In part one of this series on an Offer In Compromise we discussed how this has become one of the most misunderstood (and incorrectly promoted) tax solutions in recent times. There are a lot of companies who advertise this "Pennies on the Dollar" solution as the one and only way to resolve your tax debt with the IRS. They also willingly charge you money to submit an Offer In Compromise on your behalf with total disregard to your financial situation and the requirements the IRS has set forth in order to qualify for this resolution. While this is a viable option within the IRS tax code I must caution you to make sure you are aware of the qualifications of any company who is working on your tax resolution.
So let's look at one of the qualifications inside this program so you are aware if this is an option that you can qualify for. This could save you time and money. One reason for submitting an Offer In Compromise is called "Doubt as to Collectibility." That is when doubt exists (under your current financial conditions) that a taxpayer could fully pay off the tax liability in question before the expiration date the IRS has set. The IRS typically has ten years from the assessment date for each tax year to collect the unpaid date for that year. There are several things that can cause this expiration date to be extended but we will discuss that at another time. In order to confirm "Doubt as to Collectibility" there must be a financial analysis performed in order to discover if you can qualify under this rule. Current equity in the assets you own, current disposable income, terms on current loan payments, and future potential income are some of the things a financial analysis will uncover. If this is not properly done prior to submitting an Offer In Compromise you may be doing so without knowing whether or not you can even qualify for this program. This will waste time and money and extend the amount of time the IRS can collect the tax liability in question. Make sure you analyze your current financial situation to discover if you qualify before you follow this path to resolution.
In the next part of this series we will look into additional guidelines from the IRS on qualification for submitting an Offer In Compromise. Be sure to check back next week.
Monday, June 30, 2008
Wednesday, June 11, 2008
Over-Taxed???
Every Thursday we will look at a unique situation that has come across my desk during the week. This week we will look at a situation where a customer believed he was being over taxed. Now I realize this is not all together a surprising circumstance. There are lots of people who believe this to be the case in their own situations from time to time. This case however covers a specific circumstance.
This was a client who runs a business as a sole proprietor which is simply a small one man operation. His net income on the business is only about $20,000 on an average year. He received a notice from the IRS making him aware that he owed almost $18,000 in taxes for one tax year. He was a little confused at how he could owe so much tax on such a small income. There may be a lot of people who have experienced this and wondered the same thing. Well, here is how this occurred.
This particular customer operated his business for almost 6 years without filing a single tax return. The companies he did business for, however, filed 1099 forms with the IRS for work completed throughout the year. After several years of 1099's filed on my client without a single tax return filed, the IRS opted to complete a "Substitute for Return" on his behalf. The IRS can choose to file this type of return in lieu of an actual return being filed by the taxpayer. Typically, these are filed about three years after the due date of the unfiled return. The drawback to this type of return is that the IRS will file the income straight from the 1099 income (or W-2 income) filed with the IRS without any cosideration of tax write-offs for business expenses or other income credits such as child credits or mortgage interest which are allowed by law. This would leave the taxpayer paying taxes on total gross receipts rather than net income. For this particular client his gross receipts were over $60,000 even though he only would have claimed $20,000 in income after all of his deductions. Due to taxes, penalties and interest his total debt is $18,000 but this amount can be reduced by simply filing a return for the year in question thus enabling the taxpayer to file the appropriate deductions and only pay tax on the adjusted net income.
So make sure you file your taxes timely each year to avoid such a return being filed on your behalf. This will keep you in good graces with the IRS and eleviate the stress of being "over-taxed."
This was a client who runs a business as a sole proprietor which is simply a small one man operation. His net income on the business is only about $20,000 on an average year. He received a notice from the IRS making him aware that he owed almost $18,000 in taxes for one tax year. He was a little confused at how he could owe so much tax on such a small income. There may be a lot of people who have experienced this and wondered the same thing. Well, here is how this occurred.
