Tuesday, February 14, 2012

Unfiled Tax Returns: Why You Should Not Represent Yourself

Whether you are delinquent on filing your taxes, or you haven't filed at all, you'll often find that your tax returns have been filed for you automatically by the Internal Revenue Service. These are called a "Substitute For Return" (SFR). The IRS will give official notice of this action by sending a letter to the taxpayer’s last known address. However, in my experience, most taxpayers have no idea that the IRS prepared a tax return for them until the IRS is actually collecting on the balance due.

Unrepresented taxpayers often fail to replace the SFR returns or quickly (and carelessly) prepare and file tax returns due to IRS pressure. They overestimate the task of resolving their tax problem. A tax professional can research the taxpayer’s record and win additional time to prepare and file proper tax returns which benefit the client.

A qualified tax professional can help you by handling all contact with the IRS. IRS representatives will frequently tell you that you do not need to file an actual return of your own if an SFR return has been filed. Do not take this advice from the IRS. A taxpayer loses many rights, and money, by failing to replace the SFR tax return.

In fact, I recommend that you always prepare and file your own tax return – even if it does not reduce the amount that you owe. Here is why:

1.  The IRS can collect the balance on a Substitute for Return forever. 
The statute of limitations for collection by the IRS does not begin until taxpayer files his own tax return. Generally, the law limits the time within which the IRS can only collect to 10 years. However, this does not apply to taxes due from an SFR. For this reason alone, you should file the return.
IRS Code §6501(b)(3), Return Executed By Secretary: “The execution of a return by the Secretary pursuant to the authority conferred by such section shall not start the running of the period of limitations on assessment and collection.”

2. SFR returns will almost always be inaccurate or missing key information. 
An SFR return almost always lacks the information a taxpayer would have included on a return he prepared and filed himself – including deductible interest payments and taxes, business expenses, allowable tax credits, dependents, proper basis for capital gains, and other important information. The SFR program does NOT allow any of these reductions in your taxes until your own paperwork is submitted. 

3. The tax due on a SFR return is usually much higher than a return filed by you. 
This is because of the missing or inaccurate information mentioned above.

4. The tax due on these SFR returns cannot be eliminated through bankruptcy. 
 The bankruptcy law requires you to file your tax return before it can be “discharged” (eliminated) in bankruptcy. SFR returns do NOT counted as filed returns and the tax due will NOT go away if you ever file a bankruptcy.

5. You may lose your right to a refund if you fail to replace an SFR return. 
 Sometimes, the balance shown in an SFR tax return is paid by the taxpayer or through offsets and levies. But when a return is actually filed, the taxpayer will discover that he overpaid and is due a refund. If the tax is adjusted and a refund is due, you will lose your right to the refund after three years (this is called forfeiture).

Finally, a tax professional will allow you to avoid unnecessary contact with the IRS and give you the time to pull together your documentation so a package can be prepared by you and your attorney and submitted to IRS before the situation accelerates and spins out of control.

In short, a situation with unfiled returns has too many pitfalls for you to try to go it alone.


Thursday, January 26, 2012

IRS Audits: Why You Should Not Represent Yourself

An audit is a review by the IRS of your financial records and information to make sure that the information that you reported to the IRS on your tax returns are correct and accurate. The audit may be completed by mail or through an in-person interview – but your records are always reviewed.

The following nightmare occurred with one of my clients:
“Tom” is a small business owner who runs a successful small manufacturing business. Although he was great at his work and his clients loved him, he wasn’t as good maintaining his business records. One day, he received a notice from the IRS that he was being audited. During the audit process, the IRS requested that Tom provide copies of his bank statements.
Tragically, Tom believed that some relatively large deposits from his clients would draw the attention of the auditor, so he altered a few of the paper statements before handing them over to the IRS. When the IRS compared them to the records that they had received from the bank (the IRS can obtain these records by a “summons”), they discovered what Tom had done.

Eventually, Tom’s case was referred to Criminal Investigations and he was criminally charged for this act and is awaiting sentencing to Federal prison.

The tragedy of this story is that Tom never consulted with a professional during the audit process. Instead, he acted out of fear and ignorance – to devastating consequences.

What makes an IRS audit so daunting is that the burden of proof is on YOU to show that you have included all of your taxable income and provided receipts for all of your tax deductions. It is not enough that your return is accurate. You must be able to prove its accuracy. However, the process of proof is both time-consuming and difficult; the process sometimes leads people to make grave mistakes.

If your audit is not handled properly, the following might occur:
  • An accuracy related penalty will be assessed (20% of the underpayment); 
  • A substantial understatement penalty will be assessed (20% of the underpayment); 
  • A civil fraud penalty will be assessed (75% of the underpayment); 
  • A referral to the Criminal Investigation Division of the IRS will be made; 
  • The IRS will expand its audit to other tax years; 
  • The IRS will expand its audit to related taxpayers; 
  • The IRS will contact third parties about your tax return. 
My general rule of thumb: in any instance where you are providing financial information to the IRS, you should allow a professional to assist you because you may inadvertently supply information which is unnecessary and may harm you. 

Or you may even be tempted to make up information (as Tom did above).

Hiring a tax professional will save you time and money – and likely bring you a better result. According to IRS reports, “taxpayers represented by counsel fared noticeably better than their pro se counterparts” in audit and tax court matters. Taxpayers with representation received full or partial relief in 58 percent of litigated cases vs. just 34 percent for pro se taxpayers. This is not a time to pinch pennies.

Naturally, the best way to avoid an audit is never to end up there in the first place. But if you’re audited, (when the IRS is knocking on your door) get your tax professional involved early in the process as positioning is everything. Second, listen closely and understand fully the IRS’ concerns. Third, provide the IRS documentation and legal support justifying your positions and addressing the IRS issues. Fourth, exercise your rights for review at IRS appeals and mediation. The IRS has recently been much more open to alternative dispute resolution – something that can save you time and money.

Finally, I am a big believer that you need to be on offense when dealing with an IRS audit. The taxpayer should review the open year under exam closely and determine whether there are any additional tax savings available. This has meant that in some cases we’ve had clients who actually are OWED money by the IRS from an audit.

I have found working with many businesses and individuals that vigorous representation during exam and appeals right from the beginning will carry you a very long ways towards success.

Tuesday, January 24, 2012

Top 5 Reasons You Should Hire Tax Resolution Help

There are some circumstances when you can represent yourself and do not need to hire a professional (i.e. attorney, CPA, etc.). A person who chooses to represents himself does not always have (as the saying goes) a “fool for a client.”

If the situation cannot be worsened, you can initially try to negotiate with the IRS yourself – and only bring in professional help if you cannot get the result that you want.

For example, if you owe a small amount to the IRS (less than $10,000) and you have no unfiled tax returns, it probably does not make sense for you to hire representation. The IRS will allow you to establish a monthly installment agreement without you having to provide any financial information. You don’t even need to speak that much to the IRS. You can call them and simply ask what the minimum amount that they will accept per month.

However, the risk increases when the IRS requires financial information and documents from you. You should not go it alone if you are facing any of any of the following circumstances:
  • You are being audited. 
  • You have not filed all of your tax returns. 
  • Your bank account is being levied or your wages garnished. 
  • You (or your business) owes unpaid payroll taxes. 
  • Your case has been assigned to a Revenue Officer. 
In each of the above, the wrong response could make the situation a lot worse for you, your spouse, or your business.

In the next few blog posts, I will cover the risks of being unrepresented if your situation is one of the above – plus what you can do to minimize any harm.

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