Pros & Cons of Outsourcing the Collection of Tax Debt

Posted on August 24, 2015 by Kursti Nakagawa

Pros and Cons of Outsourcing the Collection of Tax Debt

Pros & Cons of the Outsourcing of Collection of Tax Debt

The Senate Finance Committee has recently revived their discussion of outsourcing the collection of back taxes. According to certain estimates, turning the collection of delinquent taxes over to private collection agencies would save the government more than two billion dollars over a period of ten years. However, opponents of privatization maintain that this would not be the case. In addition to emphasizing the potential threat to taxpayer security, they point to attempts at outsourcing the collection process that have not worked particularly well in the past. Time will tell whether the Treasury Secretary, who currently has the authority to make such a switch, will give it another try.

Those who favor privatizing the collection of tax debt say that it will raise more revenue that it costs. While this did not happen in a previous attempt at outsourcing that was made between 2006 and 2009, proponents say that the powers that be have learned from their past mistakes.They say that turning IRS collections over to private collection agencies will generate extra revenue that The IRS can use to hire new employees. In addition, they point to the fact that removing the task of debt collection from the IRS will allow the understaffed agency to focus its human resources on other important tax matters that have suffered in recent years.

On the other side of the fence, opponents of outsourcing say privatizing the collection of tax debt will not work. The National Treasury Employees Union points to data from the previous attempt at outsourcing which shows that the IRS collected over 60% more in the first two years of the program than the private collection agencies did – $139 million compared to $56 million. Although the private companies did better at collecting from cases where the amount owed was not in dispute, they lacked the authority to collect in the more difficult cases. The Center for Effective Government maintains that private companies will never be as effective as the IRS at collecting back taxes. According their spokesperson. “Collecting back taxes is an inherently governmental function, something that the government is uniquely positioned to do.” The IRS is the only collection agency that can garnish wages, levy bank accounts, Social Security benefits and 401k plans, place tax liens on property and even seize assets, all without judicial approval! These powers indeed make it the most powerful collection agency in the county, a fact that opponents of outsourcing tax debt collection are quick to point out.

If you have tax questions or a tax debt you are unable to pay, our tax settlement professionals are happy to discuss your tax resolution options free of charge. For more information about our services, visit us today at www.professionaltaxresolution.com or call us at 877.889.6527. With over 16 years in the business of resolving tax debt, we have a thorough understanding of tax law together with the experience to know which settlement option will be the best fit for your specific set of circumstances.

Tax Debt of $200k Settled for $1000!

Posted on July 22, 2015 by Kursti Nakagawa

Tax Debt of $200k Settled for $1000! Mr. W is a self-employed individual and the main provider for his family. As a member of the construction industry, his income fluctuates with the housing market which was in a downturn for an extended period of time. As a result, he had difficulty generating enough income to meet his minimum monthly expenses and was hit with one late payment notice after another. With all of his attention focused on keeping his family afloat, Mr. W did not file his tax returns for a number of years, thus acquiring a tax debt of over 200K. With a new edition to his family on the way and the IRS breathing down his neck, he was at loss as to what to do.

Faced with what he perceived as a desperate situation, Mr. W reached out to Professional Tax Resolution for help. During his initial phone consultation, our tax professionals were able to gather enough financial information to relieve some of his anxiety by explaining the available tax resolution options. Pleased with what he learned from this conversation, Mr. W scheduled a face to face appointment with a member of our tax resolution team. At this time, we were able to give him a full breakdown on how to resolve his back tax issues.

The IRS was taxing Mr. W based on his self-employment income without taking into account his business expenses. This naturally resulted in an extremely exaggerated tax liability. Although his business was putting out some very high income numbers, his personal net income was low due to high business expenses. This low income was the primary reason for his tight financial situation and the resulting debt accumulation.

