Case Study: How We Helped a Realtor With a $160,000 Tax Bill

a female realtor

Many taxpayers conclude that if they are going to owe money to the IRS and cannot pay, they are better off just not filing. This is 100% the wrong thought process. 

There are a few different reasons why it is very important that a person files each year by the due date regardless of their ability to pay the tax debt. The first major reason it is important to always file is that there is a non-filing penalty. The failure to file penalty is usually five percent of the tax owed for each month or part of the month that your return is late, up to a maximum of 25%. If your return is over 60 days late the minimum failure to file penalty is $425 or 100% of the tax required to be shown on the return, whichever is less.

Another major reason for a taxpayer to make sure that they file every year is because in most cases the IRS will catch up with it and file the taxes on behalf of the taxpayer. When a taxpayer receives their income forms from employers and financial institutions every year, they are also sent to the IRS. If this income has been reported to the IRS and a taxpayer has filing requirements and fails to file, the IRS will do what they call a “Substitute for Return”. 

Typically, a Substitute for Return is completed three years after the return was due. The IRS will then send a letter to the taxpayer with a proposed tax debt plus penalties, fees, and interest all accrued since the original filing due date.

Now some may reason, “Why file if the IRS just comes in and does it for you?”. Again, this is a bad way to think. If the IRS files the taxes on behalf of the taxpayer, they will prepare the returns based on only the information that was provided to them from your employer’s banks and other payers. And SFR has a filing status of single or married filing separately. This means you would miss out on any possible deductions, exclusions, or credits that you may have had rights to.

In my time in this industry, I have seen many cases where people come to us with huge tax bills because the IRS has filed unfiled yeas and the taxpayer is in absolute panic mode. This year we have heard this a lot more than other years. A lot of people who had not filed in a long time either did the non-filer tab that was put on the IRS website or filed 2019 or 2020 so they could receive the stimulus checks that were being distributed. When this was done, it also updated their address with the IRS.  A lot of people who had thought they were flying under the radar with the IRS or getting away with not filing their taxes were shocked when they received a large tax bill. 

It does still happen where somebody can fly under the IRS’ radar but it is very rare. And when the IRS does not update addresses, many people who do not file are left in the dark of what the IRS has been doing since they are unable to receive the IRS letters that have been mailed to an old address.

This past year we took on a client that this happened to. We will call her Mrs. O to respect her privacy. 

 

Mrs. O Gets a $160,000 Tax Bill

Mrs. O is a realtor that had not filed her taxes in almost 8 years. During the beginning of the coronavirus pandemic, her work came to a screeching halt. She was fortunate that the government had made unemployment available to self-employed individuals but with a daughter to support, she needed more income. She admitted that when the government set up the non-filers tab on the IRS website, she submitted as a person not required to file so she could get the benefits of the stimulus checks that were being sent out. In doing so, she also updated her address with the IRS since she had moved a few times over the past 8 years. 

The good thing was that she received her stimulus checks and they really helped her and her daughter gets through the tough times. Then earlier this year when the IRS resumed sending notifications and collecting on the debt, she received a bill from the IRS for over $160,000. All this time she had been thinking she was getting away with not filing.

 

What The Tax Investigation Revealed

We started her case as we do for everybody with a full-on Tax Investigation directly with the IRS.  Within 10 days of her signing representation documents, we were able to retrieve all of her records directly from the IRS and show her exactly what had happened. 

In the real estate industry, the majority of taxpayers are considered self-employed. Her employers had been providing her and the IRS with 1099’s for all of the 8 years. Her records showed that she hadn’t filed in 8 years as she had informed us and that the IRS had done Substitute for Returns for 4 of these years where she had substantial income reported. She also still had 4 years that were left unfiled that had filing requirements.

Now in cases like this, there are different approaches that can be taken. These different options are really going to be based on her financial situation. At this time in her career, things had started to pick back up again but she was making nowhere close to the money that she made in the past. She also had depleted almost all of her savings during the time she was not working. 

Doing a review of her income vs. her expenses we found that she would definitely qualify for some sort of hardship program. Since we would be able to utilize the hardship programs, it would not make sense to go back and redo the tax returns that the IRS had already done. Since there is a ten-year statute of limitations on tax debt in cases of hardship, it does not always make sense to redo the tax returns because there would be more savings by keeping the existing assessment dates then adding expenses to reduce the tax debt. If somebody has a good income and shows the ability to pay the debt back, then you would definitely want to redo the Substitute for Returns with the proper deductions, exclusions, and credits to reduce the tax debt.

 

The Resolution

The first thing that had to be done to get her into one of these programs was to file all of the unfiled years. Being filed up to date is a requirement for all of the different programs the IRS offers. These years were filed correctly using all of her expenses for those years, keeping the additional debts down as low as possible. 

The IRS took a few months to assess the filings. During this time, we monitored collections to make sure that the IRS did not initiate any involuntary collections on the existing tax debt. These four years added an additional $30,000 to her tax debt.

The next step would be to present her financial situation to the IRS. In her case, this was the ideal time to do this because she was definitely living paycheck to paycheck. After a long back and forth with the IRS, approximately 6 months of proving and reproving her financial situation, it was agreed upon that she would only be expected to make a small payment of $100 a month. As long as she did this and did everything right moving forward, she would only end up paying $12,000 on a $190,000 tax debt.

Our job was not done yet. We had to set her up for success with some future tax planning. She had to make sure moving forward that she filed on time every year and she must pay any new taxes on time. 

