Jan 27, 2009

The IRS audit is over...or is it? The IRS Appeals Process

Last year, the IRS audited just under 1.4 million individual taxpayers with an average tax debt bill ranging from over $20,000 per year for Field audits and almost $9,000 for mail audits. Interestingly, most individuals who are audited never contest the results. In fact, 97.4% agree or default to the IRS findings (For 2007- 40,637 audits were not agreed out of 1.55 million total IRS audits). For computer generated earned income tax credit audits, over 61% do not reply and are accessed the tax, interest and penalties imposed by the IRS. The IRS makes errors (especially last year to manage the stimulus payments) and is pre-disposed to protecting the Government's interests. Hence, you should review and question their findings just as much as you would question any legal judgement against you.

However, taxpayers generally do not question IRS audits and elevating IRS decisions. There are several main reasons why individuals do not contest audits:

1. They are afraid of the IRS and what could happen if they contact them
2. The IRS is correct in their findings
3. They do not know how to respond to the audit
4. They do not know how to Appeal an IRS tax examiner/agent findings

Understanding the audit process is essential to knowing how to reply to the IRS in an audit and how to request an Appeal of your findings. Remember this- the IRS auditor's findings are not final. You can appeal these findings within the IRS or in the Court system if you are timely with your Appeal.

If you do not agree to the IRS audit findings, here is the process you should follow (it is in chronological order and as you progress to the end- it gets more expensive and prohibitive):

1. Protest the findings directly with the IRS auditor (can be called an Agent, Tax Examiner, Compliance Officer, Office Auditor, etc.) with a written protest. Discuss in this protest: the facts, the law and your analysis and conclusion of the law as it pertains to your audit. Most audits have factual disputes (i.e. "I do not have any documents to prove my deductions!"), so make sure that you having a compelling argument and have reconstructed your records, if needed.

2. If the auditor does not agree and proposes a final adjustment (the IRS puts this in a Form 4549 or a Form 1902-B and explains the adjustment in the Form 886-A), ask to have a managerial conference with auditor's immediate supervisor. YOU MUST REQUEST THIS BEFORE THE EXAMINER ISSUES A "30-DAY" LETTER. After the issuance of the 30-Day letter (usually IRS Letter 525), then you usually have no other recourse other than to go to the next step.

3. The 30-day Letter is a formal notice to appeal WITHIN the IRS with one of their Appeals Officers ("AO"). DO NOT MISS THE 30-DAY WINDOW TO APPEAL WITHIN THE IRS! The IRS will usually not let you back into an internal IRS appeals hearing. Appealing your audit within to an IRS AO is a very cost effective method. Also, it provides an opportunity to use "hazards of litigation" factors in resolving your audit. These factors consider the many nuisances of the IRS having to "take you to Court" to respond to your contest to their audit findings.

4. If you miss the 30-day letter or you intentionally let it expire, you will another mode of appeal. However, this appeal is not cost efficient, nor is it usually successful. The last appeal is to the United States Tax Court ("USTC"). You must petition the USTC within 90-days of the dated Statutory Notice of Deficiency (i.e. the "90-day" letter- usually IRS Letter 3219). In very few instances, you may be able to get the IRS to rescind the 90-day letter issuance after it has been issued but the 90 days has not expired and "back-up" the audit to an IRS internal appeal (i.e. the 30-day letter process).

5. If you miss the 90-day letter, you will be assessed the tax and IRS Collection Activity will ensue. The recourse you now have is one of three methods: #1 - pay the tax, file a claim for refund with the IRS, have the refund denied by the IRS (or allow 6 months to expire) and sue the IRS in US District Court or Court of Claims; or #2 - beg the IRS for Audit Reconsideration- i.e. reopen the audit (by the way the IRS rarely allows a "do-over" for an audit unless it is an under-reporter audit that is not responded to timely and the tax is assessed); #3 - file an Offer in Compromise- Doubt as to Liability (Form 656-L)- this is also a rarity in that the IRS has already considered the facts, law and audit findings and has made a decision to assess the tax.

If you snooze- you lose...

The end of the audit is not the end of your rights. The auditor's findings are not final until you agree or you have exhausted your appeal rights- internally within the IRS and through the Courts. But as the old saying goes- "if you snooze, you lose"- in tax audits, this translates into: if you miss your appeals deadline- you will move farther down the process and it will be more painful and costly as it progresses.


