Posted by Dean Alexander on Fri, Sep 03, 2010
Congress imposed a time limitation on the IRS to assess taxes. Generally, the time limitation is three years.
After three years from the due date of the tax return or the filing of the tax return (whichever is later) the IRS cannot assess taxes on you.
Think of assessing taxes as sending a bill. That is one of the reasons we stress the importance of filing all your unfiled returns. If you file returns, the IRS has no right to audit you and assess new taxes after three years from filing. If you don’t file the return for a specific year, the statute is open to an IRS audit for eternity. The statute of limitation of three years will also work against you when you want to claim a refund on prior years for which the statute of limitation lapsed.
When you have an IRS audit, and you disagree with the audit findings and decided to appeal, the IRS typically will ask you to waive the statute of limitation on the older year which may be getting ready to expire. That will allow the IRS time to prepare and consider the appeal.
The IRS will send you a letter asking you to extend the statute as soon as you file the appeal if the time on the oldest year under audit is running out. They will tell you that you have the right to refuse extending the statute, but one practically must need to sign it in order to get on with the audit appeal. You will also be advised that you can limit the scope of the statute of limitation extension.
There are two ways to limit the scope of the statute. The first is when you disagree with particular items in the IRS audit. If that is the case, you may extend the statute only to those items that you have tax problems with and that you care about. The second is that you can limit the time to extend the statute of limitation. Some contend that you can limit it to six months but a typical extension of the statute is one year. The IRS will add a few months to the year to make the date a calendar year thus you may end up extending the statute of limitation to say fifteen months instead of one year.
The IRS will send you a statute of limitation consent form (Form 872). Also they will attach Publication 1035, Extending Tax Assessment Period, which discusses in detail the nature of statute of limitation extensions, your rights and your options. We typically recommend that our client signs the extension and we usually extend the statute to one year. It shows a good faith effort and we believe it will enhance the potential of a favorable IRS tax settlement.
Posted by Dean Alexander on Wed, Aug 04, 2010
It may be advisable before you start submitting your data to an IRS Agent in an IRS audit to know taxpayer's rights:
1) You are entitled to IRS representation. You can have a CPA, a tax attorney or an IRS enrolled agent to represent you in your tax audit. If it is an individual tax audit, you do not have to face the IRS auditors and answer their questions. It is your right. Your CPA or representative can answer on your behalf after interviewing you. If you are a business entity, you can avoid the personal interview but the agent has the right to tour the place.
Touring your place of business is significant.
The IRS Auditor is sniffing and observing. He looks at your inventory; he sees how many people you have and so on. This observation can help him determine the level of activity and perhaps the level of income and the type of expenses he will expect to see in your financial statements. Obtaining tax help in this regard will be a good idea. A competent CPA is valuable IRS help in this regard.
It must be said that that IRS representation is not absolute right. If your tax attorney, CPA or enrolled agent unnecessarily delay dispensing of the information requested to conduct an IRS audit, the IRS has the right to contact you directly. The auditor must however, obtain his group manager’s approval before he takes this step.
2) IRS audit should not be more than once for the same tax year. They should not look at the books several times. They can handle the same year relating to an assessment of some tax problem such as assessment of additional tax deficiency, correcting mathematical errors or a claim of refund by the taxpayer. Taxpayer should not be audited on the same item more than once if the audited items did not result in any adjustment against taxpayer.
3) You also have the right to obtain taxpayer information about you in the IRS records under Freedom of Information Act. The IRS may have the right to withhold some information that it deems exempt from FOIA but generally you are entitled to see your records and identify any tax problems you may be facing or may be brewing. This right also applies to any IRS settlements relating to tax collections.
4) Taxpayer in a tax audit is entitled to an explanation of the tax audit process including tax audit appeal. Typically the agent will hand you a brochure explaining the taxpayer's rights and the tax audit process.
5) Finally, the taxpayer is entitled to what is called Taxpayer Assistance Order (TAO). This order is issued by the Taxpayer Advocate. Many times the issues that you cannot resolve through the normal channels can be resolved by the Taxpayer Advocate. The Advocate knows how to navigate the IRS and can solve the IRS tax problems faster and perhaps more equitably.
