Tax resolution is a fascinating way to expand your firm as long as you don’t overpromise expected results. CPAs are in a unique position along with attorneys and EAs. As CPA Dan Henn describes it, “Tax resolution is when they [taxpayers] haven’t filed or owe a lot or both.” There is a greater need for adequate client representation before the IRS because of the proliferation of correspondence audits and horror stories about dealing with an understaffed IRS.
“We deal with other issues first, file the unfiled returns, pay or get on payment plan, and then ask for penalty abatement,” Henn said. “Say, a client owes over $100,000 from 2006. After filing the financials, he may owe $300 a month, but will only owe for a maximum of 10 years from the date of the return. Then it is uncollectable.”
Gaining first-time penalty abatement (FTA) is determined by your client’s qualification. You need three good years. You write a letter asking for the abatement. It is a case-by-case basis. Some agents approve, some don’t. You need a really good excuse. There are reasons the IRS will allow due to reasonable cause, medical, gambling, bad advice.
“Another client may owe $250,000 from 2004 with no money to pay,” Henn said. “He may be put into ‘currently uncollectable status,’ which the IRS is supposed to check every year but doesn’t always.
“With a partial pay agreement they are supposed to review every two years, but may not, due to the staffing burden at the IRS. [Taxpayer] must file at least the last six years, unless a substitute for return is filed for them by the IRS. The clock starts ticking after you file the return and the liability is assessed. This establishes the clock ticking over the ten years. You could be audited and get a whole new clock based on the liability of the audit. The ‘substitute for return’ prepared by the IRS is almost never accurate. The clock on your ability to amend and the IRS ability to audit is three years.”
You file Form 433 and provide the income and expenses of the taxpayer. You then determine the value of assets and liabilities or judgments against the taxpayer. Software helps prepare these by providing a survey of the taxpayer’s financials and saves time by populating the form.
“It takes patience,” Henn said. “Even the practitioner hotline can keep you on the phone two hours and torture you with a polite disconnect. You can file an amendment. If agent is not cooperative then you can escalate to the manager. If no satisfaction can be found there then you can file an appeal. “It is rarely useful [for the taxpayer] to talk with the agent. Taxpayers get nervous and become chatty-Cathys. Then, the IRS asks more questions, and person becomes irritable and that doesn’t help his case.”
An Offer in compromise (OIC) is not the primary way to get satisfaction in tax resolution. Part of the engagement is to determine reasonable collection potential (RCP) which determines taxpayers’ ability to make a payment. “They [the IRS] give you a financial rectal exam,” Henn said. “They verify what you say is true from court records and could drive by your house to see the house and cars you drive. Once they establish liability then the IRS can come after you.” If a client can pay it all, and it’s guaranteed to be under $10,000, it can be done online without help and without financial statements. “If say you owe $50,000 and only have $15,000 you may be an offer in compromise candidate,” Henn said. You must stay compliant for five years going forward paying all taxes and filing all returns.
If you are close to the end of the statute of limitations, you may be better off waiting rather filing an OIC. “As an advisor you must ask everything, even ask if client is inheriting money,” Henn said. “The IRS is entitled to 80% of any asset you own, including your house and inheritance. The IRS would take the inheritance in a Vanguard account.” Therefore, an OIC may be the better alternative. “For the OIC the IRS must do their due diligence,” Henn said. “You submit an OIC, they review for documentation, ask for more and then give it to someone who does the analysis.”
“The IRS checks the Department of Motor Vehicles for cars you own and the county [courthouse] for real estate property owned,” Henn said. They may check patents and lawsuits determined in your favor.” It will generally take a year to two. If the IRS denies the OIC, the statute of limitations begins ticking again. The time did not deduct when the OIC was filed.
It is a professional opinion on whether to file for partial pay installment agreement on Form 433, OIC (433 OIC) or currently uncollectable status. The IRS has a wizard online. The IRS does not abate interest, but can be included in an OIC. When you pay you are reducing the principal. It all may go away after 10 years of currently uncollectable status.
“If a business goes bankrupt, the trust fund penalty for unpaid payroll taxes will be assessed to the owner of the firm, which may come later before the ten years can start,” Henn said. “The IRS says they want people in the system and does want to not put people out of business but it does happen.”
Liens and levies are the tools of the IRS as Henn describes it. “When they garnish they may take two-thirds of a paycheck,” Henn said. “They request you sell the personal property usually on the uncooperative. They no longer make you sell your primary residence and keep two cars. You can’t be forced out of your house in most cases.”
When asked about how he got into tax resolution and what he likes about it, Henn reminisced about the people. “I look for the best in people,” Henn said.” I help people with an issue; they are shameful, fearful and angry. It’s like bankruptcy; you help good people in a situation out of problems, even though it was bad money management.”
“So you can sleep better at night,” Henn said. I like it. It’s like taking the boa constrictor off of them so they can breathe again. It helps them start again.”
Publishing CPA Magazine since 2002, T. Steel Rose began his career with Price Waterhouse leading to the start of Rose & Cash, CPAs. He was a VP for Solomon Software, now owned by Microsoft, and launched CPA Software News in 1991.