As a tax attorney, I have seen many so called “tax problems.” I have also resolved many tax problems for my clients. The term tax problem is pretty generic and in many respects not very specific. Therefore, this article has been drafted to outline and better define some of the common tax problems I have seen and resolved as a tax attorney.
1) Unfiled Tax Returns: Many taxpayers will call me and say, “I have a tax problem… I have not filed my tax returns.” Some businesses and individuals have not filed tax returns for years, sometimes 5-10+ years.
Not filing tax returns creates many issues. First and foremost, the IRS could deem your failure to not file a criminal issue. Moreover, the IRS assesses a failure to file penalty of up to 25% when your tax returns are not filed and generally speaking the IRS is not very lenient in allowing this failure to file penalty to be abated or waived. If you owe other taxes, but have returns that have not been filed, you will be unable to formalize an agreement with the IRS until all returns are filed as you must be current and compliant for the IRS to accept an agreement. The IRS can file a substitute return on your behalf under Internal Revenue Code Section 6020(b) and collect on the amount of tax assessed.
Solution: You need to file the tax returns. While this may sound simple to many, I realize that under certain circumstances having the returns prepared may be difficult. You may lack records or have lost records. Regardless, the returns need to be filed and you have options. Call a tax attorney or tax professional and discuss your situation if they offer a free consultation and consider paying for professional help.
2) You Owe 1040 Individual Income Taxes to the IRS: Many individuals are unable to satisfy their tax debts to the IRS. Maybe you started a business and were unaware of the tax consequences and received quite a big shock on April 15th. Maybe a divorce or health issue led to the tax debt. While it is understandable that you could not pay your tax bill, you must take action to resolve the issues. The IRS can assess you penalties and interest on the unpaid tax and enforce collection of the tax liability through bank levies, wage garnishments and the seizure of assets.
Solution: Do not avoid dealing with the IRS as the matter will only worsen. You should contact the IRS, or contact a tax attorney or tax professional to seek help. The IRS does allow you to pay your taxes in installments and you may even be able to resolve your tax debt through a tax settlement known as an Offer in Compromise. In addition to resolving the tax debt you owe, you must also figure out why you accrued taxes and take the necessary steps to prevent additional tax debts and tax accruals in the future. Maybe you were not having enough income tax withheld and thus need to adjust your withholdings. Maybe you are self employed and did not make the necessary estimated tax payments. Regardless, you need to make the changes so that you are not constantly paying off the IRS in a revolving circle.
3) Your Business Has Not Paid 941 Employment Taxes: As a tax attorney, quite often I speak with business owners who due to cash flow issues have paid their employees the net pay, but have failed to remit the withheld taxes to the IRS through federal tax deposits. This is a very serious problem because it impacts your business, which is your livelihood and you personally because a portion of the 941 tax debt can be assessed to you personally through the Trust Fund Recovery Penalty. It is also important to note that once assessed the 941 trust fund, you cannot discharge this debt in bankruptcy.
Solution: First, you must get back into compliance by making the necessary federal tax deposits if you are not in compliance. A business that is not paying 941 taxes is more likely to be shut down by the IRS, and every time you fail to make a deposit you only increase your (and the other business owners) overall exposure and liability to the trust fund recovery penalty. Once you are in compliance you can work to initiate a formal installment agreement with the IRS to resolve the 941 debt and may be able to prevent the personal assessment or allow the business installment agreement to act as the only resolution. It is important to know that once assessed to individuals, the IRS can collect the 941 tax from the business and each individual based upon their individual collection potential. If a revenue officer has made a determination regarding the personal assessment of the trust fund, the business may be able to submit an offer in compromise in an attempt to settle the tax debt if the business is an offer candidate based upon it’s circumstances. If an individual has been assessed the trust fund recovery penalty, they can resolve the debt via an installment agreement or potentially an offer in compromise with the IRS. I recommend that any business owing 941 taxes to the IRS to contact a tax attorney or tax professional. Of course all taxes are serious, but as a tax attorney, I would say if the IRS had to prioritize types of taxes, the 941 taxes would likely be at the top of their list.
4) You Are Being Audited by the IRS: Your tax return may have been randomly selected for audit or maybe a specific deduction raised a red flag. Regardless, you received a notice from the IRS that they are auditing one or more of your tax returns. Audits are very serious and can lead to additional assessments of tax. Further, and audit on one period may open the door to the IRS auditing multiple periods. For example, the IRS may initially audit your 2010 1040, but through the audit, the auditor may decide to audit 2011 and 2012.
Solution: Generally there are two types of audits. One is a substantiation audit whereby the IRS just wants you to verify certain items on the return. This may be completed by giving receipts, cancelled checks, invoices etc. to the IRS. If your audit is substantiation, provide all the necessary documents and paperwork to the examiner to verify your position and do so timely. The failure to provide the necessary documents could lead to the examiner issuing a notice of deficiency. The second type of audit would likely involve whether the item taken was correct, and may be based more on law than actually verifying the item or expense. For example, maybe you claimed something as a long term capital gain and it should be a short term capital gain, or maybe you are claiming an item as a capital gain and it should be ordinary income. If you are comfortable with the specific law or Internal Revenue Code Section, you can certainly handle the issue yourself, but you may want to be represented by a tax attorney or CPA.
If you have any tax questions or are experiencing a “tax problem” contact a Denver tax attorney at The McGuire Law Firm. You might as well take advantage of the free consultation and The McGuire Law Firm has offices in Denver and Golden Colorado for your convenience.