Monthly Archives: June 2012

IRS Collection Snapshot

As tax attorneys, we strive to reduce the amount of taxes our clients have to pay. This goal is best accomplished when we assist someone in a transaction to provide the most advantageous tax structuring from the outset. Unfortunately, many of our clients come to us after the deal has been consummated, when there is little to be done. And, while we work hard to minimize the impact of an audit, it is not uncommon for a business or individual to conclude an audit with a balance owed to the IRS. The question then becomes what are your options in regards to paying these taxes. The IRS has established three potential means of collection for taxpayers unable to full-pay their liabilities.

The first, and most common, method is an installment agreement. Generally, an installment agreement is a series of monthly payments made by the taxpayer to the IRS. The time-frame for an installment agreement depends on two factors, 1) the length of time the IRS has to collect on the tax owed, and 2) the amount the IRS believes you can pay per month. There is a general 10 year period after the tax is assessed for which the IRS can collect on a tax. There are many things that can extend this time that need not be addressed in this post.

As for the second factor, the IRS determines what a taxpayer can pay by examining their financial information. After the IRS establishes the taxpayers monthly income, the IRS subtracts their reasonably allowed monthly expenses. The result is the amount the IRS reasonably believes the taxpayer can pay. per month. This amount is then extended out for the remainder of the 10 years that the IRS has to collect. The IRS is allowed to review the payment amount during the course of the agreement to ensure they are collecting the proper amount.

The second means of paying a tax debt is to submit an Offer-in-Compromise. The initial stages of an OIC are very similar to an installment agreement, wherein the IRS determines a reasonably expected monthly payment. Only the OIC goes further into the taxpayer’s finances to look for all potential sources of income/payment. They add any additional income to the monthly amount and multiply by a factor associated with the amount owed and time-frame for collection. The IRS then adds the collectible equity the taxpayer has in any assets to the prior sum. This final amount is known as the reasonable collection potential of the taxpayer, and is generally the minimum amount the IRS will accept as full-payment. The IRS is also able to make a determination on the possibility of future income of the taxpayer, and this can lead the IRS to deny an OIC if they believe there is the potential to full-pay the amounts owed.

The OIC is often misrepresented by companies as a “pennies on the dollar” tax payment option. This marketing is unfair to the taxpayer looking to get back on their feet when faced with past due taxes. First, around only 25% of offers are accepted by the IRS. This program is not a sure-shot for taxpayers. Furthermore, once you file an OIC you extend the statute of collections by at least one year. If your offer fails then you have granted the IRS more time to collect, and are no better off than when you started.

The final option for taxpayers is to qualify for currently-not-collectible. To qualify for this option the IRS has to determine that your monthly expenses are equal to or more than your monthly income. This is a good plan for those individuals that do not expect to increase their income during the remainder of the collection period, or for those that are close to the statute of limitations timeline. The hazard with the not collectible status is the continual accrual of interest and penalties that can quickly cause a rather small amount to become over-whelming. Also, with this status the filing of liens against the taxpayer is a near automatic process.

Your tax professional should take great care in explaining all of these options to determine which direction is best suited for your situation. We have seen too many individuals come to our office that paid good money to other businesses that promised to erase their taxes and nothing was done or the taxpayer did not have their case sufficiently explained to them. When working to resolve your tax problems communication with your adviser is vitally important.



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Ohio Tax Collections

One theme I hope to address through this blog is the antiquated, unfair, and opaque system of tax collection that that state of Ohio imposes on its taxpayers. For full disclosure, my posts will always be biased toward the taxpayer, after-all I am a defense attorney. I will, however, try to be as objective as possible in this and subsequent posts.

My firm was recently engaged by a local business to assist in a sales tax collection matter. This was a rather straight-forward matter, in that the taxpayer had filed and paid their sales tax, although one year late. The Ohio Department of Tax had the returns listed as filed, but did not properly record any of the payments. By the time the taxpayer came to our office, the debt had been certified to the Ohio Attorney General’s Office for collection, and the taxpayer was receiving bills reflecting the amount owed. We worked with the taxpayer and the AG’s office to demonstrate that the taxpayer had paid the natural tax that was owed with all the returns.

This is where the tale takes a turn for the worse for the taxpayer and shows the unfair nature of the Department of Tax. Once the Department of Tax had completed a review of the matter, they determined we were correct and the tax had been paid. One would expect that the Department of Tax would merely subtract the amount paid from the amount they stated was due, and from there present a new bill to the taxpayer. Instead, the taxpayer received a bill that included a late-payment penalty that had previously not been assessed. This penalty was in excess of $10,000. If the taxpayer had merely moved forward with full-paying the amount due on the original notice they would have not incurred this additional penalty. Since the taxpayer had already paid the tax, and the Department of Tax had been unable to process those payments properly the first time.  My client suffered an excessive penalty that was originally not applied.

I understand the role of penalties. We need them to help coerce the majority of individuals to file and pay their taxes on time. I understand my client did pay late, and the Department of Tax has the discretion to apply a penalty. What I do not understand is how the Department of Tax was unaware that they had received many payments for many tax periods, assessed an amount owed, and when we show proof of payment they then increase the amount owed by attaching an additional penalty. How is this late attachment suppose to do what the penalties are designed to do? The taxpayer was already aware of the late-filings and late-payments and was working to correct the situation. Furthermore, the taxpayer would not have incurred these penalties if they had merely paid what was assessed to the AG’s office. The Department of Tax has penalized a taxpayer for paying a tax before it was assessed to the AG’s office. What message does that send to taxpayers? If you make us chase you, you will pay less than voluntarily paying late.

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Hello world!

I have created this blog to serve as a mouth piece for the individuals who have felt the great weight of the IRS or the Ohio Department of Tax upon their shoulders. I hope this blog will help educate, entertain, and draw attention to the issues I see many people going through on a daily basis.  Being my first attempt at blogging, I hope any future readers bear with me as I try to move from barely computer literate to a functional modern blogger.

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