Jan 26, 2009

Need a copy of your tax return- Form 4506 or use two other faster methods

You need a copy of your tax return for many things:

1. Obtaining a bank loan
2. Applying for Financial Aid
3. In divorce or support proceedings
4. To prepare your current year's tax return
5. Prove your income allocations to your State
6. To prepare for an IRS audit

However, you may have already disposed of it. If you need an copy, the most expeditious way is to request a copy from the person who prepared the return.

A second method is to call the IRS or go to one its Taxpayer Service Locations and ask for a "Return Transcript." A return transcript is digital printout of most items on your return. However, it is available only for the past three years.

The last method, and slowest of them all, is to request a copy via a Form 4506. This process takes about 2 months. If the return is over 3 years old, you may never retreive it as the IRS may have destroyed it.


Jan 25, 2009

Refund Anticipation Loans- The IRS really hates this program

The Refund Anticipation Loan or "RAL" is advertised as a quick way to get some money in your pocket in "anticipation" of your federal tax refund. However, the IRS hates these programs, and it appears rightfully so.

It appears the IRS has been able to make some "end-around" progress to the RALs by limiting tax preparers and those utilizing tax return information for uses other then what is directly authorized by tax clients. Normally, when you go to a tax preparer to file your tax return, you do not expect them to utiize your information for means other than the preparation of your tax return. In the past, transfer of tax return information to a third party processor of the RAL was done transparent to the taxpayer. No more- section 7216 requires that the preparer obtain consent of the use of tax return information (i.e. the tax refund for a RAL).

More to come on this new provision. Clearly, it will be thorn in the side of RAL providers and for anyone who can use this information for other then its intended uses.


IRS Relief Forthcoming- many think so...

Many news organizations are reporting on IRS Commissioner Doug Shulman's promise of a kindler, gentler IRS. Shulman's phone press conference and press release dictate new measures that the IRS is taking to relieve your tax debt pain. The IRS National Taxpayer Advocate also urged relief to those facing distressing times. And they both have the eyes of the press.

Here are some of these reports:

The Augusta, GA Chronicle

The Kankakee, IL Daily Journal


The Dunkirk, NY Observer

The Hartford, CT Courant

The Baltimore, MD Sun

NPR's Marketplace

The Flint, MI Journal

The IRS is also promoting filing your tax return early to recieve your refund or to recover your stimulus payment for last year as a means to achieve financial relief.

It goes without saying, these are hard times. They are also hard times for the government also. In fact, the government debt is at a all time high. Do you catch the contradiction here? Major media outlets are reporting the IRS phone conferences and press releases as if they were fact. Beware of the wolf in sheeps clothing, as the wolf still needs to feed his belly- now more than ever...


Jan 22, 2009

Innocent Spouse Relief- Is that for me??

Unfortunately, marriage sometimes ends in divorce. In fact, in the United States, it occurs about 40-50% of the time. To make matters worse, sometimes tax problems occur after a divorce or separation is finalized. Many times, emotional divorce situations fail to consider the post-divorce tax implications. However, all is not lost, for there is relief in what is referred to as "innocent spouse" relief.

Here is an example of a typical fact situation of a tax problem that arises in marriage but surfaces after divorce:

In year 2001-2003, John and Jane Doe file a joint tax return. John is self-employed and Jane stays at home with their two children. John reports income of $100,000 in each year and pays the associated tax with the timely filed return. Jane, who does not handle the finances or the taxes of the home, signs the tax return that John brings home from their accountant on April 14th of each year. On June 30th, 2004, John and Jane get a divorce. On September 30th, John and Jane receive a letter from the IRS that states that they owe an additional $10,000 in tax for the errors made on the 2001-2003 tax years for not reporting $12,000 in income in each year.

The income that was not reported relates to John’s business in which he failed to report all income on their tax return. The audit ensued and their joint liability was assessed. John receives the notice and does nothing about it. Jane is unaware of the return audit, the assessment, or any ensuing collection on the liability. The $10,000 in tax liability by June, 2005, grows, with penalties and interest, to $22,000.

Jane has returned to work in 2004 and files a return for 2004 and the IRS takes her $3,000 refund due to the unpaid joint liability. Also, the IRS is now sending her threatening notices to levy her wages and bank accounts for the unpaid balance of $19,000.
Jane wonders if there is anything she can do about this tax problem.
Jane is in despair, but what she may or may not know is that she may qualify for relief as an “innocent spouse.”