When being paid as a 1099 employee, you are essentially running your own business, so it only makes sense to operate as a true business and get the benefits of operating as a business entity. By setting her up as an S-corporation, we could limit her exposure to self-employment taxes. Operating in this fashion will save her thousands moving forward especially if she starts making a lot of money again. 

So, in this case, we not only saved her almost $180,000 on her older tax debt but we also set her up to save thousands moving forward by running her business more effectively. Also, to make sure that she no longer owed the IRS, it was important that estimated tax payments were made quarterly throughout the year so that at the end of the year she didn’t have to worry about any sort of tax debt. As long as she followed through with the established plans, within 10 years she would never owe the IRS again.

If you have not filed taxes out of fear that you will owe the IRS money that you don’t have, contact us for a free tax consultation. Let’s see how we can help you resolve your situation so you can stop worrying about the IRS.

 

Case Study: How We Saved Mr. J $117,000

a happy older couple

I cannot stress enough how important it is to make sure that all different types of income that you received in a year are reported on your 1040 tax filing

Most entities that received income throughout the year will provide you with the correct income form, typically a W-2 or some form of a 1099. When these are sent to a taxpayer, they are also sent to the IRS. The IRS uses an automated computer program that matches this information to your tax return to ensure the income reported on these statements is also reported on your tax return. Unfortunately, if you do not report the income, the IRS will discover it 2 or 3 years later and then access the tax debt plus penalties and backdate the interest, possibly costing you thousands of dollars in addition to the tax debt that is owed. 

This is why consulting a good tax professional is so important. A big part of their job is to go through your financial situation to determine all the income that should be reported so you don’t have to worry about being in that situation.

 

How Some People Get Into Tax Debt

We take on a lot of these types of cases where people fail, for many different reasons, to accurately report their income. The taxpayer may be a disorganized self-employed contractor receiving multiple 1099’s from different entities that he performed services for. Sometimes it’s a person who worked multiple W-2 jobs throughout the year. 

Another situation that we see often is when somebody goes through a foreclosure or a short sale on their property. This is a horrible situation to go through and the last thing a person thinks about is the tax ramifications.

If a property is sold through foreclosure or a short sale and the proceeds do not completely satisfy the debt amount, then the financial institution has the right to report the cancellation of that portion of the debt to the IRS. The forgiven debt amount now becomes income for the taxpayer and must be reported on their tax return. 

If the taxpayer omits this or other forms of income off of their tax return, they will surely receive an IRS Notice CP-2000 at some point where the IRS has reassessed their filing with that income added. This letter can appear to be a bill and many times even has a due date on it. However, in smaller print, it does state that it is not a bill but is still a proposed debt. If you do not agree with the debt, you do have the right to dispute the IRS assessment. 

However, there are many different deductions and exclusions to income that may be able to be used to amend what the IRS is saying that you owe. If you are not sure what your rights are in this type of situation, it would be wise to contact either an Enrolled Agent or a CPA to advise you.

I have seen many of these types of cases over the years but one, in particular, comes to mind. For the client’s privacy, we will call him Mr. J.

 

A Decade of Tax Struggles

When this taxpayer initially contacted us, he had been having issues with the IRS for almost a decade. Over the years he had tried many different avenues to resolve his tax debt. He had hired a few different companies but they failed to help him achieve any sort of resolution. He had tried payment arrangements directly with the IRS but could never keep up with the high payments they required. At one point he had even begun the bankruptcy process but was unable to complete that as well. 

He had used many different tax preparers to file his taxes throughout the years but the problems kept coming. On one occasion he received a letter from the IRS stating that he owed another $60,000 which essentially doubled what he had currently owed them. He didn’t understand how that was even possible. 

We talked about a few different possibilities of where the debt could have come from and possible programs that may be a solution for him. I explained to him how we work, our process, and how we always start by gathering the facts.

After dealing with so many different tax relief companies with their sales pitches and false promises over the years, he loved our approach and appreciated our honesty. He hired us immediately to begin his tax investigation. A Tax Investigation is where our Enrolled Agents contact the IRS on a client’s behalf and they provide us with their tax records. Once we have that, we know everything that is going on. This part of the process only takes about 10 days to complete. 

When and only when we have all of the facts is when we can lay out a strategy for a client. We were able to provide Mr. J with a good strategy to help him obtain an end date to his tax situation and into a program that he could afford with the IRS.

 

Results of the Tax Investigation

When we received his information from the IRS, his transcripts confirmed the story that he told us but more importantly filled in the blanks on the information that he did not know but was so very vital. 

We found out that the recent notice that he received was a CP-2000 notice. This was for unreported income a few years back. The income that he had left off of his tax filing was a 1099-C from his bank after a foreclosure he had gone through. 

It also appeared that this wasn’t the first time that he had received this type of notice. He owed the IRS for 4 other years as well, going back as far as 2008. Two of these years resulted in small tax debts due to a lack of withholdings and then there were two other years with fairly large tax debts. These particular years were from underreporting income just like the tax year he had just received the notice for.

Altogether, at this point he owed the IRS $120,000.

We took our time and educated him on what had been happening over the years and were able to show him everything with IRS documentation. By educating clients about their mistakes and by doing some future tax planning, we can set our clients up for success and prevent them from becoming repeat offenders as Mr. J had been for many years. 

Mr. J was blown away just by this part of the process. He said that of all the different companies and attorneys he had hired over the years, nobody had ever done this for him. He felt that if he had this conversation with us 10 years ago, he could have avoided 10 years of IRS problems and tax debts.

