QUESTIONS: I have a couple of tax questions for you. 1) In order to file "Head of Household" a person must have a dependent - is this correct? 2) In order for more Georgia tax to be withheld, should I change my single filing status to "0" or "1"?
ANSWERS: Thanks for submitting your questions! Here is the scoop:
1) In order to qualify for Head of Household filing status, you must:
-- have a qualifying child or other person who is your dependent. These persons must pass 1) the relationship test, 2) the age test, 3) the residence test, and 4) the financial support test. Another way to qualify for this filing status is by maintaining a separate household for a parent. I suggest you refer to IRS Publication 501 for more information on this subject. You can find this and other great information at www.irs.gov.
2) The general rule for payroll tax withholding is that the fewer exemption allowances you claim, the more withholding tax that will be deducted from your paycheck. Conversely, the more exemption allowances you claim, the less tax that will be deducted. Using your example, changing your withholding exemption allowances to "0" will result in more tax deducted from your check than changing to "1" allowance.
Jan 30, 2008
QUESTIONS: I have a couple of tax questions for you. 1) In order to file "Head of Household" a person must have a dependent - is this correct? 2) In order for more Georgia tax to be withheld, should I change my single filing status to "0" or "1"?
1. Can someone other than your child be a qualifying dependant? My fiance and I have a son. We live together and have through all of last year. He was only working for part of the year and so I was taking care of both of them.
2. Related to the above: I am separated for more than 2 years, waiting on my divorce to be finalized. I have filed married filing separate before. Now that I have a child, can I file head of household?
ANSWERS: Thanks for your questions to us!
1) Since your son lived with you for the entire year and you provided more than half of your son's total financial support for the year, he qualifies as a dependent. But your fiance does not qualify unless his gross income for the whole year was less than $3,400 and you furnished more than half of his total financial support for the entire year.
2) You do qualify for head of household filing status if you are legally separated from your spouse under a divorce decree or separate maintenance agreement on the last day of the year. Just living apart for the year does not necessarily satisfy the requirement for head of household status.
The Senate version of the rebate is a little different from the House version- ultimately what the Joint Committee on Taxation- the House/Senate subcommittee that reconciles the House and Senate version of tax bills- decides and what the President signs could be vastly different- a true lesson in American politics.
The Senate version major differences are this:
$500 per individual ($1000 for joint taxpayers)
$300 per child
Also, the Senate version adds 13 weeks to the unemployment insurance. This was done to appease most Democrats because the Senate version has no limits on income to receive the rebate checks (the House version limits the income to $75,000 for individuals and $150,000 for married couples). Also, those receiving Social Security checks only, would get the rebate checks- this differs from the House bill.
The good news is that the State of the Union emphasized the need to have this done ASAP. Treasury Secretary Paulson states that after the bill is passed, he can have rebate checks issued in 60 days.
However, if you have tax debt, the rebate check goes to the Government.
Jan 29, 2008
Sometimes when you get married you can inadvertently inherit your new spouse's tax debt problems. You can further complicate the problem by filing a joint return with your spouse. In fact, if you file a joint return and receive a refund, the IRS can take this refund to pay the new spouse's former debt. It is necessary to file a Form to tell the IRS not to take your refund to pay your new spouse's taxes. This will delay your refund.
You can file for "injured spouse" and hope the IRS finds in your favor. You will receive your portion of your refund back. Sometimes, it is best just to file separately and keep matters separate. If you live in a community property state, the issue becomes even more complicated.
In any event, a tax professional is needed in the event of filing with tax debt issues.
Our course, the answer is yes. You will recieve a Form W-2G or another reporting of gaming winnings (perhaps a Form 5754 if you receive gambling winnings as a member of a group). The payor should withhold generally at 25% of the winnings.
The income is reported on line 21, other income, on the Form 1040. You deduct the expenses only if you can itemize (i.e. your itemized deductions are over the standard deduction) as a miscellaneous deduction (not subject to the 2% limitation). However, you cannot net the income and expenses and report them on the return. The income and expenses must be reported separately.
Hence, if you do not itemize, it is possible to pay taxes on the gambling winnings. Also, if you put down alot of expenses, be prepared to document these expenses in an IRS audit.
