Contacting the IRS: Third Party Contacts

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The IRS has the right to contact third parties in an attempt to collect your taxes, penalties, and/or missing tax returns.  A third party is someone other than yourself (besides your tax relief attorney or duly authorized representative) who may have information that would assist the IRS in their investigation.  But it is important to know that there are certain restrictions on this right so that we don’t allow the IRS to take advantage.

Notice Requirements

The IRS must first give you notice that they are going to be contacting third parties.  Notice typically comes in the form of a very simple letter (Letter 3164).  There are three versions of this letter:

  • 3164-A: for Trust Fund Recovery Penalty investigations
  • 3164-B: for balance due investigations
  • 3164-C: for delinquent return investigations

The IRS revenue officer must wait 10 days after mailing the letter before initiating any third party contact.  In cases where the taxpayer was provided with a Publication 1 Your Rights as a Taxpayer, which is a majority of cases, the 3164 letter is usually not required because the third party contact language is included in Pub 1.  There are also some blanket exceptions to the notice requirement, such as where there are pending criminal investigations, where a third party contact may jeopardize collection of the tax, and where the taxpayer authorizes third party contact.

Providing Third Party Lists

The IRS is required to provide the taxpayer with a list of all third party contacts periodically, and whenever requested by the taxpayer.  Revenue officers must carefully maintain a list of all third party contacts, which should be updated after each contact in order to keep it current.  As you can see, the language (“periodically”) is just vague enough to allow the IRS to only send the list a couple times a year unless the taxpayer requests to see it more frequently.

National Small Business Week 2013

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There are so many elements involved in operating a successful business, only some of which are controllable by the owner.  You need a good business plan, adequate capital investment, not to mention an excellent product or service.  You also need to figure out how you’re going to market that product or service.  Of course, it helps if you have a head for business; some people just seem to “get it.”  But even these measures do not ensure success because so much depends on timing and luck.

One element that people tend to overlook when they start a business is the tax consequences and requirements.  No luck involved here.  And, thankfully, you don’t really need to have a knack for numbers or a specialized knowledge of tax laws to make sure the tax aspects of your business are in order.  What you do need is a basic understanding of what tax requirements apply to your business and where to go for answers.

Some small business owners consult with a tax accountant or a tax attorney in the opening and operating of their business.  But if you’re not in a position to hire a tax professional, there are still excellent resources at the IRS, especially this week.

It is National Small Business Week 2013 and the IRS is offering two free webinars, one on June 18th and one on June 20th.  The June 18th webinar is entitled “Small Business Owners: Get All the Tax Benefits You Deserve” and the June 20th webinar will cover the topic of “common mistakes.”  If you don’t have a chance to register and watch live, the IRS will be archiving both webinars on the IRS Video Portal.

Interested in hearing President Obama’s self-congratulatory introduction to National Small Business Week?  In a minute and a half he lists everything his administration is doing to help small businesses succeed.  Me neither.  But here’s the link anyways:

http://www.whitehouse.gov/blog/2013/06/17/50-years-national-small-business-week

IRS to Cancel Tax Relief Programs?

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Is the IRS really warning that emergency tax relief will no longer be allowed? I doubt it. Last week, the IRS issued a warning to taxpayers to safeguard and anticipate information needed for various tax issues in the event of an emergency during this year’s hurricane season. Typically, the IRS offers tax relief to victims and affected areas of natural disasters and other crises, such as the Oklahoma tornados and the Boston marathon bombing.

While the IRS has many many many faults, some of which are just finally being made public, I don’t think even the IRS would disallow emergency tax relief in the event of a hurricane disaster, and then point to their May 29, 2013, news release as warning taxpayers that they should have been more prepared during hurricane season. The warning may be filed under “preventative education”.

The preventative education provided by the IRS are reminders of some of the safeguards that we all know we need to take to keep our financial affairs in order, but will also allow you to maintain tax compliant in the event of an emergency.  This includes:

  • Creating an electronic backup of your records that can be accessed via the internet or other electronic format. Additionally, non-internet backup records should be stored in a secondary location;
  • A photo and video record can help prove the market value of real property and tangible items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area. However, these days photos and videos can also be easily uploaded and downloaded online.
  • Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

These precautions may help you be prepared tax-wise in the event of an emergency. While emergency tax relief will likely be offered as emergencies arise, a consultation with a tax relief attorney will ensure that your tax rights are protected even when there isn’t a natural disaster.

