Ask Your Tax Advisor First!
There is a lot of talk about settling with the IRS for pennies on the dollar and making penalties go away these days. You hear a lot of ads on the radio for companies that will handle this for you, normally at a very steep price. You may have even had these companies calling you if you owe money because at some point the IRS will put a lien against your assets to protect the government’s interest.
What should you do if you are unfortunate enough to be in this position? First of all, don’t speak to a representative of one of these companies until you talk to your tax advisor. If you use a tax preparer and not a licensed tax professional they may not be able to help you. Speak with your advisor and see what they have to say about your issue to see if they can help you out first. There will be a fee for their help but they may better be able to serve you and give you a more realistic hope for an outcome without the promise of you only paying pennies on the dollar so they can hit you with a large fee.
How IRS Collections Work
First, you should understand how the IRS works as far as collections go. If you owe taxes and have the ability to pay it, now, or over time, they expect full payment. They also expect to be paid interest on the late payment. They will also apply a penalty to the late payment. If you realistically have the ability to pay then you should look at trying to have the penalty abated because an Offer in Compromise more than likely isn’t for you but more about that later. In order for the IRS to abate your penalty, you need to establish reasonable cause for why your taxes were underpaid or paid late. Reasonable causes are just that, “Reasonable.” It could be you were in the hospital at the time a payment needed to be made and couldn’t do it, an emergency out of town could suffice, you made your best effort to pay what you owed but an event occurred that you couldn’t plan for that caused you to be late or underpaid. Based on the fact that it is termed “Reasonable Cause”, I think most prudent taxpayers would know when their situation fell under that umbrella. If you aren’t sure but think you have reasonable cause, you should still try to get your penalties abated. The worst that could happen is the IRS says “No.”
Don’t bother trying to make an offer, not an Offer in Compromise but an offer. People think that if they go to the IRS and tell them they will write them a check for $10,000 on the spot to cover their $18,000 bill including penalty and interest, that the collection agent would have the authority to make that deal. With the IRS it doesn’t work that way. If they did that, there would be a line a mile long with people wanting in on that deal. The IRS can’t set a precedent of wiping out someone’s taxes because they “like” them or they gave them a deal they couldn’t pass up. Once they do that for one person that is in play for anybody. The IRS needs your “Reasonable Cause” spelled out in writing so they have something to hang their hat on as to why they allowed the abatement for you and at the same time they have spelled out in writing why they may have disallowed a request from someone else.
Request of Penalty Abatement
Send the IRS a letter in response to their notice detailing the penalties. If you can pay the tax and interest, send a check for that along with the letter. Identify yourself in the heading of the letter along with the tax form and period in question and in the subject matter put “Request of Penalty Abatement”. Then, explain what happened. Let them know this was a one-time occurrence and that you have taken steps, along with explaining those steps, to ensure that this situation never happens again. At the end, it helps if you attest that “under penalties of perjury, I declare that I examined the facts stated in this letter and, to the best of my knowledge and belief, they are true, correct and complete” and be sure that they are.
Setup IRS Payment Plan
If you have a track record of this happening again and again, the IRS is just going to look at you like a repeat offender and your chances of qualifying under Reasonable Cause will be slim. Your best bet in this situation, if you can’t pay your debt in full, would be to log into the IRS website and set up a payment plan. To do this go to www.irs.gov/payments and you can set up a monthly payment online. You don’t even have to speak with an agent.
You can put this letter together on your own or consult with a tax pro who can guide you in the right direction. Most tax professionals have dealt with these types of situations and know what to say that works and what doesn’t work.
I’ll talk about Offers in Compromise in my next post.
Have more questions? Please contact us to set up a personal consultation.