In any case, gambling winnings and losses require a professional preparer in order to avoid many common errors that will get you if future hot water.
It appears the House has a plan that is approved. It will be a $600 rebate check per person, $1200 if married filing jointly for people who have more than $3000 in adjusted gross income. Also, an additional $300 will be paid for each child. These rebates will be eliminated by $0.05 for every dollar over $75,000 in AGI ($150,000 for married filing jointly). This will effect about 111 million Americans according to Congress.
The Senate does not have a plan approved. However, it appears to be somewhat simiar except that some Senators want to eliminate the income caps.
Regardless, it appears to be similar to the 2001 rebates. These rebates came in August of that year. Bush signed this bill in May, 2001- four months before the rebates were issued. It allowed for the IRS to handle their busy season and effectively send out rebates.
Mostly it appears that it will essential part of any plan to have the check issued to taxpayers rather than via payroll deductions (i.e. changing the withholding tables and adjusting what is received in each paycheck).
If you owe tax debt, the IRS will just simply take your check and apply it to the debt.
Jan 28, 2008
QUESTION: Hi, I'm a Mortgage Consultant (a.k.a. Loan Officer) and have been given so many different—but all of them are reasonable and seems to have some merit—answers for the same question: What's the difference between a form 4506 and a form 4506-T?
In short, from my understanding, a form 4506 is used to request the FULL Tax Return Transcripts, which includes all data for all fields that was reported on the taxpayer's tax return(s). Whereas a form 4506-T is used to just obtain a handful of pre-selected fields from the tax return, such as Job Title, employment status (i.e. self-employed, W-2, etc.), etc.).
Is this correct? And if so, what 'pre-selected fields' are included in the 4506-T? And what does the 'T' stand for in the 4506-T?
ANSWER: Thanks for your question! You are correct in that Form 4506 is used to obtain a full copy of your income tax return. The Form 4506-T is used to obtain certain information pertaining to your return, such as:
1) Transcript of the tax return,
2) Information for your tax account,
3) Your wage and income information,
4) a record of account (your tax liability vs. tax payments you have made).
So, as you can see, Form 4506 requests a full copy of your return and the Form 4506-T requests one or more elements of the return. By the way, the "T" in 4506-T probably represents the term Transcript. In reality, only the IRS really knows this answer for sure!!
Jan 27, 2008
The most common errors on tax return preparation are not errors of tax law or whether a deduction is allowed or not- they are errors that can be easily avoided. Avoiding these errors allows the IRS to process your return (and hopefully your refund) faster.
Here are the most common errors:
1. The social security numbers listed on the return do not match the Social Security Administration records (i.e. your social security card). This is common in recently married or divorced individuals or new children.
2. Tax is not computed correctly from the tax tables- check this twice, or three times to make sure you did not err.
3. Incorrectly computing the child and dependent care credit or the earned income credit. Check the form several times- especially if you are making other changes to your return.
4. Missing or incorrect identification numbers for child care providers for the child and dependent care credit- check the statement you recieve from your provider for accuracy of face a disallowance of this credit.
5. Withholding and estimated tax payments entered on the wrong line- your Form W-2 withholding and your estimated tax payments need to go on the correct line or this will delay processing.
6. Simple Math Errors of addition and subtraction- tax programs would help this- but mostly- it is carelessness that the IRS will correct to your surprise.
I always recommend that you never prepare your own tax return and if you do, have another person look at it before you file it- they will catch most of these errors if they do their job diligently. If you want to best insure that your return has no errors, hire a competent tax professional.
I think all of you know the answer to this: you are. In fact, the IRS reminds you of this in selecting a tax preparer. Hence, you should be wise to review your return for errors and omissions before you sign it. Also, beware of unscrupulous preparers that will "promise" you a high refund.
Remember, a paid preparer must sign the tax return. Also, a diligent preparer will ask the right questions before finalizing your returns. On-line tax preparation services try to divorce themselves from ownership in your tax returns- and they should be avoided. In fact, some are scams and could steal your identity as tax returns have most of what is needed for identity theft.
It is best to get a reputable company who prepares many returns and is knowledgable on tax preparation.
