Top 10 IRS tax problems and how to deal with them
Here are the Top 10 IRS tax problems that we have encountered over the years
Most CPAs and EAs have opinions about the Top 10 IRS tax problems they see on a day-to-day basis. Our business is highly specialized and focused on dealing with people all over the country who have IRS problems. We talk to IRS representatives every day, working with them to resolve clients’ issues. Because of this we have encountered the common IRS obstacles that people face every day. We put together our own list of tax problems with the IRS that we think everyone should know about.
So here we go:
IRS Wage Levy and IRS Wage Garnishment
The IRS computer system can trace your place of employment or any business or person who pays you and gives you W-2s or 1099s at year-end. If you owe back taxes, the IRS will automatically mail (to your last known address typically reported on your own tax returns) a series of notices that give details of income taxes owed and not paid. Their final notice will be titled “Notice of Intent to Levy” and will give you thirty days to respond. If you do not respond they will then transfer your case to their Collection Department.
Once in Collection they will eventually mail out IRS Wage Levy notices to your prior years’ income providers. These notices will order your employer(s) to withhold as much as 80% of your paycheck or payment. You will then have to call for help to the IRS or some type of tax professional in order to lower or completely release that IRS Wage Garnishment or IRS Wage Levy.
Unfiled Income Tax Returns
Many taxpayers can easily miss filing an income tax return by April 15. There will always be that group of people who will never file one or more tax returns. The IRS computer system is programmed to monitor everyone’s tax filing history and verify that their income tax returns are being filed. If their computer sees that a tax return has not been filed, within two to two-and-a-half years after an automatic letter will be mailed to the person’s last known address informing that the tax return has not been filed. Typically the IRS computer will then wait three to six months before taking further action.
IRS Substitute Income Tax Returns (SFRs)
If tax returns are more than three years late the IRS computer system is programmed to automatically prepare a Substitute For Return (SFR) and compute the highest amount of income tax that is possible. The person’s W-2 and 1099 payments will be used to determine the income of the taxpayer and the tax return will always be filed as either Single or Married Filing Separately with no additional dependents. Once this SFR is prepared and filed the IRS computer will assess income tax and penalties and interest to calculate exactly how much is owed. The system will then put the person’s case into what they call “Notice Status” and it will send out notices that will inform the person of the amount owed. It’s as if the person had filed his/her own tax return but the tax will always be calculated at the highest possible amount.
Unpaid Income Taxes
Most people file their tax returns on time and pay their taxes. But some people will eventually file and/or not pay what they owe. This is where the trouble starts. The IRS will eventually track you down and they will hound you until you either pay or come to some kind of monthly payment arrangement (called an IRS Installment Agreement). Sometimes however, you will be able to discuss your monthly income and living expenses and prove to them that you are unable to pay. This kind of special arrangement is known as Currently Non Collectible Status, and if you meet their requirements they will allow you to make no payments on your old income taxes as long as you continue to file your future income tax returns on time and pay everything you owe them when you file.
IRS Bank Levy
If you have a savings account or any kind of bank account that earns interest then you should receive a Form 1099-INT from your bank(s) or other payers every year for the interest that you earn. This form will be sent to the IRS and then they will be able to link the interest income from the bank with your own income tax records.
Therefore, the IRS will know where your bank account is located and they will be able to tap into your bank account and seize what you owe them. Often this will happen without prior warning even though the IRS is required to first mail a “Notice of Intent to Levy” to your last known mailing address. Since many people change addresses and don’t stay current with their tax return filings, those IRS notices will never be delivered.
Technically, when your bank receives an IRS Levy Notice 668-A they must automatically seize all or some of your money. However, they must hold that money for 21 days before they send it to IRS in order to give you enough time to prevent it from happening. You should understand, though, that you can deposit any amounts of checks or cash into your bank account beginning the very day after the levy notice is processed and you will have complete and total access to all of those future deposits. An IRS bank levy affects only the amount of money that is in your bank account(s) on the day that they receive the levy notice.
IRS Tax Lien
IRS Liens are different from IRS Levies. Levies affect cash and cash payments, while liens affect real estate, property and assets like automobiles and equipment. IRS Lien Form 668-Y is mailed to your county courthouse where it is filed and then becomes public information. Credit reporting agencies will pick up on it and it will show up on your credit report. If you own a house the lien will attach to it and you will not be able to sell your house and receive any cash profit until after the IRS gets their money. It is possible to get a Release of Lien without actually paying what you owe but this only occurs in rare circumstances. In most cases the IRS will not release your lien until after the tax is paid in full or the Collection Statute of Limitations expires.
IRS Penalties and Interest
The IRS has a lot of different types of penalties but the most common are Failure To File tax returns on time and Failure To Pay taxes that are owed. Penalties can often be combined and stacked on top of each other and can eventually add up to about 50% or more of the original tax amount. So you can see that your habit of not filing your tax returns on time and/or not paying your taxes can quickly be more than doubled when you also add in the interest that IRS charges on your unpaid balance. Fortunately, IRS interest rates are quite low and won’t cost you as much as a credit card or any other types of borrowed money.
IRS Income Tax Return Audits and Examinations
IRS Examinations can be extremely expensive – especially for self-employed individuals and businesses. These exams or audits can be conducted either by an IRS Revenue Officer (RO) in an IRS office near you who personally handles your case, or your exam can often be conducted through the mail. Never forget that the main job of the IRS Examination Division is to look over your tax return and determine how accurately you have reported your income and expenses. Once your examination is completed, your income tax penalties are computed, your new income tax is assessed and your account is updated, then your RO or examiner will expect you to pay in full or set up a payment plan. This subject is discussed in the next item.
IRS Installment Agreements
If you are unable to completely pay off what you owe then the IRS will expect you to agree to pay off your debt during the next months or even years. This agreement is called an IRS Installment Agreement and is secured with a Form 9465 IRS Installment Agreement Request. The IRS will use a very sophisticated computer program that will consider all of your income and all of your “allowable ordinary and necessary living expenses” as defined by the IRS.
You will discover that many of your monthly expenses and bills will not be classified or considered by IRS as either ordinary or necessary. The IRS will also have maximum limits for many of your allowable monthly expenses that may be less than what you actually pay.
For example, your monthly rent or mortgage plus your monthly utilities may add up to be $2,385 but the IRS chart for your family size in your county and state may show that the most they will allow is only $1,850. In such a case you would still be allowed to pay the $2,385 every month but you would get credit for only $1,850 in determining and calculating your Monthly Net Cash Flow (income minus allowable expenses). Your monthly IRS Installment Agreement amount is typically the same as your calculated Monthly Net Cash Flow.
IRS Payroll Deduction
The IRS will allow taxpayers to make their monthly payments by check, credit card, bank draft or even with a payroll deduction. All these payment methods are accepted by IRS but the easiest and most reliable is the payroll deduction. IRS Form 2159 Payroll Deduction Agreement is used to arrange a weekly, bi-weekly, semi-monthly or monthly deduction from your paycheck that will be held by your employer and then sent to the IRS on a monthly basis. This method of payment is the best way to guarantee that your monthly payments to IRS will be made in a timely manner. The monthly payment is taken out of your income before you get paid.
There are many other IRS income tax problems but these are our most common.
Everyone should educate themselves about different IRS tax issues, because no one ever thinks it will happen to them. We recommend that you read several different sources of information, including the IRS site and other professional tax expert sites. The more educated and knowledgeable you are then the better prepared you will be to deal with your particular tax trouble.