Our tax professionals began the process of resolving Mr. W’s tax debt situation by filing all unfiled tax returns. Although this produced a much more accurate picture of his outstanding tax liability, it showed that he still owed the IRS more than 90K. Since this was an amount that far surpassed his ability to pay given his current income stream, we recommended that he follow up with an IRS Offer in Compromise.

Professional Tax Resolution gathered all of the information necessary to document his specific financial situation and to explain why he would be unable to pay the full amount of his back tax balance. After multiple communications and submitted documents, the IRS agreed to a negotiated Offer in Compromise amount of a mere $1,000!

Mr. W’s case was a financial worst case scenario. He had numerous unfiled tax returns as well late payments on previously filed returns. In addition, he lacked the money to pay the required amount once an accurate back tax balance had been obtained. Luckily, Professional Tax Resolution represented him throughout the entire ordeal. Not only did we reduce the amount he owed the IRS to less than 1% of the original back tax balance but we saved him time, allowing him to devote more energy to the business that would continue to earn him even more money! While not every case goes as smoothly as Mr. W’s, our professionals pledge to always go the extra mile for our clients and follow each case though until we achieve the best possible resolution.

Common Misconceptions about the IRS

Posted on May 5, 2015 by Kursti Nakagawa

A Few Common Misconceptions about the IRS

Audits are not as common as they may seem. Although many taxpayers worry that their tax return might be selected for an IRS audit, the fact is that less than two percent of personal tax returns are audited by the IRS each year. On top of this, even if a return is selected for further examination, the IRS usually just contacts the taxpayer by mail and asks them to provide documentation to support certain specific items. Following this communication (aptly labeled a correspondence audit), there are three possible outcomes, none of which are accompanied by a serious consequence. An additional tax amount will be assessed, the return will be accepted as originally submitted or, in some cases, a tax refund may even be issued.

Making an honest mistake on a tax return usually has no serious consequences. When

Common Misconceptions about the IRS

the IRS detects a mistake on a tax return, their normal procedure is to contact the taxpayer through some form of written communication and request that the error be corrected. Although the taxpayer will be expected to pay any additional tax amount owed, there is usually no penalty for making an honest mistake on a tax return. Taking legitimate tax deductions does not flag a return for audit. The tax code provides taxpayers with certain tax credits and tax deductions with the expectation that they will make use of them. In fact, provided that they have the necessary documentation, taxpayers should claim all tax credits and tax deductions to which they are entitled because, to not do so, almost certainly means that they will be paying a higher tax bill than they would otherwise need to pay. Unless that sum total of the tax breaks claimed on a return is excessive compared to the reported income, it is unlikely that they will cause the return to be flagged for an IRS audit.

It is better to file a tax return even when resources are not available to pay the taxes owed. Although the IRS assesses a penalty for failing to pay an outstanding tax liability, they assess an additional penalty for failing to file a tax return by the filing deadline. Because of this late filing penalty, it is always advisable for a taxpayer to either submit a completed tax return by the due date or apply for an automatic six-month extension even when funds are not available to pay tax amounts owed. By doing so, the taxpayer avoids the late filing penalty which is calculated as 5% of the back tax balance for each month or partial month that the return is late up to a maximum penalty of 25 %. Once the return has been filed, there are numerous options available for resolving any back tax balance. These include setting up a payment plan or negotiating one of the various other tax settlement options offered by the IRS.

The Tax Extension Option

Posted on April 12, 2015 by Kursti Nakagawa

The Tax Extension Option

Tax Extension is a Very Good Option!

You are not alone if you do not file your tax return on or before April 15th. Although this is the official deadline for the filing of personal tax returns, each year more and more people apply for an automatic six-month tax extension. The number of taxpayers requesting an extension increased from 11 million in 2011 to over 13 million in 2013, an increase of almost 20% over the two-year period! Another interesting fact is that, in tax year 2014, 25% of those individuals who had requested and extension were still working on their tax returns in September, just one month before the October 15^th extension deadline.