 

His $120,000 Tax Debt Gets Cut in Half

As important as educating Mr. J was, the next step in the process was fixing the mess that had compounded over the years. The first thing that had to be done was deal with the recently discovered unreported income. This is where knowing tax law is very important. 

When the IRS reassess a tax year due to unreported income, they do not give any deductions, credits, or exclusions that the taxpayer may qualify for. In this case, the income came from foreclosure on Mr. J’s primary residence. The Mortgage Forgiveness Debt Relief Act of 2007 provided an allowable exclusion to income which has been extended through many other acts and was available for the year in question. The provision allows taxpayers to exclude income from the discharge of debt on their principal residence. Up to $2 million of forgiven debt is eligible for exclusion for debt reduced through mortgage restructuring as well as the mortgage debt that is forgiven in connection with a foreclosure. So, in his case, by going back and amending this tax year and using this allowable exclusion, the $60,000 tax debt from this year was eliminated.

 

From Owing the IRS $60,000 to Only $3,000

The next part of the process would be to deal with the remaining older tax debt. Unfortunately, even if these types of exclusions or deductions are available on the older debts, you can only amend a tax return up to three years of the original filing date. In this situation, that wasn’t a big concern because the IRS programs that Mr. J qualified for were much more beneficial.

At this point, Mr. J was living off of retirement income and had almost no savings. His wife also had a very small social security distribution every month. They were truly living paycheck to paycheck. As I have mentioned many times in previous articles, a taxpayer does have the right to pay his or her allowable expenses before paying on a tax debt. By enforcing this right, we were able to get Mr. J into a program where he would only pay back approximately $3000 on the remaining $60,000 tax debt.

The last thing and most important thing that had to be done for Mr. J was future tax planning. Education is a huge part of our process. To keep the benefits we obtained for him and in order to remain in his payment program, he cannot accrue another tax debt and must file his taxes on time every year. 

We instructed him how to change his withholdings so that he will no longer owe taxes every year. He decided that he would have us file his taxes correctly every year going forward. He knew from his experience with us that we will definitely scrutinize his financial situation every year to make sure that no further income is underreported. 

As long as he does all of these things moving forward, Mr. J will end up saving close to $117,000.

If you have been struggling with a tax debt or other tax issues and have no idea what to do, contact us for a free, no-obligation tax consultation.

 

Case Study: How We Saved Mrs. B $27,000

a female police officer client

After helping countless individuals with their tax issues, one thing I have learned is that no two situations are exactly alike. Any good tax professional knows that there are so many moving parts to qualifying for the different IRS programs available. Which is why we at Innovative Tax Relief start every case by doing what is called a Tax Investigation. This is where one of our Enrolled Agents contacts the IRS in behalf of a client and really puts in some work to figure out what the person will truly qualify for in terms of reducing their tax debt.

For example, you can have two people that owe the IRS $50,000 each. This does not mean they will qualify for the same type of tax relief. One of them may make $25,000 a year and qualify for some sort of hardship settlement with the IRS while the other person may make $100,000 a year and in the eyes of the IRS has a strong ability to pay the tax debt back in its entirety. 

Or in another example, two individuals may both make $100,000 a year while one lives in California which has a high cost of living and the other lives in rural Maine which has a very low cost of living. Or somebody might have many dependents or medical expenses that change their ability to pay back the tax debt. The list of the differences go on and on. There is no one-size-fits-all when it comes to tax relief.

Only after having a conversation with a potential client are we able to determine if it is worth it for them to hire us to do a Tax Investigation. That is why we offer free consultations with an experienced tax professional. This is how I met a new client that I will refer to as Mrs. B.

 

Mrs. B and Her IRS Monthly Payments

A few years ago, Mrs. B called me and really didn’t know what to do about her tax problems. She had tried to handle things on her own with the IRS, so the result was they required her to make a $400 a month payment on a $16,000 tax debt. She told me that she had eliminated many expenses from her budget in order to make her IRS payment because not only was she afraid of the IRS but she was also in law enforcement and did not want to jeopardize her job by missing a payment. So I asked her some questions to help me better understand her financial situation. 

When I speak to a potential client and I find that they are currently in the best situation possible with the IRS, I immediately let them know that. I don’t want to waste my time or theirs if I know nothing more can be done. But if I know for a fact that I can help them and save them money, I tell them so–as long as everything that the IRS has matches up with what they have told me because many times it does not. 

Then there is the taxpayer like Mrs. B. When somebody has already made an agreement with the IRS and is currently paying them, it makes it a lot more difficult to change course and get the person into a better situation. When she told me her income and informed me that she was also supporting her daughter, I felt that it was worth the time and effort to do a Tax Investigation for her. A taxpayer always has the right to pay their allowable monthly expenses before paying the IRS, so there was a chance that we could get her monthly payments reduced. And even if the payments were affordable for her, a $400 a month payment on a $16,000 tax debt was extremely high for that debt amount.

 

The Results of Our Tax Investigation

She was able to sign and send back the 8821 IRS tax form that we need to access her information from the IRS. Within 10 days we had all the information we needed directly from the IRS. 

It turns out that she made more money than she had told us, and she also had a much bigger problem than the existing tax debt. In fear of falling behind on the payment arrangement she had set up with the IRS, she had gone completely exempt from withholdings at work. So no taxes were being taken out of her paycheck. On top of that, she hadn’t filed taxes in the last two years because she knew that she would owe the IRS more money and there was no way she could afford a larger payment. She did have a daughter but even if she had claimed her daughter as a dependent for those two years, she would still owe the IRS a significant amount more.

