that their tax liability must still be paid on the original tax return due date of April 15 and not the extension date.

If you fall into one of these categories, it is likely that your unpaid tax liability is just a simple misunderstanding and one or two letters from the IRS to the taxpayer informing you of the tax debt is often enough to outline the problem and get the tax debt paid off; resolving the tax issue.

If a tax debt is not resolved through a few letters to you, the second step in the tax debt collections process is that the IRS will become more aggressive in their collection effort and may start the process to seize some assets. From the viewpoint of the IRS, if you do not respond to the IRS’ initial notifications of an unpaid taxes or follow-up to their communication, the IRS is lead to believe that you are not willing to work with them.  The seizure of assets is therefore a defensive action and only occurs in situations where the taxpayer is unwilling to work with the IRS to establish a payment plan or otherwise address the tax debt owed.

If at this point a taxpayer is still not working with the IRS to figure out a resolution, the next step in the collections process is an IRS levy of some kind. Before a levy can occur, the IRS will provide you a written notice of their intent to place a levy against your assets or property. Only after the written notice will they obtain a levy – something which allows the IRS to take your property to satisfy a tax debt.  Types of assets or property they can levy include bank accounts, wages, vehicles, and other personal property, including your house.

Clearly the IRS is aware that seizing the home of a taxpayer can cause a significant hardship in the life of the taxpayer.  Therefore, they won’t do so unless they see no other option.  Really in order to get to this point, the taxpayer has to remain unwilling to work with the IRS to establish a payment plan to pay the taxes. Also in order for the IRS to take a home, all of the other more liquid taxpayer assets – such as cash, wages, etc… must not have been sufficient enough to satisfy the amount tax debt.

As you can see, it takes a lot of effort to force the IRS to seize a home.  As long as you file your taxes, even when you cannot afford to pay them and are willing to work with the IRS and agree to a payment plan, you can avoid the common worry of having your home seized by the IRS.

If you find yourself unable to pay your tax liability to the IRS, it is a good idea to hire a tax professional.  The CPA’s and EA’s at Professional Tax Resolution have extensive experience working with the IRS and can address your tax debt quickly and effectively.  We provide our clients guidance about their specific tax situation and advice them on the best tax settlement options available.  Call for a free, no obligation tax consultation with our CPA’s today, (877) 889-6527 or email us at info@protaxres.com.

IRS Tax Debt Who Has it? Tax Lien Statistics Give Some Clues

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Feel like you are the only one with a tax debt problem? Ever wonder where in the US more people have the tax debt issues? Is this a problem of the rich or is the problem of incurring Tax Debt affecting everyone?
A recent 2010-2011 analysis of tax liens from across the U.S. found that New York City, which happens to have some of the wealthiest neighborhoods in the nation, was actually the country’s leading geographic area for federal tax liens. According to the data,New York City accounts for nine, or 18 percent, of the top 50 U.S. zip codes with the most liens recorded over the past 12 months ending in September.

Is this a problem of the rich of New York trying to skirt their fare share payments to the IRS? The economy has hit everyone so perhaps this is not the full story. Taking a harder look, four of theNew York City zip codes include some of Manhattan’s most affluent neighborhoods, including the Upper West Side (10025 and 10023), Chelsea(10011), and Murray Hill (10016), but the remaining five New York City zip codes are in more typically minority and working-class areas of Brooklyn, Queens, and the Bronx. To really understand how much richer these neighborhoods are, if you break down the differences in the New York Zip Code demographics by using recent U.S. Census data, those Manhattan’s four zip code tax debtors earned a whopping 250 percent more than those in the city’s less affluent areas. Of course with more income, comes the potential for bigger tax burden and the average IRS debt of Manhattan’s wealthier tax debtors is much higher than the amount owed by their working-class neighbors. It turns out the tax debt of the wealthy NYC zip codes averages $58,592 or about 86 times more than the boroughs. So, while the rich owe a lot more per capita the problem of owing tax debt in the NYC area is affecting both the rich and working class.

What about the rest of the country? Virtually all of the remaining nationwide zip codes in the top 50 are located in minority and economically depressed neighborhoods. Perhaps not coincidentally six of these neighborhoods are in areas hit hard by the economy including Las Vegas, Washington, D.C., and Detroit all of which have high unemployment, short sales and foreclosures which can lead to high levels of tax debt.

All that said, New Yorkhas been a high ranking tax debtors location for some time but this may be due to population density. Taking a second analysis of prior year nationwide tax liens, this time from July 2009 to July 2010, reveals that at that time New York City accounted for 16, or 32 percent, of the top 50 U.S. zip codes with the most tax liens and six of those New York zip codes were located in Manhattan.

