Following is a list of frequently asked questions and my suggested answers for your consideration. This is the newest page on this web site. It will grow as I have time to add more material.
If you have a question that is not addressed, please feel free to submit it via the Ask A Question link above.
- I have not filed my last two returns. What should I do?
- I filed my return, but I owe more tax than I can pay now. Can I make payments?
- I just received a notice that my return has been selected for examination. What now?
- My bank account was just levied! Help!
- I just received a notice of Federal Tax Lien. What is this?
- What is an Installment Agreement?
- IRS Notices
If you have tax returns that have not been filed, you really need to have a professional prepare your delinquent returns and then file them as soon as possible. If you make an effort to get back into compliance before the IRS takes action to force compliance, then you will have less of a chance of being audited or having substantial penalties imposed – or even worse, potential criminal prosecution for willful failure to file! In most situations, you will be faced with a delinquency penalty (based upon the tax due), failure to pay penalty and interest – computed from the due date of the return.
Paying your taxes
The IRS will almost always allow you the option of paying your tax liability in installments. You will pay a one-time fee for this opportunity. Please see the page on this site that discusses installment payments in depth.
Further, if the amount of tax you owe is far greater than you could ever pay, you may qualify for an Offer in Compromise. This program enables taxpayers who are in deep over their heads to settle their tax debt for less than its face value. The are strict rules and procedures that need to be followed, so be sure that you retain a qualified representative to guide you in this process.
Notice of Examination
First thing, do not panic. Most examinations are routine and result because your tax return did not quite match the “norm” for someone in your line of work and reporting approximately the same amount of income. It does not mean that there is anything wrong, but from the IRS perspective, the probability of you having made a mistake is worthy of checking out.
The general rule is that you never – repeat, never – want to ignore this notice! Unless you are aware of a significant error or omission on your return, the best advice is to cooperate with the IRS as much as possible. If you make the auditor or agent’s task difficult because of your lack of cooperation, the employee will be far less agreeable to giving you the benefit of a doubt when deciding on what evidence or oral testimony to accept that you offer in support of questioned items.
If you are aware of a significant error or omission on your return, seek professional advice immediately! How you respond can dramatically affect the outcome of your audit. In very limited circumstances, you may even need to retain a tax attorney immediately if your error or omission could possibly be viewed as fraudulent with possible criminal prosecution.
There are four types of audits – correspondence; office audit; Small Case/Self-employed (SBSE); and Large and Mid-sized business (LMSB).
* Correspondence audits are letters sent to you from an IRS Campus (Service Center) location and will identify specific issues for which the IRS is asking to be verified.
* Office Audits are face-to-face with a Tax Compliance Officer (formerly, Office Auditor) and take place in an IRS facility. The Office Auditor will sometimes let you know what areas are being looked at, but not always.
* SBSE Audits are conducted by Revenue Agents and can take place in either the taxpayer’s location or an IRS office. These are face-to-face examinations. The Revenue Agents who conduct these audits may or may not tell you up front all of the areas they are investigating. They’ll ask questions, request documentation and try to see if you’ve made an error – such as not reporting all of your income, or being unable to substantiate (provide evidence) your deductions.
* LMSB Audits are face-to-face examinations that usually involve a team of general Revenue Agents and specialist Revenue Agents who are experts in employment tax and computer sciences, for instance.
Generally speaking, you should not attempt to handle your own audit. A seasoned representative will know how to respond to questions asked by the agent or auditor in a manner as not to suggest other areas where further examination is warranted. Also, agents are usually pretty sharp. They may be asking you questions on one item hoping you will trip up and provide a basis for raising further issues.
To illustrate from a case I worked as a young Revenue Agent many years ago, a taxpayer deducted substantial expenses for his home office. His percentage of his home that he allocated to business usage was pretty significant. Certainly, it was an item I wanted to review.
Also during this same year, he sold the home and purchased another – electing to defer the gain he realized under the provision at the time that permitted its deferral if a replacement residence was acquired within 18 months. Because he was using a portion of his home for business, that percentage of his realized gain could not be deferred – and would be taxed in the year the house was sold. The taxpayer was unaware that the portion of his home used for business did not meet the requirement for deferral of the gain on sale. Therefore, he deferred 100% of the substantial gain on the sale of the residence.
