Navigating tax controversy and the Internal Revenue Service (IRS) can be daunting. It is important to consider specific factors when dealing with the IRS and, in some cases, to seek the advice of a legal expert. The following are key points to consider when dealing with the IRS:
Make sure it isn’t a scam. The first thing to do when you receive notice that you owe the IRS money is to verify that it is not a scam. You can go online to locate the correct official IRS phone number to confirm that you in fact owe money. You will have to wait on hold, but it is better to wait on hold than to fall victim to a scammer. Tax attorneys have access to a practitioner priority phone line — not available to the layperson — that can expedite the process.
Gather information. It is crucial to figure out how much you owe, whether all of your tax returns have been filed and whether you have any upcoming compliance or appeal deadlines. Once you are in communication with the IRS, you can ask these questions and determine everything the IRS expects you to do to get back into full compliance.
Come into current compliance. Aside from dealing with taxes you may owe for the past, you should make sure you are in current compliance with tax withholding, filing returns and other requirements. This is important because if you are not in compliance, the IRS will not allow you to get on a payment plan and will not accept an “offer in compromise” (an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed). If you remain out of compliance, the IRS might resort to seizing your bank accounts, wages or other assets.
If the IRS is wrong, challenge the tax assessment. The IRS might say you owe them money, but that doesn’t mean they are right. Every individual has a unique situation with the IRS. It is often helpful to find a professional who is well-versed in tax law to look at the IRS documents you receive and verify that the tax assessment is correct. For instance, if you are audited, it is important to make sure that the IRS gives you all the deductions and credits you are entitled to. You should challenge the IRS if the tax assessment is incorrect.
Seek to get penalties reduced or removed. Even if the IRS assessed the right amount of tax, in many circumstances you can file a request to remove or reduce penalties. Sometimes there are really good reasons why someone was not able to file returns or pay taxes on time, such as illness or a death in the family. The IRS may reduce or remove penalties if they receive a proper penalty abatement request.
If you can afford to pay the debt, set up a payment plan. If you think that you have the ability to pay the debt, even if it might take a few years, you can set up a payment plan and pay in increments over time. Setting up a payment plan keeps the IRS from continuing to threaten you and from seizing your assets.
If you cannot afford to pay the debt, file an offer in compromise. If the amount you owe is so big that you do not think you can pay it in full, you can file an offer in compromise. The goal of an offer in compromise is to get the IRS to accept a full settlement based on your ability to pay. In this scenario, the offer in compromise is not based on how much you owe, but on how much money you have and currently earn.
If applicable, request innocent spouse relief. Sometimes the IRS comes after a person because that person’s spouse was hiding income. A common situation is that one spouse is making money but not reporting the extra income.
If the couple filed a joint tax return, this can leave the innocent spouse responsible for the other spouse’s misconduct. In this situation, a request for innocent spouse relief can free the innocent spouse from tax liability.
In rare cases, bankruptcy, a lawsuit or another strategy may be appropriate. Not every situation fits neatly into one of the usual boxes. Some circumstances require a unique approach, which is why it is helpful to get the advice of a tax law practitioner. Doing so can cut costs and eliminate the anxiety of trying to deal with the IRS by yourself.
Do you also owe taxes to your state? A lot of times, people overlook state tax obligations because they are relatively small compared to federal taxes. However, it can make sense to resolve both state and federal taxes at the same time.
Samuel A. Lambert is an attorney with the firm of Ray Quinney & Nebeker in Salt Lake City. He helps clients resolve audits, appeals and collection issues with the IRS, the Utah State Tax Commission, and county boards of equalization.