Although procrastination is one reason for requesting a tax extension, there are other factors that contribute to tax returns not getting filed by the April 15^th filing deadline. Several of those are highlighted below:

Lacking Necessary Tax Information
Although the deadline for the mailing of brokerage statements is February 15^th, the information these statements contain may not be correct. These initial statements often say that changes may be coming. The mailing of corrected 1099s can actually occur right up until April 15^th which does not give the taxpayer enough time to complete the tax return before the filing deadline.

Missing Required Tax Forms
If a taxpayer holds investments that are structured as partnerships, they must wait for the K-1 Forms that are based on partnership income. These partnerships must first finish their own tax returns which can be extended until September 15^th before these forms are generated. This means that partnership K-1 Forms could be in the hands of taxpayers as late as the month preceding the extension deadline.

Increased Complexity of Tax Code
The increased complexity of the tax code has made tax returns more and more difficult to complete which, in turn, has made it harder to get them submitted by the April 15^th tax filing deadline. In addition to the introduction of such changes as the net investment income tax, two different dividend tax rates and the alternative minimum tax, taxpayers must now report all overseas holdings. All of these changes require increased tax preparation time for certain categories of taxpayers which, in turn, has resulted in an increase in the number of requests for tax extensions.

Although filing a request for a tax extension does not relieve a taxpayer of the obligation to pay any taxes owed, it is definitely a better option than filing an incorrect or incomplete return. As long as the request for a tax extension is either e-filed or postmarked before the end of the day on April 15^th, it will allow the requesting taxpayer to avoid the late filing penalty which usually amounts to 5% of any unpaid tax balance for any month or partial month that the return is late. In addition, it will give the requesting individual six full months to submit a complete and correct tax return.

Why You Should File Your Taxes

Posted on March 16, 2015 by Kursti Nakagawa

Why You Should File Your Taxes by April 15

Taxes Due April 15

April 15th is an important filing deadline for individual taxpayers. If the Internal Revenue Service does not receive either a completed tax return or an application for a six-month tax extension by this date, they will automatically assess a failure-to-file penalty. In addition, they will begin to assess a failure-to-pay penalty on any tax amounts owed. Although the failure-to-file penalty can be diverted by applying for a six month tax extension, late payment and interest assessments will automatically begin to accrue as of the April 15th tax deadline regardless of whether a tax extension has been filed.

Because the penalties and interest described above are compounded over time, the financial consequences of failing to file tax returns and failing to pay tax amounts owed can be significant. The failure-to-file penalty is assessed at a rate of 5% of the back tax balance for each month or partial month that a return is not filed up to a maximum of 25% of the outstanding tax liability shown on the return. A minimum penalty of either $100 or the entire amount of the back tax balance is assessed for any return that is not filed within 60 days of the filing deadline. In addition, a failure-to-pay penalty is assessed at a rate of 0.5% per month for each month or partial month following the filing deadline where a back tax balance remains unpaid. This rate is reduced it 0.25% if a taxpayer is making payments according to the terms of an official installment agreement and is excused altogether if a tax extension was filed and 90% of the back tax balance was paid on or before the original filing deadline. The failure-to-pay penalty is assessed for a maximum or 50 months, thus capping out at maximum of 25% of the original tax liability.

The lesson to be learned from all of this is that the filing of tax returns and the paying tax bills should be taken seriously. As is pointed out above, the financial consequences of not doing so can be significant. The failure-to-file penalty can be avoided by simply filing a tax return by the filing deadline even in the case where funds are not available to pay the tax amounts due. Outside of this, a taxpayer should avoid the compounding of penalties and interest by being proactive in coming up with a plan to pay any outstanding tax liability. To this end, the IRS is willing to work with delinquent taxpayers to come up with payment plans they can afford. Once a payment amount is determined based on the size of the back tax balance and the taxpayer’s financial situation, the taxpayer simply pays this monthly installment amount until the back tax balance is paid off. This is a far better solution than ignoring a tax bill and then having to pay the back taxes plus an additional 25% of the original tax amount owed.