It was very surprising that the IRS had not yet defaulted her out of her existing plan because of the unfiled years. When the IRS offers you a payment arrangement and you accept, you agree not to accrue any new tax debt and to file taxes on time every year. Mrs. B had not complied with either of those two requirements. 

At this point, we had to discuss her expenses. As I just mentioned, she did make more money than she had originally told me. From our research, we found that she lived in a part of Wisconsin that had a high cost of living. This means that the allowable expenses in her area are much higher than in some other areas. She also had her daughter as a dependent and thus could claim her expenses as well. And she had medical bills and prescription medications to purchase both for herself and her daughter, so those expenses could be used as well. 

With her high income, we really had to dig deep and put together a strong case that demonstrated her inability to pay. Anybody else that had her income, lived in a much less expensive area of the United States, and didn’t have a dependent or medical bills would likely end up with a very high monthly payment to the IRS once the tax debt was assessed for the two unfiled years. 

She was so happy once we laid out the strategy and then worked within her budget to make our tax relief work affordable for her. She understood that this would not be an overnight fix and that she would have to put in some work on her end to help us achieve the desired results.

 

Filing Her Unfiled Taxes

The first thing that had to be taken care of was the two unfiled years. Our Enrolled Agents filed these taxes using everything possible within tax law to keep the tax debt as low as possible. 

We also made sure that she immediately contacted her human resource department and corrected the amount withheld for taxes on her paycheck so that she would not owe the IRS more once we were finished. 

Once the two tax returns were submitted, we had to wait a few months for the IRS to assess the new tax debt balances. During this time, we left representation on file so that we could monitor collections and protect her income. The last thing we wanted was for the IRS to move forward with any involuntary collections that could make her financial situation worse. She ended up owing approximately $14,000 for those two years, primarily because she had gone tax exempt. 

Once we received the response from the IRS, we now had to begin presenting her financial situation and enforcing her rights on the repayment of the tax debt.

This part of the process isn’t simple. We must prove and reprove the taxpayer’s financial situation. The taxpayer also has to play a big part in this by providing the necessary documented proof to our agents so they can convey the situation correctly to the IRS. 

 

$400 Monthly Payments Reduced to $25 and $27,000 Saved

After several months of back and forth with the IRS, we were able to come to an amazing resolution for Mrs. B: the IRS agreed to accept payments of $25 a month for her entire tax debt. She would pay that amount for 10 years and if she did everything right moving forward, meaning filed her taxes on time and not accrued any new tax debt, she would be completely out of tax debt and would have paid back only $3,000 on a $30,000 tax debt–a small fraction of what she would’ve paid without our help. She would end up saving $27,000.

Mrs. B was beyond thankful. She had come to us stuck in a payment arrangement that she couldn’t afford while accumulating more tax debt every year. She said she felt like she was in quicksand and now somebody had handed her a stick and pulled her out. In a way, she was right–if she had kept going as she had been, she would have never seen an end to owing the IRS. 

With cases like this, it isn’t rocket science how we achieve such great results for clients. It’s about knowing tax law and also knowing what rights a client has and can be enforced to get them into a payment situation which they can afford. By doing that, we can save a client thousands of dollars on the tax debt alone not to mention the penalties, fees, and interest that accumulate when a person attempts to deal with the IRS on their own.

If you have tried dealing with the IRS unsuccessfully or are not sure how to deal with your tax problems, contact us for a free tax relief consultation. We’ll listen, share some information and advice, and let you know how we can help you, with absolutely no obligation on your part.

 

Case Study: From Owing the IRS $36,000 to Only $3,000

a father and his teenage daughter

There are many different types of situations that force people to come out of “hiding” from their tax issues and make them face the IRS to get themselves back on track. 

Many times it is the result of some sort of involuntary collection action by the IRS or at least the threat of such. 

Other times people have changes in life where they need to get their past in order, especially with the IRS. This can be when they are about to get married and a future spouse demands they rectify any problems with the IRS prior to tying the knot. Or sometimes people are at the point in life where they want to buy a home but they are being held back by their situation with the IRS.

 

A Father’s Tax Situation Affects His Entire Family

In the particular case I’m going to share with you, Mr. H’s daughter was accepted to college and needed proof of her father’s tax filings in order to be accepted for financial aid to pay for her schooling. Mr. H had not filed in many years but did not want to let his daughter down. He was also very embarrassed that his past had caught up to him in this way.

Mr. H reached out to us and needed to get his tax issues resolved quickly, at least regarding the filings that the school was looking for so that his daughter could obtain financial aid. He knew he had to get those years filed in order to help his daughter, but he also knew he could not leave the rest of his tax situation as it was. 

He understood that with a situation like his there would be no overnight fix. He was very honest and explained that he had been speaking to a few different companies and they all wanted large lump sums upfront without even really knowing anything about his situation or what could be done. Personally, I have no clue what these other companies could have possibly based their cost on considering they knew very little about his tax situation. 

All Mr. H knew was that he had not filed taxes for approximately 6-10 years but was not exactly sure. He had none of his W-2’s or any other income information. He was also very honest and told us that he had gone tax-exempt during a good portion of that time, so he knew he would be owing a good amount of money to the IRS. He also mentioned that he had moved around quite a bit and it was very unlikely that the IRS had his correct address.

 

Step 1: The Tax Investigation

I explained our process to him and why it was 100% necessary to start with a Tax Investigation. I explained to him that in most cases when somebody fails to file for such a length of time as he did, the IRS may have done what they call “substitute returns”. This is where the IRS will file those unfiled tax returns for you. Since he had gone tax-exempt as well, there was a very good chance that the IRS filed substitute returns for at least some of the years. 