Better to be Employed when Filing OIC

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The Offer in Compromise (OIC) is an IRS program whereby some taxpayers are able to settle their tax debts for less than what they owe.  But the OIC option is not for everyone.  For instance, if the fair market value of taxpayer’s assets adds up to more than what is owed, then OIC is not an option.  Also, OIC is not a good option if a taxpayer’s income is too high.

So how does the IRS calculate income while reviewing an OIC filed by a taxpayer who is unemployed?  There are many different options:

  1. Unemployment Income – If the Offer Examiner is focused purely on what the taxpayer is earning at the present, then it would make sense to simply use the monthly unemployment benefit amount. However, it is unusual for the IRS to go this route because unemployment benefits tend to be temporary. If the IRS is going to wipe the slate clean then they want to be sure they are getting every last dime they can possibly get from the taxpayer. Unemployment income is normally an understatement of one’s true earning potential.
  2. Income history – Sometimes the IRS compares a taxpayer’s current income with income reported via tax returns going back 1, 2, 3, or even more years. If the present year income appears to be an anomaly, then the IRS may elect to calculate an average income using several years’ tax returns.
  3. Income potential – This is similar to using an income history because it seeks to determine what the taxpayer can theoretically make rather than taking the current income for face value. One example of using income potential would be to increase the income of a taxpayer who is close to finishing school and who will be moving into a high-paying field of work.
  4. Impute income – I have seen the IRS simply impute/assign minimum wage when a taxpayer is unemployed.  However, the IRS is not likely going to do this if the taxpayer has a history of high wages.
  5. Reject the Offer – I put rejection as a final option because, in reality, if the IRS is unable to determine what the taxpayer’s income is, they are more likely to reject the offer than struggle too long figuring it out.

Income is one of the most important factors that the IRS looks at when determining whether to accept or reject an Offer in Compromise. Based on my experience, the IRS simply does not believe it when someone claims their income is $0.  Since the IRS is going to resort to one of the above analyses or simply reject the offer when unemployed, then it is safe to say that an OIC is a more successful form of tax relief for those who have a steady job.

When do you need to file an amended tax return?

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This is the time of the “tax year” that little tax issues on your recently filed tax return usually come to light. You thought your taxes were done when you filed your tax return in April. Well, you may have some more work to do.

The “little issues” may include the discovery of the misfiled or belatedly received income statement, the discovery of a corrected income statement, or remembering that it was (or wasn’t) your turn to claim a shared dependent. The amended tax return, simplified, is a tool often used in one of two ways; 1) to make changes to a filed tax return for the taxpayer’s benefit, or 2) to make changes to a filed tax return for the government’s benefit.

Taxpayer Will Benefit From Amending the Tax Return

The use of an amended tax return is the tool to use when you notice that you paid too much tax or you were due more money back from the government than you received on your original tax return. The government isn’t likely going to make an adjustment when the unadjusted return is in their favor. Therefore, you’re going to need to push the issue to ensure you don’t pay more taxes than you’re legally obligated to pay.

This may include correcting your filing status or the number of dependents to your benefit, or claiming credits you were entitled to claim, but didn’t, on your original tax return. Although more rare, sometimes there are changes in the law that are retroactive and allow you to amend your tax return for a past tax year to take advantage of the change to the law.

In the present age of initial computer review of your tax return, calculation or transposition errors are normally caught fairly quickly by the IRS and normally do not require amending your tax return, as you will normally be notified of errors or the need for additional information.

If you will receive an additional refund by filing an amended tax return, you should normally wait until you have received the refund due to you as shown on your original tax return before filing your amended tax return. Waiting until the original refund is received may help avoid IRS delays and errors in processing your amended return and the additional refund. Generally, to claim a refund based on an amended tax return, the amended tax return must be filed within three years from the due date of the original tax return or within two years from the date the tax was paid, whichever is later.

The Government Will Benefit From Amending the Tax Return

In cases where amending a tax return will result in a higher tax owed and a tax debt, the taxpayer may drag their feet in filing their amended tax return. This situation may include, for example, the realization that you earned more income than you thought you had at the time you filed your tax return, or you claimed a dependent you were not eligible to claim. The reality is that the IRS, for all their faults, is likely to eventually catch an error that will result in a higher tax owed. The real question most taxpayers in this situation face is whether they can actually pay the increase in tax; and they often opt to wait for the IRS to push the issue.