There are three types of Innocent Spouse relief:

Traditional innocent relief- your spouse did something wrong on your return and you are potential not liable
Separation of Liability- the understatement of tax allocated to you is generally the amount for which you are responsible
Equitable Relief- taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax

The requirements are generally the following:

1. Must file the form 8857 no later than 2 years after collection starts
2. Must file a joint return
3. Understatement of return due to error by the non-requesting spouse
4. At the time of the signing the return, did not know of understatement (and prove this)
5. It is inequitable to hold the requesting person who did not know of the error (understatement) liable for the additional tax

What are your chances of obtaining the relief (assuming you meet the pre-requisites above)- here are the factors for and against relief:

Factors for Relief
1. Your marital status is divorced or separated (in fact, for Separation of Liability, it is required for at least the past 12 months)
2. Requesting spouse will suffer a hardship due to the error
3. The requesting spouse has suffered abuse
4. In a divorce decree or separate legal arrangement, the non-requesting spouse is obligated to pay the liability (it is helpful if the decree states why they are liable- i.e. it was their error that was not known to the requesting spouse)

Factors Against Relief
1. The understatement is attributable to an error made by the requesting spouse
2. The requesting spouse had knowledge or a reason to know of the omission or error
3. The requesting spouse received significant benefit from the income that was understated
4. In a divorce decree or separate legal arrangement, the requesting spouse is obligated to pay the liability

Clearly, Jane has a good case for relief. She should file a Form 8857 with the IRS within the 2 year window from when the IRS starts collecting (absent the two year window, she will have an uphill battle to fight to have the IRS consider the innocent spouse relief). Jane will have to build her case knowing that the IRS will ask her former spouse about what she is allegating against him (he will be asked for his side of the story!). The biggest factor for Jane is whether she knew of the understatement or had benefit from it. Jane should center on this argument.

Divorce is painful. Taxes from a past relationship can make it more painful. Exploring your options for innocent spouse may be your best option to finally get that part of your life behind you.


Jan 18, 2009

New 2008 IRS Enforcement Statistics- Surprise- less enforcement?

The IRS data on its 2008 enforcement results are mixed. If you owe, there was more enforcement with less results- if you were worried about an audit- good news- less enforcement and less results. Most of the IRS enforcement falloff was due to the agencies emergency management of the 2008 stimulus payments. Many IRS personnel were taken off of front line enforcement positions in order to service questions on the stimulus payments.

Here are some FY 2008 (the IRS fiscal year ends the the government's fiscal year ending- September 30th) IRS Enforcement Data highlights:

1. IRS audit revenue and collection reduced- Audit enforcement revenue decreased from $23.8 billion to $20.6 billion; and Collection enforcement revenue decreased slightly from $31.8 billion to $31.1 billion
2. The number of IRS Revenue Officers (Collection personnel) decreased from 5,662 to 5,492.
3. The number of IRS Revenue Agents (Field audit personnel) decreased from 12,816 to 12,599. Also, similar drops in IRS Special Agents- i.e. criminal investigators - dropped also- there are only 2,631 remaining
4. The IRS had increased all of these positions in the two years prior
5. The IRS Information Document matching (IRP program and Automated Underreporter Unit - i.e. CP 2000 letters) had a major increase in enforcement- from $3.9 billion to $4.7 billion
6. If your income was between $200,000 and $1 million- your chance of audit substantially increased- to the extent that almost 3% of these returns filed are now being examined by the IRS by Field agents or by correspondence examiners
7. Levies dropped by 30%- after 7 straight years of dramatic increases in this IRS enforcement area
8. However, IRS tax liens increased by 12%- so the IRS makes sure that the tax debt does not get outside of its ability to collect in the future.

It appears that the IRS' management of the stimulus payments had an impact on the enforcement results- especially in the area of levies. The IRS used many of its Automated Collection System personnel ("ACS") to answer taxpayer phones for the stimulus payment questions from February to October- thus- effecting their results.

But do not despair- enforcement will be back- no stimulus payments (yet?) for 2009- hence, you better resolve your problem, if you have one, before the IRS enforces it on you.


