IRS Audit Red Flags – What the IRS is looking for – Tax Tips Part 1

Posted on January 10, 2012 by Kursti Nakagawa

Most people have a great fear of getting audited. Audits can be long, expensive and can require a lot of supporting documentation and professional guidance. There are actually three types of Audits that an individual or business can experience, a field, office, or correspondence audit. Each comes with a different set of requirements to find a tax resolution.

Of course the fear of having a tax return audited is justified if you are misleading the government, but for most taxpayers it is simply a worry they hold in the back of their minds each year. Are you curious about what your chances to get “Flagged” for an audit review might be? With this in mind, we begin a three part blog series on common “Red Flags” that can trigger your tax return for an audit.

Tax Return Red (Audit) Flags – Part 1

Most tax returns are processed by IRS computers that are programmed to watch for anything unusual. Here are some red flags that may cause the IRS to take a closer look at your tax return:

Abusive tax shelters: Offshore Transactions involve activities in “tax havens” that offer financial secrecy. The IRS is intensely interested in people with offshore accounts, Failure to report a foreign bank account has strict penalties and the IRS has made this issue a top priority.

Foreign trusts (Disguise income because they are flow-through entities)
Foreign (Offshore) Partnerships, LLCs and LLPs
Offshore-Private Annuities or Offshore-Private Banks
Personal Investment Companies – Captive Insurance Companies – Related Party loans

Amending Returns: Did you forget to include a deductible expense which would give you a small refund? If that amount is truly minimal it could be better to just let it pass. Why? Amended returns get more attention from the IRS than initial ones – you may be inviting trouble.

Compiling your tax return incorrectly: Your return must be in the Proper Order. First, is the return itself. Then, attach the schedules in alphabetical order, forms in numerical order and plain paper statements. Do not forget to enclose W-2 and your 1099s. (or you could just e-file)

Disagreements between State and Federal returns: Oh how we love technology – here is another example of how computers are making the IRS an efficient agency. Be sure that ALL of your state and federal tax information match – because computers will catch any errors.

DIF Score: The IRS assigns a numeric value to tax returns known as a DIF score. The IRS used a computer-scoring system known as Discriminate Information Function (DIF). The DIF is based on deductions, credits and exemptions for the average taxpayer in each of the income brackets If deductions on your return are not comparable to your income bracket an audit/red flag is released. Here are some CCH Itemized Deduction Averages for 2008

IncomeRange	Medical Expenses	Taxes Paid	Home Mtg Interest	Charitable Contribution
$15 – $30,000	$7,000	$3,100	$9,200	$2,000
$30 – $50,000	$6,100	$3,800	$9,000	$2,100
$50-$100,000	$7,000	$6,000	$10,600	$2,600
$100-$200,000	$9,200	$10,800	$13,700	$3,700

Home office: This is because historically people who claim a home office don’t meet all the requirements for properly taking the deductions: 1) the space must be used EXCLUSIVELY and 2) on a REGULAR basis used as your principal place of business.

Mistakes, Math errors and Messy returns: This is one reason to file electronically. Computer software will calculate your return and create neat and clean copies to e-file. Mistakes can include writing your social security number for yourself, your spouse of your claimed dependents.

Pay or Contest: If you receive a small balance due from the IRS it may be better to pay it and forget it in. If you disagree it gives the IRS the opportunity to look more closely at your return so you could be liable for even a greater amount.

Round numbers: It’s unlikely that your investment returns were exactly $1,000 or that your mortgage interest deduction was $8,000. Too many round numbers on a return marks a return for an audit/red flag.

Underpayment: The IRS may audit you if you don’t pay enough taxes and don’t offer an explanation as to why you aren’t paying. If you can’t pay the taxes include Form 9465 “Installment Agreement Request”

Never boast you “outwitted” the Internal Revenue Service: Informers can earn a reward of 15%-20% of the additional tax collected, including fines, penalties and interest. So keep your “tax strategies” to yourself.

