What is an IRS tax problem? You may have seen or heard commercials regarding IRS tax problems, but what would constitute such a problem? As a tax attorney I have witnessed many tax problems and the article and video below outlines and discusses these situations.
IRS Tax Audits
An IRS tax audit would certainly be considered an IRS tax problem to most individuals or businesses, especially if they were the taxpayer being audited by the Internal Revenue Service. The IRS can audit taxpayers at random, or many tax returns that are audited are chosen because an item on the return was flagged. For example, maybe the taxpayer’s total expenses seemed very high in relation to their total income and number of years in business. Maybe a specific expense such as travel and/or meals and entertainment appeared high in comparison to the taxpayer’s income and other expense. Not only is the audit a tax problem by itself, but such audit may lead to other tax problems such as the audit of additional tax periods and/or the taxpayer being assessed additional tax liabilities.
IRS Tax Liability
A tax liability would certainly be considered an IRS tax problem to all taxpayers as well. The IRS can be a formidable creditor and has the power to file a Federal tax lien, levy bank accounts, garnish wages and even seize assets. Additionally, the assessment of penalty and interest to the tax liability only makes it harder to repay the debt, and interest and penalty continue to accrue until the debt is paid. The good news is, you have options to resolve such debt, such as an installment agreement, offer in compromise and other remedies & resolutions. If you do owe a tax debt, it is recommended you work to resolve the issue as quickly as possible to prevent IRS enforcement action and the assessment of penalty and interest. Common types of tax liabilities are outlined below.
1040 Individual Income Tax Liability:
This would mean that when you file your individual income tax return you owe an amount and have not paid such amount to the IRS. Generally individuals accrue income tax liabilities because of the following circumstances: 1) They do not have enough federal income tax withheld. This can be resolved by changing the number of exemptions on your W-4. 2) When an individual is self employed, they are required to pay all of the self employment tax and make estimated tax payments during the year. Often a self employed individual is shocked at how much must be paid in self employment taxes, and when they have not made estimated tax payments, the tax bill adds up and thus there is significant tax due come April 15th that the taxpayer cannot afford to pay. 3) The taxpayer has specific transaction or 2 during the tax year and without the proper planning is not ready for the large tax bill. For example, a taxpayer may have sold or disposed of an asset such as stock or a business interest and must recognize capital gain, or even have sold an asset (or been involved with a business that sold an asset) of which a large amount of depreciation had to be recaptured. I have seen taxpayers receive a large sum of money through such as sale and then perhaps use the proceeds to satisfy other debts or spend the money elsewhere. Thus, when the time comes, they have no cash to pay the tax.
941 Employment Tax Liabilities:
941 debts are a common tax liability and a very big tax problem. Form 941 is the form used to report employment taxes. If a business pays the net pay check to an employee but then does not pay the taxes over to the IRS, the business will accrue a 941 tax debt. This creates a problem for the business because the IRS will look to collect the tax from the business and it creates a problem for certain individuals (typically the owners of the business) because they will be held personally responsible for the trust fund portion of the 941 debt (the trust fund portion being the employee’s share of the self employment taxes and federal withholding). Thus, a 941 tax debt, creates an IRS tax problem for both the business and individuals within the business- kind of like a double whammy because the IRS can and will attempt to collect from the business and the responsible individuals.
IRS Enforcement- Tax Lien, Bank Levies & Wage Garnishments:
When taxes are not paid, the IRS files a Notice of Federal Tax Lien which attaches to all of the taxpayer’s assets. A tax lien creates a problem because it impacts the taxpayer’s ability to transfer an asset without paying money to the IRS (if there is equity in the asset), and the ability to obtain lending is impacted and the taxpayer’s credit it likely to take a hit. In addition, because the lien is public record, it is highly likely you will receive annoying solicitations from many tax companies promising to resolve your problem, but quite often, they will only take your money and leave you in a worse position. Caveat emptor!
A bank levy issued by the IRS would certainly be an IRS tax problem unless of course you enjoy waking up to find no money in your bank account, checks & payments bouncing and your bank assessing fees for processing the levy and bounced checks. Such a levy also indicates a tax liability, which stated above is a problem, and likely a bigger one at that! The IRS may release or partially release the bank levy, but I have seen a taxpayer accrue hundreds of dollars in bounced check and payment fees because of a levy, and the bank can charge a levy processing fee. Upon receipt of the bank levy the bank will hold the funds in your account up and to the levy amount for 21 days. If the bank does not receive a release or partial release of levy in such 21 day time period, the bank will then release the funds to the IRS.
In addition to levying a bank account, the IRS can garnish wages and a wage garnishment is obviously a big problem because it cuts off your source of income. Thus, it can be very hard to pay your everyday bills. Moreover, as opposed to a bank levy, which is typically only a one time act of collection enforcement, a wage garnishment is continuous. This means that each and every paycheck you receive is garnished until the liability is satisfied! The IRS will consider releasing a wage garnishment in full or a partially release depending upon the taxpayer’s circumstances.
The above state the most common forms of an IRS tax problem in my opinion. In general, those problems would be: 1) A tax audit; 2) A tax liability (1040, 941 liabilities or others), and 3) IRS enforcement action (bank levy and/or wage garnishment). If you are experiencing any of these types of problems, please feel free to contact The McGuire Law Firm for a free consultation. The video below was prepared by a tax attorney to further discuss IRS tax problems. Please click on the link to view the video.