Posted by Dean Alexander on Mon, Jul 12, 2010
Taxpayer Advocate continues to report IRS problems and IRS collection practices. National Taxpayer Advocate Nina E. Olson released a few days ago (we appreciate her work on behalf of taxpayers who have IRS tax problems) a report to congress. It addresses three main concerns:
1. Taxpayer Services: To show how the service is degrading the IRS after answering 87% of taxpayer's calls to IRS in 2004 now it is down to 57%. The IRS is taking on more of the social program such as Economic Stimulus payments, First Time Homebuyer Credit, Making Work Pay Credit and now the anticipated Health Care program. The IRS plans to increase funding for Collections activites by about 17% from 2004 while dereased spending on taxpayer service by 7%. Does that explain why almost half the calls to the IRS are not answered?
2. Reporting 1099 Requirement: This is a huge, huge problem and we would speculate that it may be practically unenforceable. This 1099 provision applies to businesses, non profit organizations and even government entites. Basically they are trying to tell us if you do business with anyone and you pay them over $600 a year, then you must report them to the IRS. This requires that as a small business owner, you must keep track of everyone you do business with during the year, tally up how much you pay them, and then report them by giving them 1099 at the end of the year.
Taxpayer’s Advocate estimates that about 40 million busineses are affected by this. Assuming that every business deals with 25 people a year, the IRS must receive 1 billion extra pieces of paper to deal with in addition to the burden they have. Common sense says that you should answer first the calls that you get before adding 1 billion 1099's to add to your fights. In addition, imagine the burden placed on each small business owner. If they don’t comply, they incur another penalty, another IRS notice, another collection action and another Revenue Officer that knocks on your door because now you owe tax debt to the IRS just because you did not participate in the massive paper Leviathan.
The third emphasized by Taxpayer advocate is the IRS Collection Practice which we will address in the next blog....
Posted by Dean Alexander on Tue, Jul 06, 2010
We continue to explain the Taxpayer Advocate's findings with regards to the difficulties that US taxpayers encounter in dealing with the IRS. In the previous two blogs we discussed the issue of tax-related identity theft and cancellation of debt. We found that identity theft can cause the IRS to take actions against an innocent, oblivious taxpayer such as wage garnishment or bank levies. We found out that the IRS system as it exists does not have the mechanisms to accommodate the innocent party. The system as it exists will assume that you are guilty until you can prove that you are innocent by refuting that the 1099 income that you received was a bogus one.
We also discussed cancellation of debt income considered by the Taxpayer Advocate to be the second worst harm that inflicts a great deal of injustice upon people who are suffering financial difficulty. Basically, and as an example, if a taxpayer suffered mortgage foreclosure that cause him or her to lose their home, they will not only be devastated by the incident but may have to be subject to IRS actions because the bank reports them to the IRS claiming in essence that they made money by losing their house because the bank forgave the debt owed to them. And according to IRS rules, the forgivenss of debt is a taxable event. Luckily now this injustice can be addressed.
Property Seizure, Levies, Installment Agreement Allowable Living Expense Standards
This time we want to explain the hardships visited upon people when they are subjected to aggressive techniques such as seizing property that they may be in desperate need to have or others such as bank levies. I spoke to a person who was getting kidney dialysis and was in such distress over the seizure of his automobile that he was using going back and forth for his dialysis. It did not matter to the IRS that the person's car they took may have only a few years to live.
The Taxpayer Advocate is arguing that the IRS uses these collection avenues more readily than they should. The advocate wants the IRS to give the taxpayer more time or possibly resort to other methods before instituting a seizure. We remove tax garnishment for clients whose salary is $50,000 a year and the IRS leaves them with $300 a month to live on before our intervention. What makes that matter worse is when the taxpayer had fullfiled all the required documents needed to negotiate an installment agreement to remove the levy, a revenue officer refuses to return the call. We have made eight communication attempts to reach a revenue officer who holds the fate of a lady in her hand. Meanwhile the levy continues with the $300. So many times the taxpayer is in compliance but a Revenue Officer or collection people are so overwhelmed that they don’t return the calls. We had to interfere at higher levels to get their attention.
The case of an installment agreement is another thorn in the side of taxpayers. The IRS has their own definition of allowable expenses based either on national or local standards. They toss many expenses that taxpayers are obigated to pay. So, the definition of taxpayer’s ability to pay is disconnected from reality. If they see you can afford $1,500, that will be the amount they want you to pay as installment agreement. Nevermind that you cannot because you have a contractual obligation. The rationale they have is that you can default on your obligation to others but not on the IRS obligation. It is a distasteful argument. It is therefore the Taxpayer Advocate may be arguing for a partial payment Installment Agreement in the near future.