These tax tips are just examples of the type of the proactive, year-round tax guidance we provide to our clients. We have more we want to share with you about IRS Audits so look for our next installment of Audit Red Flags in the coming days.

If you need to file your 2011 or earlier tax returns, or have an IRS or State Tax problem, our experienced tax professionals can help. For more information about our tax services, visit us today at www.professionaltaxresolution.com. You may also Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.

Have IRS Tax Debt? Need a New Passport? The GAO wants to know.

Posted on December 7, 2011 by Kursti Nakagawa

As of the end of fiscal 2010, the balance of reported unpaid federal taxes was about $330 billion according to the IRS. This is a huge amount and as we have written about in the past, the enforcement of the tax laws and the tax code is on Government Accountability Office’s list of high-risk areas. The deficit being what it is it may come as no surprise that the GAO was asked to investigate, by cross referencing unpaid federal taxes and passport issuance, the magnitude of known unpaid federal taxes for individuals who were issued passports. Selecting a past year, the GAO did a study for the fiscal year 2008 to identify examples of passport recipients who had known unpaid federal taxes.

They study discovered that individual states issued passports to about 16 million individuals during fiscal year 2008 and that of these, over 224,000 individuals (over 1 percent) owed more than $5.8 billion in unpaid federal taxes. That is JUST those individuals who got new passports in 2008 – not all passport holders.

Does that come as a surprise? Currently each state is not authorized to restrict the issuance of a passport to an individual because they owe federal taxes. In addition, federal law does not permit the IRS to disclose taxpayer information, including unpaid federal taxes to State officials unless the taxpayer consents. The reason this is at least somewhat surprising is that in contrast, federal law does permit certain other restrictions on the issuance of passports to individuals, such as for those individuals owing child support debts over $2,500.

Really, the problem is likely far greater than 1% of the newly issued passport holding population. In addition to the obvious population balance of all valid passport holders for the studied year of 2008, the estimated amount of unpaid federal taxes was actually likely understated because it excluded individuals who had not yet filed tax returns or who had underreported income.

Making matters harder, individual States currently cannot compel a passport applicant to provide a Social Security Number (SSN). Because the IRS uses the SSN to identify each taxpayer, without an SSN you cannot match an individual back to their IRS data.

This study had produced such alarming results already and the GAO wanted to know a bit more. They took the 2008 study and dug deeper into the backgrounds of a very small group of just 25 passport recipients. Clearly this is a tiny study and cannot be reflective of the population as a whole. That said, some pretty interesting things were discovered. When investigating for abuse related to the federal tax system or criminal activity, of these 25 cases, at least 10 passport recipients had been indicted or convicted of federal laws! In addition, the IRS had assessed trust fund recovery penalties on several passport recipients; a penalty which is applied when an individual does not remit payroll taxes to the federal government. How does someone fall behind on Payroll taxes? Instead of acting appropriately as the trustee of an individual employee’s withholding and forwarding it onto IRS, they divert the money for other purposes. Using payroll taxes is a big crime; in fact the willful failure to remit payroll taxes is a felony underU.S.law.

In this smaller study of the 2008, of those 25 new passport holders, some had accumulated substantial wealth and assets, including million-dollar houses and luxury vehicles, all while failing to pay their federal taxes. In fact, of the 25, at least 16 passport recipients traveled outside the country all while owing federal taxes and another 4 passport recipients actually resided in another country at the time! Worse yet, two individuals used the identities of deceased people to fraudulently obtain passports in the first place and then used the passports to travel toMexico,France, and Africa. Ironically in one case, the unpaid tax debt belonged to a deceased individual and in the other; the debt was actually incurred by the imposter.

If this small study is any indication, there appears to be a big opportunity to crack down on passport issuance for those who owe federal tax debt. Although nothing official has been implemented to date, Congress could pursue policy to link federal tax debt collection and passport issuance by enabling States to screen and prevent individuals who owe federal taxes from receiving passports. This would require transparency and more communication between the IRS and the individual States, but it seems that the opportunity to collect unpaid tax debt would be greatly improved as a result.