I explained to him that if the IRS has filed those years, they will not be giving him any of the credits or tax deductions that he may have qualified for. But there are also provisions set up where we may not have to file returns for some of the older years. By not having to file those years, not only would it save him on the cost of filing but it would also eliminate the chance of him owing any tax debt from those years. And if that period included some of the years in which he went exempt, there could be substantial savings right from the start. The only way to figure all of this out for him was by having our agents put representation on file and get his tax records directly from the IRS.

He was excited about how we do things and loved all of our great reviews online. He immediately hired us for the Tax Investigation. He sent back his signed representation forms quickly, so we were able to contact the IRS and request his transcripts.

 

We Saved Him $15,000 Right Off the Bat

We were back on the phone with him within 10 days ready to go over everything we discovered. He was correct that he had not filed in quite some time. There were 10 years of unfiled tax returns. He had gotten lucky, though, and the IRS had never filed any of those years. The good news was that he would only be required to file 6 of the 10 years. If he had been required to file the other 4 years, he would have accrued an additional $15,000 of tax debt. So just by doing this preliminary work and knowing tax law, the savings had already begun. 

Unfortunately, I speak to many clients that have tried to figure these things out on their own first and they typically use tax software to file all of the missing returns. They then contact us with massive tax debt and I inform them that they probably would not have had to file all of those years. But once they are filed and the debt is assessed by the IRS, there is no backtracking. The debt is owed. 

It is especially important in these cases to figure out a full game plan and strategy first so that all tax law provisions can be used throughout the entire process to save a client as much money as possible.

The first step in his case would be filing all those years. We filed the years required for his daughter’s financial aid as quickly as possible. This was particularly important to him since his daughter meant everything to him. Once all the years were filed, we now had to wait for the IRS to assess the filings. 

For the years that he was required to file, he was correct about the fact that he had gone tax-exempt for most of that time. This meant that he was going to owe the IRS a substantial amount of money. The IRS took a few months to respond and during that time they kept everything on hold until they had assessed all filings.

 

The IRS Wanted $36,000

Mr. H ended up owing $36,000 which included the assessed tax debt plus penalties, fees, and interest. This was expected and we were very ready to deal with this debt for him to see how much we could get it reduced. 

Mr. H was not a low-income earner and thus a person that would be a sure fit for one of the hardship programs the IRS offers. But his wife was not working and his daughter was still living in his household as a dependent. 

The backbone of all the hardship programs that are available is one’s ability to pay the debt back. A taxpayer has the right to pay their allowable monthly expenses and the expenses of those that are dependent on him or her prior to paying the IRS. This is where our agents get involved. Our Enrolled Agents can represent a taxpayer’s rights on the repayment of tax debt.

 

From Owing $36,000 to Only $3,000

Over months of going back and forth with the IRS, proving and reproving exactly where Mr. H was financially, our agents were able to come to terms with the IRS. He would be responsible to pay back only $3,000 through monthly payments over a long period of time and the remainder of the tax debt would eventually be forgiven.

Mr. H and his family were excited that they were finally able to stop looking over their shoulders, so to speak, wondering when the IRS would come after them. He had come to us as an embarrassed man in jeopardy of preventing his daughter from getting the funding she needed to further her education. Now, not only was he completely compliant in terms of his filing requirements but he was also in a payment plan that he could afford. 

If Mr. H remained compliant with the IRS moving forward, he would save close to $33,000 not to mention the $15,000 we saved him for knowing which years did not need to be filed. Sad to say, many other tax preparation companies would have just filed those years for him simply in order to charge him more money or because they don’t understand the tax law. He also told us that because we were willing to investigate and clearly assess his situation first, we were much more affordable than the other tax relief companies he had originally spoken to, saving him even more money.

This was not the end of the case for us, though. We had to do everything possible to make sure that he was set up for success and did not lose the amazing benefits we worked so hard to obtain for him. In his case, he needed to make sure that the correct amount was withheld from his paycheck for taxes so he would never again owe the IRS. If he did that and was sure to file his taxes on time every year, he would be out of debt with the IRS in no time.

 

Case Study: A $180,000 Tax Debt Reduced to $9,600

elderly retired man

In speaking with potential clients, I have always held a firm line when it comes to promising results. Many people want promises and guarantees of a substantial reduction of their tax debt right away when they contact us. In essence, they just want to be sold on false promises. 

But if you as a tax expert have any ethics or integrity, you realize that making any guarantees immediately is an impossible thing to do. Many tax relief companies out there have no problem putting a salesperson on the phone to make huge false promises. Without knowing the facts of a case, doing that is simply unfair to the potential client. This would be the same as a doctor diagnosing somebody without examining them or a mechanic diagnosing issues without opening the vehicle’s hood.

I have had too many conversations with clients where they tell me one thing but when I get their file from the IRS, it provides a whole different picture. Sometimes, people outright lie about their situation but that is not always the case. Sometimes, people simply do not know everything that is going on and how serious their situation is. 

Additionally, when a person does not understand how IRS programs work they may exaggerate their situation. Or sometimes an individual is just so bad at managing their money that their view of their financial situation is entirely different than the IRS’. 

These are just some of the many reasons is why it is so important for us to put in some heavy lifting in the beginning and figure out what is truly going on with a person’s tax debt and financial situation. Then I can predict a resolution based on an educated approach. I also stress to every potential client that this is a long process and the facts will eventually be revealed, so from the start, they need to be 100% honest with me and everyone at my firm.