There are many programs that you can utilize for filing and electonic submission of your tax returns. In fact, the IRS does not endorse any one program. I do not either. Most of the market share in self-preparation is with TurboTax- an Intuit product. Mostly, it depends on your level of tax expertise. Most programs offer an "interview" to walk you through the program. However, I have seen many examples of this interview gone wrong. And the results are erroneous returns.
I use ATX (a CCH product) but I do not recommend it if you are just doing it your own return. First, it is cost prohibitive and second, it is not user friendly to a non tax-professional.
However, I stress that if you have any deductions or income omission issues, that you utilize a tax professional.
The IRS is stressing electronic filing- in fact, there are many more electronic filers each year. Almost 80 million (about 60% of all filers) people filed electronically in 2007.
Free filing is available to those who make under $54,000 and meet many other requirements. However, since its inception in 2003, only 19.2 million have used this free file service sponsored by the IRS and its free file consortium.
Almost 23 million used IRS forms and/or tax programs to self file. This is up over 10% from a prior year. However, if you are not tax savvy and are attempting to take deductions or omit income, you need a tax professional to file your taxes. In fact, almost 60% of all returns are filed by professionals.
Jan 24, 2008
I can tell you from working for the IRS for a number of years, the IRS enforcement data is not always reliable. Audits can be defined widely- by mail (i.e. correspondence,) office, or in person. I cannot confirm this, but the IRS is not "auditing" all of the returns it says it is examining. The IRS can trump these statistics in their favor by auditing one year and then picking up the next year if they are not in jeopardy of holding the tax year before they can assess before the assessment statute of limitations. There are many other tricks to give the impression of more audit coverage- the point is that the IRS agents and managers know these and their targets that need to meet and they are playing the game.
I know this because I was told to do this when "coverage" was a key performance factor. The IRS can no longer use numerical enforcement statistics to rate their employees- this ended in 1998- however, there are performance measures- the IRS "three-legged stool" or "balanced measures" of performance: business results, customer satisfaction and employee satisfaction- the one that has emerged as the forerunner is "business results"- i.e. enforcement.
The kindler, gentler IRS is over- it wants to put this perception to lower the "tax gap." The IRS wants to appear to be more efficient and to cover more areas. I am calling the shot: a well known celebrity- most likely a prominent figure from the Mitchell Report- will be singled out by the IRS for tax evasion- around April 15th. The timing will be impecable and calculated: to strike fear into voluntary compliance before April 15th.
More on this to come- because the IRS has figured one of the areas of non-compliance out- so if you think you have "skated under the radar" for years- I would not bet on it for long.
Give you a preview- if you have old tax returns unfiled- you best find a good tax professional that will get the IRS records and file a tax return that matches their records before they find you first.
The latest enforcement data is out from the IRS. It appears they are wanting to show how they are doing more with the same level of personnel. Effectively, the IRS has not increased their enforcement personnel (Revenue Officers, Revenue Agents and Special Agents). In fact the net increase of these personnel is from 21,185 in 2006 ro 21,187 in 2007- a net increase of "2". So much from IRS stepping up of personnel.
However, the IRS is hiring- the delay by Congress and President Bush in passing legislation to fund the Government (and the IRS) is over. The IRS is back to hiring.
The IRS is clearly emphasizing in their news release on the enforcement data increases in audits- they are attempting to close the tax gap.
More on this later- if you are under IRS pressure, consult a tax professional that will give you peace of mind.
Jan 23, 2008
QUESTION: I have a question regarding worker misclassification that I can't find an answer to anywhere on the web including the IRS web site. You have a post regarding the potential problems if an employee is actually an independent contractor. What happens when the situation is reversed? I was misclassified as an IC for about 2 years and my company now openly admits they were in the wrong. To their credit, they are working with me to add 2 years to my retirement and possible give me some back pay for lost overtime and benefits. However, what happens to all of the extra taxes I already paid to the IRS ( i.e. my company's portion in addition to my portion)? The IRS web site states that my company may be forced to pay back taxes for their share even if I already paid them, but is there any way for me to get that money back? It doesn't seem right that the IRS will get paid twice for the same taxes.