If you have an unresolved tax debt, visit us today at www.professionaltaxresolution.com for more information about our customized tax settlement assistance. The CPAs and tax professionals at Professional Tax Resolution use their extensive knowledge of the tax code to provide taxpayers with the best settlement option available. 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.

IRS Innocent Spouse Relief – A $1,200,000 Tax Settlement Success Story

Posted on November 17, 2011 by Kursti Nakagawa

Mrs. M. was referred to us by a local attorney. Her husband had recently passed away and, shortly after his death, she became aware of an outstanding IRS tax liability in the amount of an astonishing $1,200,000.

Mrs. M. had had no knowledge of this tax debt before her husband’s death. A few months later in our initial meeting with her, we learned that her personal tragedy was even worse than the death of her husband and realization of this massive IRS debt. She informed us that she had hired a very large tax settlement firm to resolve the issue and had already paid them a whopping $25,000. She came to us after six months, when she had no indication that the tax settlement company she had employed was making progress towards resolving the issue. Now skeptical that a firm might really be able to help, she did her research and read all of our credentials and reviews before arranging our initial meeting.

We immediately started working on her case and during our initial conversation with the IRS Revenue Officer assigned to Mrs. M’s file, we were brought up to date on the details of the case. Unfortunately due to the inaction of the previous tax settlement company, the IRS had already levied the client’s insurance and financial accounts. Even more alarming was the fact that the IRS was also in the process pursuing other aggressive collection techniques to the extent that Mrs. M actually risked the immediate seizure of her additional assets to settle the outstanding liability. After assuring the revenue officer that we were working towards a resolution, we were granted a 90 day hold. This time interval gave us the opportunity to resolve the case in manor that was acceptable to the IRS and still allowed Mrs. M to keep her assets.

After reviewing all of the relevant information and consulting with our client, we felt that she qualified for Innocent Spouse Relief. Innocent Spouse Relief is an IRS tax settlement option available to taxpayers who owe the IRS for tax amounts incurred by their spouse. While it is an excellent tax settlement alternative for a spouse who meets the qualifying criteria, it is definitely not a blanket solution for anyone with a marital tax debt. The acceptance criteria for Innocent Spouse Relief are very explicit and must be well documented. After careful analysis, we determined that Mrs. M’s situation met these criteria and felt that her application would be accepted by the IRS

After gathering all of the relevant information and documentation, we were able to prepare and file the application for Innocent Spouse Relief. Although there was a wait of several months after the request was submitted, the IRS granted the Innocent Spouse Relief for our client’s half of the $1,200,000 tax liability.

This was excellent news. However because the husband was deceased, this is not the end of the story. While this was the best result that anyone could have hoped for, the IRS did not relieve the husband’s estate for its share of the outstanding tax debt. Therefore to complete the resolution process, we continued our efforts. We were able to negotiate a settlement contract for the estate with the IRS. The terms were that Mrs. M. would sell one of her residences and whatever the sale of the home produced as an asset, the IRS would accept 50% of the net equity from this sale as a final settlement of the debt.

This is truly a remarkable success story and Mrs. M. is finally able to move on and heal after a tumultuous year.

Here is a Recap:

Total Deceased Husband/Wife Total IRS liability $1,200,000
Wife’s portion of this liability $600,000
Wife’s liability after Innocent Spouse Relief Ruling $0 a 100% Reduction!
Husband’s Estate IRS Liability $600,000
Tax Settlement (50% of Net Equity from Home Sale) $300,000 a 50% Reduction!

This example is an excellent illustration of how Innocent Spouse Relief can be used to settle large IRS tax debt. In Mrs. M’s case the joint $1,200,000 tax debt was settled for just $300,000! The wife’s personal liability was reduced by 100% and the total estate settled for just 25% of the original liability!

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

Posted on November 10, 2011 by Kursti Nakagawa

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

Posted on November 9, 2011 by Kursti Nakagawa

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