 

Mr. E Contacts Us For Some Help

One particular case comes to mind that always reminds me to stress to potential clients the importance of being 100% honest and forthright with us. This client was as nice as it gets and I do not want to imply that he ever intentionally lied to me. 

Owing to the IRS a little bit of money can be scary enough, but this elderly man came in thinking that he owed close to $100,000. At the time, he had a good income, but he was 75 years old and needed to retire. He felt he owed the IRS more at one point but thought a lot of the older tax debt had been included in a bankruptcy judgment. He had tried many different payment arrangements directly with the IRS but without having somebody knowledgeable of his rights to negotiate with the IRS on his behalf, the payments were never affordable for him.

 

A Tax Investigation: Getting the Facts First

Just like every case that we take on, we started the process with a Tax Investigation. Within a few days, the IRS sent us his information. The information we received from the IRS was much different than what Mr. E had shared with us during his original consultation and is a prime example of why these investigations are so necessary. 

The biggest difference was the debt amount. He owed the IRS $180,000, not $100,000 as he believed, from as far back as 2002. The IRS records did show a record of his bankruptcy but none of the IRS debt was included in it. The bankruptcy did affect the tax debt, though–it put a hold on his expiration dates, giving the IRS longer to collect on the debt. The transcripts also showed that in 2016 the client had filed tax returns for many older years and that the IRS had done substitute returns on a few of those years. This timeline of events is especially important to the tax resolution because the processing of the filings, NOT the tax year, is what sets the final expiration date of tax debts.

Once we had this information from the IRS and did our initial discovery, we were back on the phone with this client ready to go over everything. We thoroughly educated him on his situation with the IRS and then began getting more in-depth information from him about his financial situation. At that time, he was employed in the oil drilling industry and his 1099’s showed a good income. Most of his income though went to cover his expenses. 

He told us that he had a little money in savings and that he owned nothing except an old truck.  After a thorough conversation, based on what he was telling us it was determined that he could qualify for a long-term settlement on the debt but because of his high income, he would still be required to pay back a large portion of that debt. 

A client in this situation has the right to pay his cost-of-living expenses and the cost of doing business expenses prior to paying the IRS. In his case, he still had a large net disposable income, or in other words, a lot of money left over after expenses.

Mr. E was 75 at this time and had been needing to retire for a few years but had continued to work because he had this large tax debt hanging over his head. Now that he knew his rights as a taxpayer, we started discussing the resolution that could be obtained based on the income he would have if he retired. As long as everything matched up with what he was telling us, he was a sure fit for one of the many hardship programs available with the IRS. He decided that he would retire and we would pursue one of these hardship programs for him. 

With the lack of savings and assets, we began the process for an Offer in Compromise. This is a program where the IRS will accept a lump sum that is less than the amount owed and completely forgive the remainder of the debt.

 

The Situation Was Much Worse Than Expected

It is so important that we as a tax relief firm know everything about a client’s situation and that the client is completely honest and forthright with us. I do not think that Mr. E was trying to be outright dishonest with us but more facts did come out during the process. 

Many times clients think they can hide things from us or the IRS in order to achieve a better result. They must remember that this is the IRS we are dealing with. About six months into the process, the IRS found a property that was owned outright by Mr. E. This changed everything in terms of what he would qualify for and what he would not. A major disqualifier for the Offer in Compromise is the ownership of property. 

This made things extremely difficult. Not only did our agents have to completely change course on the determined resolution but they also had done a months’ worth of work towards a program that Mr. E did not qualify for. This work of course had to be paid for and we had to start from the beginning on a new resolution for him. Unfortunately, the cost of Mr. E’s case almost doubled because he failed to disclose this detail to us. This was not to penalize him but it was to simply pay for the work that had already been done by our team and the work that now needed to be done to get him into the resolution that he qualified for.  

The IRS program we then began focusing on would provide nearly the same type of savings to the client but just would not be the lump sum that he had hoped for. If he had just been forthright from the beginning, we would not only have obtained a resolution for him much sooner but he would have saved himself a lot of money.

Again, I want to stress that Mr. E was not a bad or dishonest person. These situations can be very scary and when people are backed into a corner with the IRS, they sometimes make bad decisions. Luckily in this situation, our agents were able to change course very quickly and kept a good working relationship with the IRS, so they did not move forward with any collection actions like garnishments or levies

 

A $180,000 Tax Debt Becomes $9,600

Even though he owned his property outright, our agents were still able to show his inability to pay the full tax debt. They were able to prove, based on his current income, that all he could afford to pay was $100 a month. With this resolution, Mr. E would ultimately be responsible to pay back only $9600 on his $180,000 tax debt. He would be completely out of debt with the IRS in less than ten years if he remained compliant moving forward. 

From here we further educated him on tax planning based on his new financial situation. We made sure he had the correct withholdings on his retirement income so that he would not owe the IRS again or get defaulted out of his plan. After a case like this and still being able to achieve such great results, the last thing we would want to see is our client lose this great tax debt resolution.

Mr. E was very thankful that we stuck with him throughout the process. He told us that he thought he was done learning at his age but that he definitely learned a lot from our process. He acknowledged he should have been more honest from the beginning and wishes he had contacted us years sooner. 

He was now finally in a place where he could retire, which he should have done years ago, and could afford to pay the IRS back but on his terms.

 

Case Study: After a Long Uphill Battle, We Saved Mr. B $28k

example of a tax relief client

Throughout my many years of working with clients that have profoundly serious situations with the IRS, I have met many different types of people.