Also, in negotiating with my HR Director (who is acting as the middleman with their attorney) they now want me to produce copies of tax returns for those 2 years so "they can compare them to the 1099s they issued". I assume they want to have proof as insurance that I already paid those taxes. Even though I can't come up with a clear reason, I'm not comfortable giving that information to anyone other than my tax preparer or the IRS. It seems to me that there could potentially be some things I would be better off not sharing with my employer. Am I being paranoid in wanting to keep those past returns private?
ANSWER: Thanks for your question. The proper method to handle your problem is for your employer to void the Form 1099's issued to you as independent contractor for the years in question and issue Form W-2's for the same periods. When you receive the Form W-2's, you then can file amended tax returns and claim refunds of the overpaid income taxes for those years. Your company's back taxes payment you refer to represents both your employer's portion and your portion of Social Security and Medicare withholding taxes which they owe due to misclassifying your employment status.
As far as sharing your tax returns with your employer, this is private information and does not have to be shared with them. How you have completed your personal tax returns should be of no concern to them. Sharing tax return information with anyone is totally your decision.
QUESTION: In 1994 I received Permanent Disability Status. In addition to Social Security payments I was entitled to a Disability Pension from my employer. I was never told this. AS a result I lost my home. In 2006 at the age of 55, I contacted my former employer to ask about my pension. That is when I found out about the Disability Pension. They paid me the back pension, which totaled $59, 000.00 and began to send me monthly payment of $272.58. They did not take out taxes of the $59,000.00I did not file a tax return. I have received a letter from IRS asking for a return. Had I received the pension as it was supposed to be, I would have received money back each year. Now I am afraid that if I file I may have to pay taxes on $59, 000.00, which I do not have. Please any advise you can give would be appreciated Thank you
ANSWER: Thanks for your question. Unfortunately, since the $59,000 of disability pension benefits was paid in 2006, the entire amount is taxable for that year (unless some or all of the cost of the pension benefit was deducted from your paycheck while working). This amount will be taxed as ordinary income on your tax return and taxed at your normal tax rate.
Here are two suggestions to help ease the burden when you file your 2006 return:
1) Request an Installment Payment Agreement when you mail the return to the IRS. Utilize Form 9465 for this purpose. You will be able to spread your tax payments over an extended period of time. Be aware that penalties and interest continue to accrue until the balance is paid.
2) When the balance has been paid, send a request to the IRS asking for abatement of all penalties related to this issue. The fact that you did not know about the disability pension plan until 2006 may be sound reasoning to have the penalties abated.
Jan 22, 2008
Unfortunately, many of our armed forces personnel have tax debt they owe to the IRS. Fortunately for our armed forces personnel that are serving in a combat zone, their pay is not subject to levy while they are in the combat zone.
How does the IRS know this? You can notify them according to their procedures. Also, in some discussions with the IRS related to armed forces tax levies, the IRS has indicated that they have received a listing of the qualified personnel. It is my experience that this list cannot be relied on for getting the exclusion because it is not efficiently managed.
The best manner to lift an IRS levy during this time is to get evidence of employment with the armed services and proof of deployment to a combat zone. Then, the IRS can be contacted and the levy released.
A combat zone exclusion will also extend the collection statute of limitations. You will need a competent tax professional to weave you through the resolution of your taxes.
Enlisted personnel and warrant officers in the military may qualify to have a certain amount of their income excluded from being taxed depending on if they are in a "combat zone" as defined by the President via Executive Order.
Their are two items that people are often confused:
1. Am I a member of the "armed forces" for purposes of this exclusion?
2. Am I in a combat zone?
The IRS has published a 27 page publication that explains all of the intericate details of this exclusion. However, most need a tax professional to explain the "gray" areas.
Often some people get fooled by two additional requirements needed for taking a dependent deduction. The IRS cites them in their publications but rarely does anyone read this fine print.
There are two added rules:
1. The dependent must be a US citizen or national, or a resident of a contiguous country: Mexico or Canada. There are exceptions for adopted children, but generally US citizens are adopting and they will get the appropriate citizenship.
2. The person must not be married and file a joint return with another person. This can often happen when Mom and Dad keep a young daughter home when her husband is in a work status or school status somewhere. I cannot find any data on this, but I beleive many of our armed service personnel have their wives staying with family. This family, if all other tests are met, should be able to deduct their family guest, who they are supporting, as a dependent. There is an exception to this also- if a joint return is only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns- it is OK. Again, I have military personnel in mind for this exception.
