3 Steps to Resolve Tax Problems
As the calendar turns from the pandemic ridden year that shall not be named, it is common practice for people to make a list of resolutions and things they wish to accomplish during the next twelve months. If you have endured a lingering tax problem, then there is no better time than now to address the problem. Taking up an issue with the IRS is no small feat, even without a pandemic, but when you step back and take another look, the pathway to fixing your tax problem can be broken down into the following three steps:
Know the issue – Getting your arms around what tax years and what issues the IRS claims you have a problem with is the first step. It is very difficult to reach a solution, before knowing what problem you are trying to solve. In our firm, we refer to this first phase as the investigation and case analysis phase. It often starts with requesting transcripts from the IRS to see what they already have on your record and what they are expecting to see based on the information they have already received from others.
Get into compliance – Many people do not know that in order to reach a resolution or collection alternative with the IRS, you must first be in compliance with your tax return filing and current year withholding obligations. For IRS collection purposes, this generally means having the last six years of tax returns filed and making arrangements to have your current year tax withholding set appropriately or be making timely estimated tax payments. Why six years is a topic for another day but suffice to say there are statutes of limitations (specific time periods by which the IRS is authorized to take action). If you have not filed a tax return in ten years, depending on your facts and circumstances, you may only need to prepare and file the last six years instead of all ten in order to work out a resolution with the IRS.
Reach a solution – There are numerous outcomes available to resolving a tax problem with the IRS and other state tax authorities too. A few of the most commonly advertised collection alternatives include:
Offer in compromise – this is when you settle your outstanding balance due for less than the amount the IRS claims you owe. While the “pennies on the dollar” settlements do exist, they are less frequent than the radio and late-night television advertisements may lead you to believe. All offer in compromise applications are reviewed in depth and are dependent on the specific circumstances of that case.
Installment agreements – these are payment plans where the amount owed is repaid over time and either satisfies the entire amount due or a portion of it. Once you enter into an installment agreement, you are deemed in compliance even though the total amount due has not been paid. This is helpful when trying to get qualified for a new mortgage or refinance.
Currently not collectible – based on your facts and circumstances, your account with the IRS may be flagged as not collectible at this time. Your collection status is updated in the IRS systems and enforced collection is put on pause until you either have a change in income or other change that would provide an opportunity for the IRS to collect what is owed.
Penalty abatement – while not a designated collection alternative per se, it is worth mentioning that it is possible to have the penalties reduced or removed if your circumstances support the request. Reasonable cause for filing or paying late may be demonstrated through hardships, medical issues, disasters and other circumstances. There are even administrative processes available to help remove penalties for taxpayers that have otherwise been in compliance and had a problem occur as an outlier event.
Please do not allow the formal procedures, documents and labyrinth of 800 numbers at the IRS deter you from resolving your tax problems. When you are making your list of resolutions and plans for a better year ahead, it is worth following the three steps outlined above to resolve your tax problem. This last year has shown us that we have other issues to worry about, why not check the tax problem off the list and make your life that much simpler?
To get help with an IRS tax problem, or learn more legal, tax-saving strategies for business owners, contact me at (360) 474-5892 or e-mail me at tate@ensigncpa.com.