Why did the NYC area drop in 2010-2011 to just 18 percent from a 2009-2010 amount of 32 percent? Seems the nationwide recession has caused more working-class Americans to lack the means to pay their tax debts. The problem is more widespread, so perhaps the number of individuals affected in New York is simply a smaller percentage to the growing nationwide issue.

If you are in need of tax settlement help, probably the most important decision you will make is the selection of a qualified tax professional. The CPAs and Enrolled Agents at Professional Tax Resolution have many years of experience providing tax settlement help. We encourage our customers to check our memberships, reviews and affiliations for verification of our credentials and our past successes. For more information about the tax settlement services we can provide, visit us today at www.professionaltaxresolution.com. Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation

 

IRS Tax Debt – Avoid a Tax Liability When Helping Friends or Relatives

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With credit so tight and banks unwilling to loan to small businesses and individuals, more and more family members are faced with the difficult decision of how or when to help out. Once you decide to lend a hand, you have to consider the potential tax implications. You ask yourself would it be better to make an outright gift or to make a loan with the expectation of repayment?

Let’s consider the scenario of a gift.

Many people are aware that small cash gifts generally don’t have to be reported to IRS. However, you should also keep in mind that if you give more than $13,000 in a single year to an individual it still needs to be reported on a gift tax return, and this could have an effect on your general estate situation.

But, wait are there not new estate tax rules that would protect you from a tax standpoint? The answer is Yes and No. The 2010 Tax Act provides everyone a $5 million lifetime exemption for estate and gift transfers. However, it does not exclude you from having to report a gift to an individual when it exceeds $13,000 in one year.

Why you might ask? The generous $5 million lifetime exemption is only on the books until Dec. 31, 2012 and many tax professionals dread the potential for a “claw back” which may in fact happen after the 2012 cut off considering the sorry state of our economy. What a ‘claw back” could mean is that all of the reportable gifts you made during your lifetime could be considered having actually occurred in your estate after 2012 – regardless of how much exemption Congress will allow after next year. The bottom line is you can’t assume that the IRS will not monitor your gift transfers in the months ahead even though you don’t have any tax liability right now.

So, now let’s consider a Loan.

Is it advantageous to treat your monetary support as a loan rather than an outright gift? A properly documented loan will show the IRS that you did not intend to make a reportable gift and will also clarify the repayment expectations with whomever you are helping. But perhaps most importantly for you, certain tax reporting issues can be easily eliminated with the documentation of this support having been a loan.

Of course this does not come without caution. The IRS is leery about the legitimacy of loans especially when they’re between family members. So whatever you prepare as loan documentation you must make it clear that it is what is considered an arm’s-length loan and that you expect to be repaid. While you don’t need an attorney to draft up a formal document, it does always help to spell out the payment terms and any interest that you may charge. Even better, you can try to secure collateral to legitimize your loan agreement.

Gosh, how can you even think about charging interest when the person you are helping is faced with a dire financial situation? It is true; most will just try to keep things simple by making an interest-free loan, especially when it involves family. But here is why this is not a great idea for you from a tax standpoint. The IRS really considers that true bona fide loans have a reasonable interest rate charged and paid by the borrower. In fact here is the real rub, if you make an “interest-free” loan over $10,000 to anyone, the IRS will “impute” interest for you, based on rates set by the Treasury. What does that mean? You could wind up paying tax on fictitious interest that you never received! To protect yourself, charge a minimal interest rate for any loan you make.

Ok so now what happens when that Loan fails to be repaid?

Yikes. Well, if you loaned $20,000 or $30,000 to a friend or a relative, you now have a true loss or debt and you might be wishing you some records of that fact. Why you ask? You may now be eligible for an attractive (bad-debt) tax deduction in the year of worthlessness.

But how formal a set of documentation do you need to be able to document this bad-debt deduction? Obviously the more the better, but if you have some written documentation and the transfer of funds was clearly labeled you may be ok. A landmark tax court decision observed that a valid debt may exist without all the legal formalities even when between related parties. In this case, the taxpayer prevailed over the IRS because his intentions were proved with business-like actions and by making informal notations – such as marking “loan” on checks and deposit slips, etc. In this particular case the key was that that taxpayer and the recipient of the loan were recognized as creditable witnesses with a prior debtor-creditor relationship. The bottom line is, do what you can to document and legitimize the loan and consider it and insurance policy for yourself in the future.

This is just one example of the tax advice and guidance we provide each and every day. If you have a loan that has failed to be repaid, a tax debt, unfiled tax returns, or any other tax related problem give us a call for a free, no obligation consultation (877) 889-6527. Talk directly with a CPA and understand what we can do to resolve your tax problem once and for all. Look us up – we are proud A rated members of the BBB.