In any event, a competent tax professional is required to maze through these rules.
Jan 21, 2008
Who is a qualifying child for a dependent deduction?
A qualifying child is a child that meets four tests: relationship (very specific), residence (live more than one-half the year generally), age (under age 19 unless a full time student), and support (provide greater than one-half of the total support).In general, to be a taxpayer’s qualifying child, a person must satisfy four tests:
Relationship — the taxpayer’s child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of one of these.
Residence — has the same principal residence as the taxpayer for more than half the tax year. Exceptions apply, in certain cases, for children of divorced or separated parents, kidnapped children, temporary absences, and for children who were born or died during the year.
Age — must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.
Support — did not provide more than one-half of his/her own support for the year.
Interestingly, the IRS will default the dependent to the one who has more adjusted gross income or "AGI".
The effects of an incorrect dependent are huge. It can consist of adjustments to one or more of the following:
1. Dependent deduction lost
2. Filing status impact (i.e. head of household)- tax rates, standard deductions, etc.
3. Child tax credits
4. Child and Dependent Care Credit, and
5. Earned Income Tax Credit
And, once disallowed by the IRS, it is disallowed forever until the dependency exemption is justifed to the IRS.
Jan 16, 2008
(The following is a response to an email question.)
QUESTION: I have a tax question and was told you were the best to ask. I am a contracted employee in North Carolina and I am in the process of setting up a home office in my spare bedroom. If I convert this bedroom into my work office can I somehow write part of that off of on my taxes? The room I am using is not detached from the home, it is my spare bedroom. Also, I will be working in it but not full time. Thanks for your time!
ANSWER: Great question! You are able to deduct certain expenses related to setting up the room for business purposes. Expenses such as mortgage interest, real estate tax, homeowners insurance, utilities are deductible. The expenses are inputted on Form 8829, Expenses For Business Use of Your Home. The amount of allowable expenses is based upon the square footage of the area used for business as a percentage of the total square footage living space of the home. The deductible expenses are in turn based on this percentage. Also, costs to upfit the room for business use are deductible.
Be aware that to be able to deduct any costs, the area must be used for business on a regular basis and is your principal place of business or is a meeting place for clients or customers. Even if you are not working in the room full time, using it regularly for business purposes should satisfy the requirements.
(For answers to more questions about business deductions and other issues, send an email to firstname.lastname@example.org)
Jan 14, 2008
As previously blogged, the IRS considers this a major issue of non-compliance. In fact, they have issued more public guidance on this issue for employers.
The issue is that of control. Who controls the worker?? Is it the worker who controls his hours, what he charges, is at risk for a business loss?? These and other factors are used to determine if the worker is in business for themselves (i.e. and is an "independent contractor" and subject to receive a Form 1099-MISC and pay the entirety of their FICA and Medicare taxes- referred to as Self-employment tax) or an employee (receives a Form W-2 and the employer is required to withhold taxes for FICA/Medicare and income taxes).
If you are misclassified, you will need to file a Form SS-8 with the IRS to challenge the determination and to get the IRS to reclassify you. During the time the IRS considers this determination, you can now file a Form 8919 to pay only the portion of the FICA and Medicare that are attributable to you. Keep in mind, if the determination does not go to treatment as an employee, you will be liable for the entire FICA and Medicare tax.
Even the IRS suggests you get tax counsel on this issue.
Here is the latest IRS budget details:
The President has signed the bill funding most federal agencies for the remainder of fiscal year '08. IRS receives $10.89 billion allocated as follows: Taxpayer services: $2.15 billion Enforcement: $4.78 billion Operations support: $3.68 billion Business systems modernization: $267 million The final budget is $295 million over FY07 and $203 million below Bush's request. Also included is a mandate for IRS to spend $7.35 million to hire full- time employees in ACS (Automated Collection System.)
Enforcement means the IRS at your doorstep if you have tax debt.
Watch out for the IRS now....they have realized that the Automated Collection System function is very effective in collecting taxes. Hence, the new IRS budget (just passed on 12/19/2007- it was to be passed by 10/1/2007- the IRS fiscal year starts on 10/1 of each year- but did not do to squabbles from Bush and Congress) has earmarked $7.35 million for new ACS hires. This equates to about 175 or so new ACS personnel.