Similar to calculation and transposition errors that benefit the taxpayer, simple calculation and transposition errors that may benefit the government are likely to be discovered in the initial computer processing of your tax return and don’t necessarily require an amendment. It is the more complex or intentional errors that warrant use of the amended tax return to minimize civil and criminal exposure for disclosures made on your original tax return. The use of the amended tax return will minimize the monetary penalties and interest assessed if amended before the IRS corrects the return for you. Like any tax issue, a proactive and organized approach will save you money over time.

IRS Closed Tomorrow – That Levy Release Will Have to Wait as the Potluck has Begun

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The Potlucks have begun in the bowels of the Internal Revenue Service (IRS) today in celebration of what is essentially a four-day weekend.  The Tax Battalion notified you on April 22, 2013, of the news announced by the IRS on May 15, 2013, that they would be closed additional days due to federal budget woes.

The IRS closures are scheduled for May 24 (tomorrow), June 14, July 5, July 22 and Aug. 30, 2013. Each of these closure or furlough days are conveniently scheduled to coincide with a federal holiday, manufacturing a four-day weekend for those people who collect your taxes, but not for those who owe the taxes (this isn’t necessarily true, click to read more about IRS Employees Tax Debt).

Beginning (officially) tomorrow IRS operations will be closed. This means that all IRS offices, including all toll-free hotlines, the Taxpayer Advocate Service and the agency’s nearly 400 taxpayer assistance centers nationwide, will be closed. IRS employees will be furloughed without pay. No tax returns will be processed and no compliance-related activities will take place.

The IRS while firing up the BBQ noted, of course, that taxpayers should continue to file their returns and pay any taxes due as usual. However, since none of the furlough days are considered federal holidays, the shutdown will have no impact on any tax-filing deadlines. The IRS will be unable to accept or acknowledge receipt of electronically-filed returns on any day the agency is shut down. However, where the last day for responding to an IRS request falls on a furlough day, the taxpayer will have until the next business day. The short of it is, if you haven’t obtained that bank levy release yet, it’s not going to happen until the IRS returns to work with a suntan and a full belly on Tuesday, May 28, 2013.

Is Your Online Imprint Going to Trigger an IRS Audit?

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In mid-April I noticed a rather innocuous news release on the IRS website in regards to some type of email policy. If it wasn’t so cryptic and fraught with legal positioning, I would probably have considered it with the same drab spun by the IRS press cycle on a daily basis. However, the statement was so obtuse, it required at least a Google search or two to decipher the precipitous for the need to publically proclaim their position on email surveillance.

Here’s the IRS statement from April 18, 2013:

“Where the IRS already has an active criminal investigation and seeks to obtain the content of emails from an Internet Service Provider, we obtain a court ordered search warrant. It is not the IRS policy to seek the content of emails from ISPs in civil cases. Respecting taxpayer rights and taxpayer privacy are cornerstone principles for the IRS. Our job is to administer the nation’s tax laws, and we do so in a way that follows the law and treats taxpayers with respect. However, to resolve any remaining confusion surrounding this issue, the IRS is reviewing its policy and guidance and will make appropriate updates.”

I don’t have a crystal ball or a microphone in the IRS headquarters, but I believe the precipitous for the statement was damage control based on numerous news stories circulating recently that the IRS was beginning to use more than the standard tax disclosures to catch you in a tax lie. It was reported that the IRS was acquiring personal information on taxpayers’ online activities, from eBay auctions, Facebook posts, credit card transaction records, and e-payment transaction records, to verify the information reported (or not reported) on your tax return.

It was reported that the new online surveillance policy was precipitated because the IRS is under heavy pressure to help the federal government out of its budget crisis by chasing down revenue lost to evasions and errors each year. According to Edward Zelinsky, a professor at Benjamin N. Cardozo School of Law and Yale Law School. “I am sure people will be concerned about the use of personal information on databases in government, and those concerns are well-taken. It’s appropriate to watch it carefully. There should be safeguards.” He adds that taxpayers should know that whatever people do and say electronically can and will be used against them in IRS enforcement. Be warned.