I expected the taxpayer was totally in the dark about this potential gain issue. So, I first attacked the office in the home deduction – giving the taxpayer the impression I was trying to reduce the percentage of business use. The taxpayer never realized that by providing me with lots of evidence and testimony to support a high business usage, he would incur substantially more tax liability because that percentage of the total gain on the house sale could not be deferred.
A seasoned representative should have anticipated where I was going with my questioning, and been suspicious of my readiness to allow a large home office expense. He or she would have endeavored to reduce the home office deduction so as to save the taxpayer considerably more money on the capital gains tax from the sale of the residence.
Another example is taken from a colleague of mine at the IRS. To illustrate from a case he worked, he asked a taxpayer questions about his children to verify that they were proper dependency exemptions. In addition to giving the agent some basic information, the taxpayer volunteered that his kids were both full time college students – and attending colleges hundreds of miles away from the area. The agent remembered that piece of information when he audited the taxpayer’s salary and wages expenses for his corporation and noted that his children were on the payroll. Since they were going to school full time, out of state, and never actually performed work for the corporation, the agent disallowed these “salary expenses” in full and assessed the taxpayer with a penalty for claiming these bogus expenses. It could have been worse for the taxpayer if the agent had referred the case for possible criminal prosecution!
Remember – tax returns are executed under penalty of perjury. Intentionally taking a deduction that is known to be false (or knowingly failing to report all of your income) is a crime.
As a side note, if you are aware of any prior returns you filed that have errors, now is the time to consider amending them BEFORE they are selected for audit (when it will be too late!).
These are just a couple of examples of why it is important to have a qualified and experienced Enrolled Agent, CPA or Attorney represent you in an audit with the IRS or any State.
Levied Bank Account or Salary
If the IRS levies on your bank account, your bank must hold the funds you have on deposit only on the particular day of the levy is received by the bank. The bank is required to remove whatever amount is available in your account that day (up to the amount you owe the IRS), and send it to the IRS in 21 days. This 21-day holding period allows you time to resolve any issues about account ownership of the bank account and also provides a period of time to negotiate with the IRS for a release. After the 21-day holding period, the bank must send the money plus interest earned on the seized amount to the IRS.
A levy on your wages is far more serious! This is a continuous levy – meaning, the IRS will CONTINUE to take a substantial amount of your take-home pay until they have collected all that is due, or a “deal” is worked out for an alternative payment plan (installment agreement or offer-in-compromise most likely). Of further concern, many employers have personnel policies that can result in employee termination if their wages are subjected to a government levy. They just do not want the potential controversy with the IRS or State over what the levy attached in the way of wages/earnings.
Regardless of the type of levy. you must act quickly! We strongly suggest that you secure the services of a tax professional to represent you before the IRS. The levy will released either by working with the IRS or State tax agency directly, or by paying the full amount of the tax debt.
Liens are different that from levies. A lien is a legal instrument that is used as security for the tax debt. On the other hand, a levy is a legal action of taking your property to satisfy the tax debt.
A tax lien is a negative record on your credit report which usually significantly lowers your credit rating. This often makes it difficult for a taxpayer to obtain financing on an automobile or a home, get a credit card, or sign a lease. Tax liens are public records that indicate that you owe the IRS (or state agency) money. Tax liens are filed with the Clerk in the county where you live or where your business operates. Once a Federal or State tax lien is filed against your property, it will affect your ability to sell or transfer the property because of the cloud on its title. You need to act NOW!
Liens establish the priority of the IRS and State against other creditors and attach to all your assets as payment for your tax debt.
A Notice of Federal Tax Lien may be filed after
* the IRS has assessed the liability;
* the IRS has sent you a Notice for Demand of Payment (a bill that tells you how much taxes you owe; and
* you neglect or refuse to fully pay the tax debt within 10 days after the IRS notifies you.
The IRS will issue a Release of the Notice of Federal Tax Lien:
* within 30 days after you satisfy the taxes due (including interest and other additions) by paying the debt or by having it adjusted;
* or immediately upon payment with cash or the equivalent of cash, or
*within 30 days after the IRS accepts a ban, guaranteeing payment of the debt, or
* a mortgage is given to the IRS against property that is worth twice the amount of your tax liability, or
*usually 10 years after a tax is assessed, a lien releases automatically, if the IRS has not filed the Notice of Federal Tax Lien again.
You may appeal the filing of a lien. You may also ask the responsible IRS Collection manager to review your case. In addition, you may request a Collection Due Process hearing with the IRS’ Office of Appeals by filing a request for a formal Appeals hearing. You must file your Appeals request by the date shown on your notice.