This particular customer operated his business for almost 6 years without filing a single tax return. The companies he did business for, however, filed 1099 forms with the IRS for work completed throughout the year. After several years of 1099's filed on my client without a single tax return filed, the IRS opted to complete a "Substitute for Return" on his behalf. The IRS can choose to file this type of return in lieu of an actual return being filed by the taxpayer. Typically, these are filed about three years after the due date of the unfiled return. The drawback to this type of return is that the IRS will file the income straight from the 1099 income (or W-2 income) filed with the IRS without any cosideration of tax write-offs for business expenses or other income credits such as child credits or mortgage interest which are allowed by law. This would leave the taxpayer paying taxes on total gross receipts rather than net income. For this particular client his gross receipts were over $60,000 even though he only would have claimed $20,000 in income after all of his deductions. Due to taxes, penalties and interest his total debt is $18,000 but this amount can be reduced by simply filing a return for the year in question thus enabling the taxpayer to file the appropriate deductions and only pay tax on the adjusted net income.
So make sure you file your taxes timely each year to avoid such a return being filed on your behalf. This will keep you in good graces with the IRS and eleviate the stress of being "over-taxed."
Saturday, June 7, 2008
Tax Tip of the Week
Haven't received your Tax Stimulus check yet? Tired of looking in the mail day after day for a check that never comes? Here is one thing to take into consideration.
Do you currently owe money to the IRS for an unpaid tax debt?
If the answer to that question is "YES" then you will not be receiving your check. Your check, just like any refund check from subsequent tax years, will be automatically applied to the tax debt on your behalf. Typically, if there is several years of tax debt owed the money from your stimulus check and tax refund checks will be applied to the oldest year for which a debt is owed. Thus making sure the IRS maximizes the time it is allowed by law to collect the tax debt. So if you owe any money to the IRS the bad news is you won't receive a stimulus check or refund check until the debt is paid in full or the time the IRS is allowed to collect that debt has expired. The good news is you now owe less to the IRS than you did a month ago.
Do you currently owe money to the IRS for an unpaid tax debt?
If the answer to that question is "YES" then you will not be receiving your check. Your check, just like any refund check from subsequent tax years, will be automatically applied to the tax debt on your behalf. Typically, if there is several years of tax debt owed the money from your stimulus check and tax refund checks will be applied to the oldest year for which a debt is owed. Thus making sure the IRS maximizes the time it is allowed by law to collect the tax debt. So if you owe any money to the IRS the bad news is you won't receive a stimulus check or refund check until the debt is paid in full or the time the IRS is allowed to collect that debt has expired. The good news is you now owe less to the IRS than you did a month ago.
Caution: "Pennies on the Dollar." - Part One
There seems to be a lot of companies out there offering taxpayers quick and easy settlements of their tax debt for "pennies on the dollar." This program is called an Offer In Compromise but is this really the best solution for your tax problem? The IRS warns us to check carefully before using this option to resolve your debt. There are specific circumstances where this is a viable option or it would not be available within the IRS tax code. However, it is not the "automatic solution" that these companies are trying to sell to taxpayers. Most of these companies DO NOT GUARANTEE an Offer In Compromise will be accepted by the IRS on your case...they simply charge large amounts of money from the taxpayer to simply submit an offer to the IRS on your behalf. Typically, there is little examination as to the taxpayer's current financial circumstances in order to determine whether a settlement is an available option or even the best solution.
The IRS does have the ability to agree to a settlement of a debt for less than the current balance in certain situations. The IRS only approves about nineteen percent of the Offer in Compromises submitted annually. In fact, the IRS resolves less than one percent of all balance due accounts through the Offer In Compromise program. This option can cost the taxpayer time and money and should only be considered after all other options have been exhausted.
If this solution is something you are considering you will want to check back over the next few weeks. We will review the specific circumstances and requirements for this program so you can understand if this program is right for your tax situation.
The IRS does have the ability to agree to a settlement of a debt for less than the current balance in certain situations. The IRS only approves about nineteen percent of the Offer in Compromises submitted annually. In fact, the IRS resolves less than one percent of all balance due accounts through the Offer In Compromise program. This option can cost the taxpayer time and money and should only be considered after all other options have been exhausted.
If this solution is something you are considering you will want to check back over the next few weeks. We will review the specific circumstances and requirements for this program so you can understand if this program is right for your tax situation.
Tuesday, June 3, 2008
IRS Tax Relief
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