It is alleged that the IRS is going a step beyond law enforcement agencies that use openly displayed social media information such as twitter, facebook, and instagram to prove illegal activity by asserting there is no right to privacy in personal correspondence via email, facebook chats, twitters direct messages, and similar non-public online communications.

According to a blog post by Nathan Wessler on the ACLU’s blog, even though judges are holding that people’s emails are private communications (most notably in United States v. Warshak, a 2010 decision from the Sixth Circuit Court of Appeals), the IRS is going its own way on the matter, claiming that Americans have no privacy rights in any correspondence sent via the internet, so that the IRS has no obligation to get search warrants. It was the policy of the IRS to read people’s email without getting a warrant. Not only that, but the IRS believed that the Fourth Amendment did not apply to email at all. A 2009 “Search Warrant Handbook” from the IRS Criminal Tax Division’s Office of Chief Counsel baldly asserts that “the Fourth Amendment does not protect communications held in electronic storage, such as email messages stored on a server, because internet users do not have a reasonable expectation of privacy in such communications.” Again in 2010, a presentation by the IRS Office of Chief Counsel asserts that the “4th Amendment Does Not Protect Emails Stored on Server” and there is “No Privacy Expectation” in those emails.

I suppose the end result for me on this issue is the portion of the statement that reads: “It is not the IRS policy to seek the content of emails from ISPs in civil cases.” In my dealings with the IRS in non-criminal cases, policy has no president or consideration in a collection case. Therefore, you should consider your online footprint a fishbowl for IRS audit fodder.

Still Waiting on Your Tax Refund?

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By the time you read this article, you should have that interest free loan that you gave to Uncle Sam returned to you via your federal tax refund. This assumes that you filed your tax return on time, and that you exercised savvy tax planning so that you didn’t incur a tax debt. So have you already spent your refund, or are you still waiting for the money you’ve already earmarked for that desired frill?

According to the IRS, they generally issue refunds within 21 calendar days of receiving your tax return. This is, of course, if you E-File your tax return and disclose your banking information for purposes of direct deposit. If you snail mail a paper return and want a check or savings bond snail mailed back to you, your refund should arrive in about six to eight weeks.

Should you have received your refund already? Still waiting? You may want to use the IRS’ where’s my refund tool available online at www.irs.gov or as a smartphone application. If you are still left wondering where your money is, like many have been this tax season, a systematic approach may help you alleviate your anxiety if you think you should have already received your refund.

Step 1: Were there basic errors on your tax return?

The first question you need to answer is whether you made an error on the face of your tax return. This includes, for example, using the wrong social security number, making computation mistakes, checking wrong or multiple boxes, failing to sign your return, or pay for postage. Any of these seemingly simple tasks results in common errors which will likely cause an error in the initial processing of your tax return and a delay in issuing your refund. So double check your tax return before sending it, and if you’re still waiting for your refund, maybe check the copy of your tax return (you did save a copy your return, right?) and see if there is some basic error that needs to be corrected.

Step 2: Do you owe the government?

So you reviewed your tax return and confirmed that you made no errors on the face of the tax return. Then, the delay in receiving your refund may be more problematic. I receive calls every year from people who owe the government taxes or some other type of debt and are wondering why they didn’t receive their refund that they had already earmarked for some necessary expense. Unfortunately, the federal government, like any other creditor, isn’t going to give your money back when a debt is owed. If you owe the government, it’s almost certain that your refund was applied to your debt in the best interest of the government.

Step 3: Was your tax return more complex?

So you’re certain that you don’t owe the federal government any money and that you made no errors on your tax return; then what are the other reasons that your refund may be delayed? A refund may also be delayed if you use an Individual Taxpayer Identification Number, amend a tax return, or claim specific tax credits that need to be manually reviewed like the adoption tax credit, for example. Or, maybe the IRS is examining/auditing or disputing some item(s) on your tax return. The latter is usually not the normal operating procedure for delaying a refund as the refund is normally issued, and then months later an audit notification is sent, then informing you that your tax return is being audited. However, it is always a possibility especially if you are using novel accounting practices or extreme red flag expenditures.

Step 4: Have you moved recently?