What does this mean?? More enforced collection by computers.
Levies...liens...and more contacts.
If you are deliquent in your taxes, you need to thwart it off before it happens.
Each year the IRS Taxpayer Advocate's Office or "TAO" puts out an annual report to Congress on areas of improvement needed in the IRS. The TAO is intended to be an independent, unbaised arm of the IRS that would allow for taxpayers, in hardships, to utilize this resource to cut through the "red tape." The reality of this is for a future blog entry. This year, like every other year, the TAO asks for improvements in the IRS Collections process. Specifically, the TAO criticizes the IRS for again restricting access to the Offer in Compromise program.
I have blogged on this subject in the past. The IRS should make the OIC program more accessible to those who qualify. If you want to know if you qualify, consult a tax professional.
The IRS has never liked the Refund Anticipation Loans ("RAL") offered by many franchised tax preparation firms. The IRS has aggressively pursued fraud in these areas and are now proposing changes (and suggesting eliminating) to this consumer loan. Consumer organizations have also criticized these as usurous fees on the working poor.
Now the IRS has requested rulemaking on the RALs and other tax preparation products including "audit insurance." This includes banning these programs.
The best scenario is to get ahead of the IRS and your tax debt. Then, a RAL or other "insurance" is not needed and you will not be abused.
Jan 4, 2008
I commonly receive a question on whether the IRS can levy an individual for the liabilities of the single-member limited liability company or "LLC." This answer is complicated as it depends on how the IRS treats the LLC.
If the LLC is single member, how is the LLC treated or tax purposes? If no special election was made (i.e. Form 8832- Election of Entity Classification or Form 2553- S Corporation election), the IRS will treat the LLC appropriately as an individual sole-proprietorship for tax purposes. Hence, this person will file the LLC as a Schedule C (Sole Proprietorship Business) with their Form 1040 annually. The IRS will treat this liability as an individual liability for all payroll and income taxes. This means that the IRS must collect on the individual for all liabilities. For payroll taxes, no separate assessment is needed for civil trust fund taxes.
So how can the IRS collect on LLC payroll and income tax liabilities when the LLC is treated as a sole proprietorship?? The answer is by a careful levy. According the IRS Internal Revenue Manual, the IRS can levy both the LLC (under its EIN) and the individual (under their SSN) for the liability. To quote the IRM:
When notice of levy is issued to collect liabilities assessed in the name and TIN of a disregarded entity, special care is needed. To avoid accounts being incorrectly attached and to facilitate the posting of levy proceeds received, a disclaimer may be added to the notice of levy: " This notice attaches to all accounts in the name of (single member owner name and EIN) as owner of (name of disregarded LLC and EIN) but does not attach accounts established in the name of (name of disregarded LLC and EIN)" .
Hence, the LLC is not a manner to avoid taxes. The IRS has got you covered on this angle. If you have a Revenue Officer, they will understand this rule and not make an error in levy.
If you have questions related to LLC, tax debt, and IRS collections (especially levies), then contact an experienced tax professional. If a levy is present, the only manner to release it is to get into an agreement with the IRS.
Jan 3, 2008
I often get questions on how to get a "settlement" with the IRS. What most are referring to is the "Offer in Compromise- Doubt as to Collectibilty" or "OIC" as the industry puts it.
The term settlement infers that it is an arbitrary amount offered to the IRS and that there is a wide range of possibilities. In fact, this is not the case. It is a detailed financial investigation that has no arbitrary features about it. The science and art of an OIC is knowing what is allowed, the rules the IRS has to abide by, and what items are subject to negotiations and representation.
You need to weigh all options before looking at the "settlement." The settlement is the final number, not the process. You need an experienced tax professional to review all the options.
Jan 2, 2008
For anyone who is responsible for the unpaid employment taxes of a company, the "trust fund recovery penalty" or "civil trust fund penalty" or "100% penalty" is looming nightmare. The IRS can collect trust fund taxes on employment taxes (i.e. the federal income tax and FICA tax withheld from the employee and not remitted to the US Treasury) from two sources: the company and the person(s) who are responsible for the taxes and willfully fails to pay these taxes to the US Treasury.