Posted by Dean Alexander on Thu, Nov 19, 2009
Generally speaking, an IRS tax levy such as a bank levy, garnishment, or an accounts receivable levy (taking the tax debt amount from other people who owe you.), all end up in the IRS by a check. So, a levy or garnishment is an IRS collection action in which they get a check in the amount they determine from either your bank or from your employer. The IRS uses Form 686, Intent to Levy Notice, to initiate the process.
IRS property seizure is something bulky the IRS will get in its collection efforts to satisfy a tax debt. They will get a clunker, a boat, a piece of land, or any other type of asset they can take, and eventually auction it off to collect for back taxes. Again, Form 686 is used. Example of serving this notice: IRS embarks on seizing property in an effort to collect on back taxes owed, such as a car which is parking in a commercial parking lot. The IRS will, once again, use Form 686 to deliver to the attendant. The IRS will give the attendant Form 686-A, Notice of Levy and demand the car be turned over. Amazing power? No court order is needed, no nothing.
IRS Authority to Levy, Issue Garnishment, or Attempt Property Seizure
Does the IRS have the authority to execute a levy, garnishment, or property seizure?
They sure do. The Internal Revenue Code (IRC) authorizes a levy as a means to collect delinquent taxes (IRC 6331). It is permitted for any property, or rights to property, that belong to you.
Required IRS Notices for Levy
IRS must deliver the following notices:
1. Notice and Demand for Payment for Tax Debt
2. Notice of Intent to Levy
3. Taxpayers Right to a Collection Due Process Hearing (CDP hearing)
Can You Appeal an IRS Intent to Levy?
Yes, there are two ways:
1. You may request a Collection Due Process (CDP) hearing by filing Form 12153 no later than 30 days from the time you receive the levy notice. The Office of Appeal will issue a determination as to whether the levy was issued correctly or not. If you don't like the decision of the appeal, you can go to United States Tax Court within 30 days after that.
2. You can also appeal a federal levy or garnishment under Collection Appeal Program (CAP) regardless of the taxpayer's ability to appeal under The Collection Due Process (Such as missing the initial 30 day deadline required for the CDP). CAP is independent from the collection function. It gives administrative relief to taxpayer. It is a chance for an administrative review. Quick cautionary note on this point: Unlike the CDP, a CAP cannot be challenged nor can the amount of the tax liability. You cannot proceed under CAP to Tax Court.
Posted by Dean Alexander on Thu, Oct 08, 2009
The IRS examines (audits) tax returns to verify that the tax reported on that return is correct. Almost everyone cringes when the word "audit" is introduced in conversation, formal or not. Although I am classified as the latters I just mentioned, selecting a return for examination does not always suggest that the taxpayer made an error or was dishonest. In fact, some examinations result in a refund to the taxpayer or acceptance of the return without change.
The overwhelming majority of people file returns and make payments timely and accurately. As such, they have a right to expect fair and efficient tax administration from the IRS, including verification that taxes are correctly reported and paid. Below describes some fundamental rights taxpayers have when dealing with the IRS. We'll move to the "meat & potatoes" afterwards.
Taxpayer Rights
The IRS trains its employees to explain and protect taxpayers' rights throughout their contacts with taxpayers. These rights include:
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A right to professional and courteous treatment by IRS employees.
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A right to privacy and confidentiality about tax matters.
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A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
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A right to representation, by oneself or an authorized representative.
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A right to appeal disagreements, both within the IRS and before the courts.
The purpose of throwing the above points in this article before discussing anything else is because many of you reading this are currently dealing with a tax problem or debt and may even have been selected by the IRS for examination. These points also serve as key things to remember when dealing with the IRS.
Should you decide to discuss your tax issue directly with the IRS, no matter how intimidated you get and regardless of how difficult it is to produce documentation their requesting, ultimately, the system is built on ethical grounds. Of the hundreds of publications the IRS have, those bullets can be found in the first publication. Publication 1: Your Rights as A Taxpayer.
Before ending the article, as the title states, below is how the IRS selects tax returns to audit.
How Returns Are Selected for Examination
The IRS selects returns using a variety of methods, including:
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Potential participants in abusive tax avoidance transactions - Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. Examples include information received from "John Doe" summonses issued to credit card companies and businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.
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Computer Scoring - Some returns are selected for examination on the basis of computer scoring. Computer programs give each return numeric "scores". The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.
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Large Corporations - The IRS examines many large corporate returns annually.
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Information Matching - Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return.
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Related Examinations - Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination.
Other - Area offices may identify returns for examination in connection with local compliance