For example, I have been contacted by people that owe small balances and call immediately after they receive their first letter from the IRS. They insist on hiring representation to make sure that they are in the best program possible with the IRS and want some tax education so they never find themselves in that situation again. I would describe these people as being very proactive. As much as they are already in a tough situation owing money to the IRS, they hired us at a point that we know we can keep them protected and work at their pace and our pace to fix the situation.

Then you have the person that has let their situation with the IRS get so bad that their back is against the wall and time is not on their side. One client that comes to mind when I think of the person that really came to us with their back against the wall is a client that I will call Mr. B for his privacy.

This was a case that many times during representation we were fighting the IRS AND our client to provide us with the information we needed to get him into the best situation possible with the IRS. This was also a case where time was not on our side.

 

Ignoring the IRS & the Notice of Intent

This client had come to us owing about $13,000 to the IRS from the tax years 2007-2013. While that is not a huge amount to owe relatively speaking, Mr. B also had not filed his taxes for a few years and assumed he would owe the IRS more. He admitted that he had been just trying to ignore the situation in hopes that it would go away. Unfortunately, with the IRS, if you do nothing, the situation only gets worse.

He contacted us at this point because he had received the dreaded Notice of Intent to Levy from the IRS. The IRS was making him aware that unless he paid the balance in full within 30 days, they would begin garnishing his income to recover the debt. 

He originally contacted us right after he received that letter and we had a great conversation about how we can help him if he allows us the time to get representation on file and get him protected. He wanted to take his time and investigate us to make sure he was hiring the right company. I absolutely encouraged him to do this. We have worked extremely hard to maintain the amazing reputation that we have and always want our clients to feel confident about who they are hiring. I did let him know that the Notice of Intent to Levy was a serious letter and that he needed to get back to me as soon as possible so that we can get him into a protected status with the IRS.

The next time I heard from Mr. B was 30 days later. He was now in a panic hoping that it was not too late to do something. I explained to him it would have been preferable to have more time to work on his case but we would be able to rush the file and get him protected.

 

We Start Helping Mr. B

We began his process by first doing a Tax Investigation to get all the facts from the IRS first. This is where our agents put representation on file with the IRS and then the IRS provides us with tax transcripts of everything that needs to be dealt with. We were able to complete this within a few days which is lightning fast when dealing with the IRS.

The IRS made us aware that the situation was a lot more serious than the client thought. To start with, based on the years in which he had filed he owed almost $20,000. His debt came from the tax years of 2007-2013. After 2013, he had stopped filing. 

One big thing that he did not make me aware of is throughout recent years he had taken large early withdrawals from his 401k without the proper withholdings. Once these years were filed, his IRS tax debt would significantly increase. It’s important to note that in order to qualify for any of the programs available from the IRS, you absolutely must be filed up-to-date with your tax returns. So that would be the first step in Mr. B’s case.

To file these overdue tax returns, Mr. B was assigned a case manager to help facilitate the process. The case manager explained all of the information we need directly from Mr. B so that the filings could be completed. We sent him all of the information via email. This is where the uphill battle began. 

A lot of clients, once they know they are protected, go back to their old ways. Luckily for him, our case managers take these cases very seriously and after about a month of chasing him, he finally started sending over the information we needed. Our agents were able to file all the required years and they used everything within the tax law to keep the tax debts as low as possible. But he ended up owing another $28,000 from the lack of withholdings. Between the previously accrued tax debt already owed and this new amount, he collectively owed $48,000 to the IRS.

At this point, there is nothing more that can be done but wait for the IRS to assess these tax years. This typically takes a few months. During this time, our agents leave representation on file and monitor collections so that we immediately know once these debts are assessed. Once these debts are assessed, we begin the process of enforcing the client’s right on the repayment of the tax debt.

 

Our Persistence Pays Off

Just like the filing process, our case managers and Enrolled Agents do most of the work but the client must be involved as well. Mr. B’s case manager began trying to reach out to him but got no response whatsoever. Because of the persistence of the case manager and a month of emails, texts, and phone calls, Mr. B finally responded and began providing the information needed to get him into the best program available to take care of his tax debt.

The main qualifier for all of these IRS programs is a client’s ability to pay the debt back. Mr. B had gone through some tough times in years past but at this point he was doing better financially but he still could not pay that debt back in full. The next part of the process was proving this. 

In some cases, this part of the process can take a few months but sometimes the IRS will very closely scrutinize the taxpayer’s financials and ask for resubmission of the proof month after month after month. This was one of those cases. 

When the IRS decides to do this AND you have a client that is not quick to respond, this can become a very difficult task. Fortunately, our case managers are very serious about helping our clients and in many cases want to get great results more than it seems the client does. With the persistence of our case managers, we were able to jump through the hoops the IRS provided and come to a final resolution.

 

A Low Payment Plan & Tax Debt Reduced by $28,000

The final determination, in this case, ended up saving Mr. B almost $28,000. This was largely based on the fact that he had gone through very tough times financially and he also had no savings set aside to be able to pay the lump sum. The great news was that we were able to get him into a payment plan and he would be able to pay his tax debt through payments of approximately $200 a month. 

After a long uphill battle, Mr. B was ecstatic not only to finally have the IRS off his back but that he was also going to be able to afford the payments without falling behind on any of his other monthly bills.

But our job was not done yet. From here we explained to him that moving forward he must do the right thing with the IRS. To keep these benefits including his payment plan, we explained to him that he must file his taxes on time every year and cannot accrue any further tax debt. If he does these things, he will remain in this program until the debt is gone. 