However, most do not know that, if the company or the individual makes payments on employment tax liablity, the payment can be designated to the trust fund liability that can be jointly assessed. This limits the responsible parties' personal liability. However, if the IRS enforces the liability (i.e. lien, levy, seizure), then they designate the payments accordingly to the non-trust fund tax liability- increasing the collection sources and potential for the IRS.
This policy is expounded in IRS Policy Statement 5-14. This is a very detailed, complicated process in which the IRS makes mistakes- and they are not in your favor. You will a professional who is knowledgeable in IRS procedure and rights to represent you in an civil penalty assessment and collection.
The IRS has deputized tax preparers for any returns filed after 1/1/2008 (this appears to include 2007 tax returns (and corresponding information statements and other returns filed through professionals) and deliquent returns filed from this date forward). To emphasize this point, the IRS has published 5 notices and announcements for the new tax preparer penalties and due diligence requirements.
The new rules require the tax preparer to use a realistic possibility standard for items on a return that are not disclosed by a specific statement on a return. However, disclosure will not be a "get out of jail free card." The tax preparer must have a reasonable basis that their position will be supported. This essentially is a change to a 33% assurance requirement to a 51% assurance requirement for the statistic buffs.
Preparers generally can continue to rely on taxpayer representations in preparing returns and can also generally rely on representations of third parties, unless the preparer has reason to know they are wrong. If there is a reason to believe they are hiding something (i.e. client claims no income but drives up to the office in a Ferrari) then the preparer has the diligence to ask some very personal questions.
The best due diligence is to compare your records to the IRS records of Forms W-2, 1099, etc. that are filed each year. They are available for the past 6 years- and will be available for 2007 around the end of May, 2008. At that time, the 2001 documents will fall off line by the IRS. These documents are the minimum to be reported to the IRS: if your documents do not match the IRS documents- you will be audited in some manner.
If you are filing old returns or want to make sure this year's return is minimally processable by the IRS (i.e. gets past audit step #1- match against IRS records), you need a firm that specializes in such returns.
Most people believe the IRS is predisposed to not allowing Offer in Compromises ("OIC"). If fact, the professional tax community believes so also and has constantly lobbied for more liberal OIC interpretations by the IRS. The recent 20% pay-in requirement is an obvious example of the IRS influence on Congress in stiffening the OICs filed.
IRS Policy Statement 5-100 (approved in 1992) states that the IRS should accept Offers if it is in the best interest of the Government. In fact, in most cases it is in the best interest of the Government. The General Accounting Office and the Taxpayer Advocate Service ("TAS" or known also as the Taxpayer Advocate Office or "TAO") have shown that 40% of IRS rejected OICs end up "currently not collectible"- hence- the Government gets nothing!!
PS 5-100 states:
The ultimate goal is a compromise which is in the best interest of both the taxpayer and the Service. Acceptance of an adequate offer will also result in creating for the taxpayer an expectation of and a fresh start toward compliance with all future filing and payment requirements.
The GAO and TAS studies both show that 80% of OICs accepted by the IRS result in compliant taxpayers that stay in the tax system at least 5 years!!
Hence, Congress is aware that it is in the best interest as the data reflects this to be true! However, the IRS is predisposed to allow OIC access to taxpayers (data reflects this in the TAS study).
You need to have someone who knows the system to fight for your rights. The IRS has many manuevers to limit your access to the OIC from not processing the OIC, to rejection, to requesting withdrawal or withdrawing you after a limited non-response period. In any event, you cannot go this alone and expect to successfully maze through the IRS.
As previously entries have noted, an Offer in Compromise ("OIC") cannot be filed frivolously and without merit. What this means is that you should do the financial analysis prior to the OIC submission and be prepared to explain every asset, liability, income and expense item- past, present and future.
The IRS has aggressively persued criminal sanctions against frivolous preparers and preparers and taxpayers who attempt to hide assets and income.
Honesty is always the best policy in any walk in life- especially in taxes.
It is prudent and wise to examine all options before the submission of any offer. Do you know how to submit, disclose and properly negotiate an OIC?? Most likely, you will need the assistance of a competent professional.