If The IRS Wants To Be Kinder & Gentler, It Actually Needs To Try

Two weeks ago, the IRS announced that it will be “kinder” and “gentler” to those who have been affected by the dipping economy. Among the claimed IRS concessions are:

1. Levy relief for those in hardship (the IRS procedures for what is a hardship is nebulous at best- see IRM, paragraph J)
2. Increased access to an Offer in Compromise considering the loss of equity (see IRM which remains unchanged since the last IRS modification on 9-23-2008) from devalued home values (an OIC is known as “a settlement on your tax debt”)
3. Solution options for missed OIC payments for those who cannot make payments on already accepted OICs (link to IRM on 24 months of payment)
4. Added flexibility for those who have missed on back payments on balances owed. (i.e. Installment Agreements) (again, the latest IRS procedure change in this area was on September 23rd, 2008- no procedure was changed to reflect the January 6, 2009 IRS relief proclamation)

To the untrained eye, this may seem like relief. However, when you take a closer look, this “relief” is simply the usual rules packaged in a more appetizing way. This can be seen by taking a closer look at long standing IRS practices, especially in the very 4 areas mentioned above.

Levy Relief for Hardship
The “new” rule stated has always been the rule and there does not appear to be any change to this rule to signal increased relief. For example, the IRS does not appear to be any more flexible on allowable living expenses in determining your ability to pay. In fact, the IRS Taxpayer Advocate Office (“TAO”) continually criticizes the IRS for not being flexible with these standards.

Americans are seeing housing costs skyrocket due to escalation of ARM loans and vehicle operating costs escalating from rising fuel costs (in fact, the IRS has raised its own standard mileage rates but not the allowable expense for operating a vehicle- this has not changed since March 1, 2008- the IRS is set to redesign these standards on March 1, 2009). However, the IRS will not take these “actual costs” into account (see Page 435 of the 2007 TAO Study). Even more interesting is that, in many cases, using the actual costs will cause the taxpayer to be uncollectible (see page 442 of the same report that states that the IRS put more amounts into a non-collectible status than all amounts collected from Installment Agreements and Offers combined).

Does this sound like relief to you?

Increased Access to the OIC
The 2006 law changes and recent IRS data show (see Page 27 of the 2009 TAO recommendation to Congress) that the IRS is institutionally restricting access to the OIC, despite the IRS’ new assertion that it will allow greater access.

Offers are a complex computation of assets and liability/expenses. The expenses allowed are held to allowable standards set by the IRS, as stated above. The IRS also considers: whether the taxpayer’s financial circumstances are temporary - i.e. the taxpayer has a history of producing income, or is in a business that is in a downturn, or is “under-employed” in some manner. If the financial hardship is show to be “temporary”, then these individuals will have higher offer in compromise amounts than they can afford. This is why an unemployed doctor will never receive an OIC. Do not take my word for it; statistics show that 1/3rd of rejected OICs end up in currently non-collectible status--the taxpayer is so broke he can’t currently pay at all! The fact is: the IRS institutionally restricts access to the OIC.

Does this sound like relief to you?

Allow clients flexible terms in defaulted OICs that were previously accepted.

This one is nice in theory, but how many will this reach? In 2008, only 10,667 offers were accepted. To put this in perspective, there are almost 10 million taxpayers that the IRS is pursuing collections on. Also, in this concession, the IRS is referring to the 24-month periodic payment OIC. But this type of offer in compromise is rarely used. So, this provision appears to have little or no relief to the masses.

Does this sound like relief to you?

Added flexibility for those who have missed on back payments on balances owed.

This policy is already in effect. If you are in a payment agreement, the IRS will allow you to miss one payment or be late on one payment annually and you will not default your agreement. But if you, in combination, miss more than one payment or are late on a payment, you enter into default. The IRS sends you a certified letter, a CP 523, that states that you have defaulted and that you have 30 days to contact the IRS or be subject to immediately levy. At that point, the IRS has two choices: ask for new financials to setup a new payment plan or restore the prior installment agreement. Thus, missing payments will just afford you the opportunity to renegotiate under the existing IRS procedures or restore your previous agreement. The conclusion: maybe you pay more, maybe you pay less, or maybe you pay the same. However, relief will not be automatic as a result of missing a payment. This is not a policy or procedure change with the IRS and unless your financial situation changes relative to what the IRS allows, your payments will be the same.

Does this sound like relief to you?

The reality is this: the IRS is a collection agency. The IRS Christmas levy reprieve is not a permanent measure.. In fact, the IRS did not change its Internal Revenue Manual, its “bible” on its enforcement procedures, to accommodate these recent “policy” changes. Because IRS procedure has not changed, the institutional “relief” that the IRS is professing will not be as easy as it sounds. It will still require you to go through the old traditional IRS standards for payment. The IRS press release and many news articles seem to imply that it will be easier to get relief, but the history of IRS enforcement does not reflect the IRS to be “kindler and gentler.”


  © Blogger templates The Professional Template by Ourblogtemplates.com 2008

Back to TOP