It’s also important to attack tax liens that are invalid. A tax lien could be invalid if a lien is on property which is not owned by the debtor, a lien was filed during the automatic stay, a lien was recorded in the wrong county, or was for discharged taxes now being asserted on future-acquired assets.
An installment agreement (IA) is an amount paid monthly to satisfy your full tax obligation. IA’s are generally used when you are unable to pay your taxes all at once, but you can pay enough each month to pay off your total tax debt in a reasonable period of time…usually not more than 6 years. On cases exceeding the automatic installment agreement requirements, the IRS will generally require you to provide information regarding your monthly income and expenses by submitting a Form 433-A (and Form 433-B if you’re a business like a Corporation).
There close to a 1,000 different notices and letters – mostly computer generated – that the IRS sends to taxpayers. The topics relate to unfiled taxes, balances due, audits, and enforcement actions being contemplated or actually taken. Many have time limits, and missing a deadline could result in receiving a levy (garnishment) of a bank account or paycheck, a lien being filed or some other adverse consequence. Read them carefully, and if you do not understand it, get help immediately.
We have included below a brief discussion on the more common letter and notices issued by the IRS.
Letter 11 – Final Notice of Intent to Levy and Notice of Your Right to a Hearing
Do not ignore this notice. The next step would be for the IRS to begin enforcement which could be a levy on your bank account or your wages. I suggest you call us promptly so we can discuss your options.
Letter 1058 – Final Notice Reply Within 30 Days/Collection Due Process Notice
This is another version of the Letter 11 (above).
CP 90 – Final Notice of Intent to Levy
This is another version of the Letter 11 (above).
CP 504 – Urgent!! We Intend to Levy on Certain Assets. Please respond NOW.
Do not ignore this notice. A CP 504 is usually issued before the Letter 11 or the Letter 1058. You still have time to respond. However, if you ignore this notice you will soon receive the final notice (one of the letters above). if there is no action. The CP 504 warns you that collection action such as wage garnishments, bank levies or tax liens and seizures of assets are next.
Letter 1085 – 30-Day Letter Proposed 6020(b) Assessment
If you fail to file a tax return voluntarily, the IRS has the authority under the Internal Revenue Code to prepare a return on your behalf using information they have received (such as copies of forms W-2, 1099, K-1, etc) and industry standards for your job or business. You have just been given a 30-day window to protest the IRS proposed assessment – which is most often a balance due that is more than what you truly owe as the IRS will never include deductions or credits for which you may be entitled. Get help quickly.
CP 92 – Notice of Levy upon Your State Tax Refund
If you have ignored the previous letters (such as the CP503) or failed to do what you promised, this letter informs you that a levy has been placed on your state tax refund. Any refund due you will go to the IRS instead. It is very difficult to get this levy removed until you have paid the amounts owed in full. However, if you fail to act now to resolve your tax debt, the IRS can and will look for other property to lien or liquid assets to levy.
CP 242 – Notice of Levy upon Your State Tax Refund
This letter lets you know that the IRS can take your state tax refund. Any refund due you will go to the IRS instead. It is very difficult to get this removed until you have paid the amounts owed in full. However, if you fail to act now to resolve your tax debt, the IRS can and will look for other property to lien or liquid assets to levy.
CP 523 – IMF Installment Agreement Default Notice
If you don’t make a payment as promised or you incurred a NEW tax liability, this may cause your installment agreement to default. This letter is putting you on notice that the IRS intends to terminate your agreement in 30 days. You have the right to file a Collection Appeal Request (CAP) to ask for an appeal, if you do not agree.
CP 2000 – Proposed Adjustment
This is one of the most common letters issued by the IRS. When returns are filed, they are computer matched against the IRS database that contains copies of W-2s, 1099s, K-1s and other information documents. If the computer identifies one or more items (like an interest income or dividend payment you received) that was not included in your return, the IRS will recompute your tax liability and notify you of their plans to change your return as filed. You are provided a computation of the proposed adjustment to your tax return based upon this information. If you agree, you sign and return the agreement forms. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. You have a limited time period within which to file the request. If you had your return prepared by a professional, be sure to contact them immediately for assistance and to verify that the item or items the IRS identified were not already included in the return. If you prepared the return yourself and you do not understand what the IRS is proposing, get help quickly.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.