Have you ever heard the term “tax controversy” before? Here are some examples of it. If you do not agree with your county property tax bill, that is a tax controversy. When the Internal Revenue Service (IRS) decides to audit you (to more closely scrutinize your federal tax return by requesting documentation from you etc.) and you do not agree with the audit results, that is a tax controversy. If the Arizona Department of Revenue has been sending you letters demanding you pay your tax bill, but you do not have the money to pay it, that is a tax controversy.
Your response to a tax controversy depends on where it is coming from. Whether it is local, state or federal, there is a process in place to address whatever the issue is. Our Recommendation: Do not ignore a tax controversy because it will usually just make things worse. If you do not know what to do, we can help you. Here are a few of the more common solutions when it comes to owing the federal government back taxes.
Offer in Compromise and Installment Agreements
If you are unable to pay your full tax debt to the IRS, an offer in compromise makes it possible for you to settle your tax debt for a lesser amount than what you actually owe. This is likely only an option if you are unable to pay the full amount of tax that you owe or if doing so would put you in a financial bind (a “financial hardship”). Items the IRS considers are:
- Ability to pay
- Income
- Expenses
- Asset Equity (how much your stuff is worth after the loan is subtracted)
The IRS typically approves an offer in compromise if it includes an amount the IRS would expect to collect in a given time period, but that doesn’t mean that you can or should do it. In order to prove eligible to apply for an offer in compromise, you must meet the following requirements:
- You have to have filed all required tax returns and made all required estimated payments.
- You can’t be in an open bankruptcy proceeding.
- You need to have a valid extension for a current year return (if applying for the current year).
- If you are an employer, you have to have made tax deposits for the current quarter and past two quarters before you apply.
If you apply for an offer in compromise and the IRS finds you ineligible, then the IRS will return your application and application fee. If you made an offer as part of your application, the IRS will apply that amount to your total tax amount due. You may appeal a rejection within 30 days on Form 13711.
If the IRS accepts your offer, then you must meet all the offer terms in Section 7 of IRS Form 656. Your offer is automatically accepted if the IRS takes more than two years to make a decision from the date the IRS receives your application. This time period is tolled if there is an appeal. This means if you appeal within the two year period, then that appeal period stops the two-year clock until the appeal is over. Then the two year period begins to tally again.
When submitting your application, you must complete Form 433-A (OIC) (individuals) and Form 656(s). Once your application is complete, you will submit it to the proper site listed on Form 656-B.
What you pay and how depends on what you can pay and the payment option you choose. It can be a lump sum payment, which is 20% of the offer amount with the application. If the offer is accepted, then the remaining balance must be paid in five payments or less.
You may also choose to pay periodic installments as a part of an installment agreement, which means you would make monthly payments until the taxes due have been paid. The IRS does not release federal tax liens until the terms of your offer have been satisfied whether it's an offer in compromise or an installment agreement.
Common Pitfalls
Underpayment of taxes. If you do not keep accurate records and you underpay your taxes, the IRS may require you to pay a fine if your underpayment meets the IRS’ policy guidelines for issuing a fine.
Sometimes you may fail to pay your taxes on time, or you might fail to pay them at all. At times, you may find yourself in a situation where you have not filed your taxes for several years. This subjects you to penalties by the IRS. If you cannot prove reasonable cause for failing to file or pay your taxes in a timely manner, you will likely not be able to get the fine dropped.
While you may not be a person who has ever failed to file a tax return on time, disputes may arise even with strategic, careful planning. Tax returns that are timely filed are still subject to being audited and it is likely that you will not agree with what the IRS has done. An understanding of the tax law and related issues is essential when the IRS, or a state or local tax authority for that matter, is conducting an audit or trying to collect taxes from you.
How We Can Help You
Our office deals with the IRS, the U.S. Department of Treasury, the Department of Justice and state and local authorities in resolving tax disputes. We have helped our clients with a variety of cases at the federal, state and local tax levels. These are some examples of the types of tax controversy we handle:
- Audits and Appeals
- Bankruptcy and Workouts
- Income Tax Problems
- Innocent / Injured Spouse
- IRS Collection Activity
- Non-Filer
- Offers in Compromise
- Payroll Tax
- Payroll Tax Problems/Trust Fund Issues
- Sales Tax Problems
- Sales/Use Tax
- Tax Controversies - Federal
- Tax Controversies - State
- Tax Liens and Levies
- Tax Penalties
- Tax Planning
If you are involved in a tax controversy or a similar issue to one of the items in the bullet list above, please call us. We can help.
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