The IRS will mail to you notifications regarding delays, examinations, or other problems in issuing your refund. If you recently moved, you may not be receiving notification from the IRS explaining what actions are being taken on your account causing your refund to not be timely issued. Therefore, you or your authorized representative may need to contact the IRS to determine why your tax refund has been delayed. This is the case even if you did not move and you have not received an explanation for the delay.

Lastly, the government is back-logged and does make mistakes; this is always a consideration when waiting for a refund check that doesn’t come. This basic approach will hopefully help you determine when it’s time to contact the IRS for clarification or seek professional assistance in obtaining that tax refund that you’ve already counted on to get through the month.

"irs.gov is not responding"

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This is the error message I kept getting when I tried to navigate around the IRS website today.  I don’t know enough about computers to say for sure what is going on, but I would guess the problem is too much internet traffic from last minute filers and refund seekers.

Happy Tax Day! – April 15, 2013

The most useful bit of advice I could give today is this: if you’re not 100% prepared to file your taxes, don’t throw your forms together at the last minute.  File an extension!  Enough said.

File an extension using Form 4868.

Tax Day is Around the Corner; Are You Prepared?

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Happy Tax Day! Come Monday April 15, 2013, your tax returns are due. Have you prepared? While many people filed their tax returns well before the April 15 deadline because they gave the government an interest free loan and are due a refund; many other people delay filing their tax return or never file a tax return. These people dread Tax Day because they know that they’re going to owe a tax debt once they actually do file their tax return. So they believe it’s better to not even file. This is not the correct approach.

If you are in the group of people who procrastinate filing their return or do not file your tax returns in fear of a tax debt, given the present Internal Revenue Service (IRS) collection regulations, this needs to be the year you fix your tax problem. If you have a filing requirement, you need to either file a tax return or an extension to file by April 15. Simply ignoring your filing requirement will likely cost you more money in the long-run as failure to file monetary penalties are severe.

Eventually, the IRS is likely to catch up with your shenanigans. If you had sufficient income requiring you to file a tax return, such income was likely reported to the IRS. Once your income is reported, even if you don’t file a tax return, the IRS may eventually file a return on your behalf by using the reported income and minimum deductions to assess a liability against you.  Even if your income isn’t reported, taxing entities have been known to use other means to estimate your income to assess a liability against you.

You’re legally allowed to file an extension to file, so use it if you’re not ready to file your tax return. This is a simple procedure. Many taxpayers fail to file a timely tax return. Or, alternatively, they elect to pay undue taxes by claiming the standard deduction simply for the purpose of meeting the tax day deadline because they don’t think they have the time to itemize and calculate the deductions and credits they are entitled to claim. While an extension to file is not an extension to pay, filing an extension and properly preparing your tax return will likely save you money.  You must file your extension by April 15. If needed, filing an extension will generally allow you until October 15, 2013, to properly prepare your tax return.

So you filed your tax return or you are about to file your tax return, and you owe a non-disputed tax debt… what do you do now? Can you pay the debt? If you can afford to pay the debt owed, paying the debt is usually the least costly option after penalties and interest are factored into the equation. But if you’re like most people who end up owing a tax debt, you likely were not expecting to owe a tax debt and it’s simply another debt you cannot afford to pay.

If this is the case, there is one thing to keep in mind: the IRS is not your friend when you owe a tax debt, they are like any other creditor, they need as much money from you as they can get, as quickly as they can get it. Even with the public relations blitz over the past couple years of a kinder, gentler IRS, keep this in mind as your financial situation needs to control the final resolution of the tax debt. Too often I hear from people owing tax debts who agreed to some outrageous payment plan because the IRS required such payment based on their liability owed and disregarded their actual financial situation.

Therefore, it’s important to know your financial limitations. If you truly cannot pay your tax debt, there are options available to you. However, you need to have an organized and systemic presentation of your circumstances to get the appropriate resolution to your tax headache. While the IRS will likely pressure you to pay your debt in full within 90 – 120 days or make payments including penalties and interest over the next five to six years, there are other options available which include petitioning for non-payment of the debt, to settling the debt for less than the amount owed. The point is that there are options available to you and the key is to file your return, and then address the debt within your financial limits, do not ignore it. And, if you need professional assistance, call the tax relief attorneys at Montgomery & Wetenkamp toll free at (800) 454-7043 for your free consultation. We can help you resolve your tax debt.