Choices When the IRS Calls You

RATING PROFESSIONALS FOR TAX PROBLEMS

The Internal Revenue Service is the largest collection agency I know of. Tax collectors, called Revenue Officers, are the tax debtors’ nightmare. I rarely have had a client that has not filed tax returns or owes tax monies to the IRS who is not expecting a phone call from the IRS. Anticipation is often worse than the reality. However, the reality is bad enough.

Why are you being called? Usually the IRS sends letter to collect the tax debt or demand the filing of tax returns. It usually starts out with you owing taxes for a year that has filed or we have no record of your filing a tax return for this year. Multiple letters are sent out and failing to respond promptly has caused the IRS to look more seriously at your case. The least expensive method of handling your taxes filing and payment starts with the taxpayer voluntarily filing his tax return and paying the taxes due on time. However, this article is interesting reading because you probably are expecting a call.

Who, what, when, where, and why are the pertinent questions to be answered. Who do I call? What do I do? When do I call? Where do I need to go to find my records so that the taxes can be prepared and an arrangement made to pay the tax debt? Why do you call?

The choice of who to call should be based upon fear. Failure to file tax returns or can become a criminal act. If you feel you have a serious problem an attorney is the only reasonable choice. I will explain.

There are several different types of professions that can represent a taxpayer before the IRS. The lowest level is an enrolled agent. Frequently the enrolled agent is an individual is a former IRS employee. The passing of a test is required for other people wanting to be an enrolled agent.

The powers of an enrolled agent are very limited. They are only able to represent you within the IRS. Taxpayers need the availability of the courts. Taxpayers need a representative that cannot be called to testify against them in court. An enrolled agent can be a very competent person. However, the scope of their representation is limited. It is reasonable to want the full range of services that are possible .The enrolled agent can not shield the communications between you and the enrolled agent. The major advantage over the other two professions is simply cost. It can be less expensive to have the lowest level of professional. Of course, they may be the most expensive if complications occur.

The next highest level of profession is the Certified Public Accountant., CPA. The CPA license requires a college degree. Often, there are a minimum number of semester hours in accounting. The individual must have experience working for a CPA or other acceptable employers. The CPA test is very hard to pass. Most fail to pass. The training of a CPA is more formal than most enrolled agents. Additionally, the CPA has a breadth of financial knowledge and tax experience to be able to provide quality representation before the IRS. The CPA client privilege for communications between a CPA and their client is very limited. It is much lower than an attorney. Additionally, the scope of the services offered by a CPA when there is a tax problem is limited because they do not represent taxpayers in court.

An attorney is of course the highest level of representation. Communication is protected by the attorney client privilege. The full range of services available to represent a taxpayer with tax problems is available. Attorneys can represent the taxpayer in court. This additional level of representation provides the option of bankruptcy as well as litigation.

Hopefully you have read enough attorney jokes that you are able to continue. If not I will wait. Feeling better? Let’s proceed.

Most attorneys do not practice in the tax arena. Most attorneys do not practice in bankruptcy court. This obviously requires the services of an attorney that is able to look at all of the options available and provide solid careful advice regarding your present tax problem.

I like to think that an attorney that has significant financial and tax training and bankruptcy experience can provide a wider scope of services for a taxpayer having tax problems. As this article is primarily for public education about tax problems I will not trouble you with my training as a CPA or my having earned a master degree in tax accounting or even my experience in providing attorney services in thousands of bankruptcies and tax cases.

When do I call? The best time to call is when you can still be compliant and have the funds to pay. Normally, the call to the representative should be made before the IRS calls you. If the call has not been made before the IRS has called as soon as possible call the person you want to represent you.

If you do not have records for prior year tax returns this paragraph is for you. Obtaining records for earlier years can be very simple. Just printout your perfectly prepared computerized financial statement for the tax periods requested. Rare things happen. The rest of my potential clients have material weaknesses in the quality of their records. This is addressed to these latter taxpayers.

The IRS receives information reports from employers and 1099 statements for all passive incomes such as dividends, interest income, and gross proceeds from sales of property and can provide that information to you. The IRS does not typically receive information reports detailing your deductions. Therefore, your records must be able to prove the income and deductions claimed in your return.

The IRS is the best starting point in the records gathering search. The IRS will give you a transcript showing all of the income reported to the IRS. You must report the income items reported to the IRS. Self employed individuals and investors often have income that is not reported to the IRS. This income must be calculated using records like bank statements and journals. Contrary to popular opinion cash or bartering for service is taxable and must be declared on your tax return.

The tax return will be estimated by the IRS if you are too late in filing the tax return. Get help early because this is a disaster waiting to happen. The IRS will not estimate deductions and will solely estimate income. This creates the highest tax liability and increases penalties and interest owed. The estimated tax return is called a substitute for return. No statutes of limitations apply to substitutes for returns. The substitutes for returns are not dischargeable in bankruptcy.

Taxpayers who owe tax should get help as early as possible. Small debts often are able to be paid in full or paid out over time by an installment agreement. Failure to obtain the installment agreement will result in a levy taking bank account balances or your wages. A notice of federal tax lien may be filed by the IRS. This notice will make it very difficult to borrow and damage your credit score. It will place the claim of the IRS ahead of later filed liens.

Taxpayers with significant debt or other issues such as failure to file returns need professional help. When you owe a large amount to the IRS prompt attention can improve your ability to resolve the tax problem. The ability to resolve the tax situation favorably diminishes when the notice of federal tax lien has been filed. The lien attached to all property of the taxpayer. Sometimes filing a bankruptcy before the lien is filed can dramatically improve the ability to repay the IRS.

You have probably seen or heard hundreds of ads from nationwide companies heralding their ability settle IRS tax debts. The rejection rate of these offers in compromise approaches 90%. Often these large companies have sales offices and you do not have a meeting with the person representing you. This is not a good choice. The internet offers many of these companies’ poor references from their prior clients and various attorney generals.

The best solution benefits from prompt handling of the tax problem. Use a representative that is skilled in all phases of your tax problem. All options for resolution should be able to be considered by your professional representative. The differences between the choices can be subtle. Tax problems that are serious require serious representation able to analyze your finances. Financial training is important. Bankruptcy experience is important. Broad tax experience is important. Attorney client privilege is important in protecting communications with your representative.

This article is not intended as legal advice. Please obtain tax or legal advice from an attorney. The purpose of this article is educational. Copyright ©2011 William F. Kunofsky. All Rights Reserved.