Today I would like to talk to you about Settling Debts with the IRS. We all dread getting that letter, that unmistakable letter in the mail, that we know is from the IRS; it gives us a lot of anxiety. In an effort to help calm those anxieties, I want to talk to you specifically about two different types of debts with the IRS. One being penalties and the other being income tax.
Video Transcript - Settling Debts With The IRS
It's time to get down to the Brass Tacks. My name is Mel Sams, and I'm the managing associate of Sams CPA, and today I'd like to talk to you about settling debts with the IRS. We all dread getting that letter in, that unmistakable letter in the mail. We know it's from the IRS. You know it's there. You know it is from them. It gives us a lot of anxiety, and I want to talk to you specifically about two different types of debts with the IRS, one being penalties and the other being income tax.
Let's start with the penalties first. There are a number of different penalties that can result for doing or not doing something with the IRS or filing something a certain way or filing something late, and without going into great detail about each individual penalty, I do want to talk to you about some high level points.
Number one, the IRS is typically, historically, been a little more lenient towards individuals than to businesses. They take the stance that businesses can afford to have the advisors and do the compliance and there's really no reason why they should be late, whereas individuals are more burdened by some of the requirements, and that it can be a hard shift for people, so the IRS is typically more favorable towards individuals than businesses.
Now, if you're a business and you have a penalty, for instance, failure to file a tax return or a late filing penalty, what a lot of people don't know is there is actually a one-time get-out-of-jail-free card that businesses can use if they filed late or forgot to file or something else happened or had extenuating circumstances. It's called the first-time abatement. At least that's what I've heard them call it. The key is is that you've never used it before and you've never had a penalty abated before, and you explain to them that you've corrected the issue that caused the late filing or non-filing or deficiency. Typically, if you mention that language, the IRS will remove that penalty from your account and clean the slate.
As far as individuals go, one of the more common penalties that I see is penalty for late payment or failure to file, failure to pay, meaning, if all of your taxes are not paid in by April 15th, even if you file for an extension, because an extension is an extension of time to file, not to pay, remember that, not to pay, just to file, if you don't have every dollar of tax paid in by April 15th, say, you file your return in June and you owe money, the IRS is going to assess you with a failure-to-pay penalty, meaning, you didn't pay everything in by April 15th. If that occurs, you can explain to the IRS extenuating circumstances or reasons why you were unable to make that payment timely.
Now, I will tell you, even though CPAs generally are very knowledgeable, excellent people to work with, occasionally, you get some bad apples out there. I have people that come to me and they say, "Hey, my CPA, they said they were filing things. They weren't. I found out from IRS that I hadn't filed a return in years and years, and now I have all these penalties and then things are a mess."
We don't want to go back to the IRS and say, "Well, my CPA messed up." They will tell you that it is your responsibility as a taxpayer ultimately to ensure that these filings are done correctly. Now, I know that sounds silly because that's what you're paying a CPA for or a tax preparer for, but, nonetheless, if you go to them with a reason of extenuating circumstances and explain to them not only why it happened, but what you've done to fix it, generally, they'll be pretty lenient towards individuals and can remove those penalties. It may require a letter. It may require a follow-up phone call, but I recommend anytime there's a penalty situation at least attempting to get it removed.
You'll be surprised. Sometimes, we can ... We're sitting there and, a year or two later, we get a check in the mail one day, and it's that penalty that we had requested abatement from finally being processed and showing back up at our door in the form of a refund, so, penalties, that's one type of debt, lots of specific ones. You have to combat the issue why did it happen, not only why, but what have I done to fix it, what am I doing to ensure this doesn't happen again?
The other aspect of debt to the IRS income tax, and this can be businesses, at the business level, but lots of times it's individuals, and we've all heard those commercials on TV and on the radio of, oh, "Call us. We can ... if you're ... If you owe more than $10,000, we can get your debt removed," and they make these grandiose promises about what they can do, and they make it sound like all they do is pick up the phone and call IRS and the IRS just forgives it and we're off on our merry way. It doesn't exactly happen that way.
What these institutions are doing, and a lot of those have been banned from doing business in New York, California, various other states where the state attorney-generals have shut them down because of their unethical practices, they collect large deposits up front from you and then many times don't do anything.
I recommend you talk to a CPA about how to reduce and/or eliminate income tax debt that you're unable to pay, so talk to a CPA, but, back to the mechanics, what we do is we file for what is known as an offer in compromise, OIC, and what an offer in compromise is is a fairly lengthy packet of documents where we walk the IRS through our monthly income. We tell them where we make money. We tell them what our expenses are. We tell them what our personal assets and liabilities are, and there are exclusions for a vehicle, for a homestead, certain other things are protected or you have an allowance of a certain amount you can have, but you work through that sheet and those papers and, ultimately, you come to a number via formula, and that number is the minimum amount IRS believes you can repay of your tax debt.
Now, you can make an offer lower than that and you can make an offer ... I don't know why you would make an offer higher than that, but you could if you wanted to or felt obligated to, but, at any rate, the point is is that that reduction in income tax debt is done through a very defined process, through a series of packets of, packages of paper, documents you fill out with the CPA. You submit that to the IRS, and you do open up your personal books to them. You tell them everything about yourself, what you have, what you make, but sometimes we find ourselves in situations where we had a business go bad or we had a personal situation that drained us of money and we were not able to pay our tax debt, so there is hope. There is a way to potentially eliminate or greatly reduce that debt.
Filing an offer in compromise, a qualified CPA can help you with that, but also be advised there may be times in which we don't want to do an offer in compromise. There could be certain things that by statute of limitations, if we file that offer in compromise, we might extend the government's time to collect debts, and that's one of the common complaints that I've heard from the TV, radio tax reduction people. They will just blissfully file paperwork with IRS without really knowing your situation and knowing what they're doing behind the scenes. A good CPA will know and they'll ask the right questions, so talk to a CPA. If you owe the IRS money, call a CPA. They can help.
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