A few days later, Mr. B called us. He wanted to make sure that everyone here knew how great his case manager was. He admitted that without the persistence of the case manager, he knows that he would never be in the good spot he is in now with the IRS. I explained to him that we know this is a big part of our job. A lot of people that get themselves into situations like this need to turn the reins over to tax professionals to make sure things are done and done right.

If you can relate to Mr. B and have either accrued a tax debt with the IRS, have unfiled taxes, or are ignoring your tax situation in hopes that it will go away (it won’t), contact us for a free, no-obligation tax relief consultation and let’s start eliminating your tax problems today.

 

Case Study: IRS Payments Completely Eliminated

an older female tax relief client

Throughout my years in this industry, it is always tough speaking to people in awful situations with the IRS. When someone’s financial situation is so tight, I always try to steer them to try to contact the IRS directly first in hopes that the IRS would see how bad their situation really is and try to help them. The programs that companies of our nature utilize are programs that all people have the right to. 

I can understand the cases where people are making good money but have large tax debts and of course, the IRS being a debt collector will try to get as much money as quickly as possible. But when a client clearly has no ability to pay the tax debt back and the IRS still forces them to pay hefty amounts every month, it bothers me. This has happened many times over the years but there was one client that will always stick out when I think of these situations. For her privacy, we will call her Ms. B.

 

Small Tax Debts That Kept Getting Bigger

Ms. B reached out to us a few years ago and explained her situation to me. She owed about $14,000 to the IRS. Compared to a lot of other cases that I have handled, this is not a huge amount of money to owe the IRS. I may have even told her that she might want to try to contact them directly and they should be able to work with her. She explained to me that she had tried that and then told me her experience dealing with them. 

Beginning in 2006 when she accrued a tax debt, she worked with the IRS in setting up payment arrangements to try to pay her debt. Now though, she was getting older and was not able to work as much as she used to, so her income was decreasing each year. 

Every time she spoke to the IRS, the only remedy they offered was payment arrangements that consisted of high payments she felt she could not afford. She said that they were very intimidating when she spoke to them and she was afraid to fall behind so she would accept their payment terms. She did without many times in order to make those payments but in doing so failed to set aside money for taxes for the present tax year because she simply could not afford to do both. She explained to me how the tax debt balance was barely going down but year after year she ended up owing the IRS more.

 

Forced to Give the IRS 30% of Her Social Security

In 2010 she was forced to retire for health reasons. At this point, all she had was a small amount in savings and a social security income of $1200 a month. She described her situation to me as being in quicksand with the IRS. Things had gotten so bad that she defaulted on her payment and was barely able to pay her living expenses with the money she had leftover. 

She was not a bad person trying to avoid paying the IRS back; she just truly could not afford to do so. She tried to contact the IRS many times for help but they always only wanted a payment. At this point, she figured the only thing she could do was ignore all of it because the stress had been eating her alive.

She was able to stay under the radar for a few years but then one day she received a letter from the IRS stating that they were going to garnish her social security if the tax debt was not paid. She contacted the IRS again and it was the same story–all they wanted was a payment that she could not afford. Knowing that she would not be able to survive if she lost her social security each month, she agreed to a $350 a month payment. This payment very quickly ate up the remainder of her savings and so she was forced to pay this amount out of the $1200 a month she received from social security, leaving her with only $850 a month to survive. Knowing she could no longer go on like this, she reached out to us at Innovative Tax Relief.

 

Ms. B Reaches Out to Us for Help

All I could think about when hearing her explain her situation is that she should not have to hire representation. She was so obviously qualified for one of the many hardship programs the IRS offers that I was shocked that the IRS would not just put her into one. I also wished we had spoken many years ago because if everything matched up with what she was telling me, we could have saved her years of anguish and struggling to make that high payment.

I explained to her the first thing we needed to do was get the facts from the IRS. We started off the case by doing a Tax Investigation for her. When we received her transcripts from the IRS, everything matched up with what she had told us. We could see these were all originally small tax debts that had gotten larger because of penalties and fees. We could also see her best attempts to make the payments over the years. 

Through her wage and income reports, we could also see that her income had reduced over time to the point that it was amazing she was even able to make a payment! Now that I had the facts, I was able to put her at ease and explain her rights in this type of case. The biggest right she had was the right to pay her monthly expenses prior to paying the IRS.

This would not be an overnight fix but I assured her that we could get her into a program where she would not be required to pay the IRS back because of what they call a hardship. She had stopped making her monthly payment to the IRS, so we kept our representation on file so that we could monitor collections, making sure that the IRS did not proceed with any type of the threatened involuntary actions. From here we began the process of presenting her financial situation to the IRS. 

 

IRS Payments Completely Eliminated

Through this process, we were able to prove that after allowable expenses there was simply nothing left over to afford any sort of payment to the IRS. As a result, she was officially put into a “currently non-collectible status” which is a hardship program that protects a person from the IRS’ involuntary collection actions when they have proven that they cannot afford to pay the tax debt back.

After years of anguish, Ms. B was ecstatic that she could finally stop worrying about the IRS on a daily basis and lose sleep. She was even happier when I explained to her how the IRS only has 10 years to collect on a tax debt. In her case, this is probably the reason why the IRS had been demanding such high payments–they were trying to get as much money as possible from her while they had the right to collect on the debt. 

I explained to her how in just a few more years, based on the statute of limitations, the tax debts would start to be forgiven year after year until they were all gone. Unless she had a big jump in income or won the lottery, she would not have to make any sort of payment to the IRS ever again and it would soon all be forgiven and wiped away. I gave her all the information and dates, so she finally had an end date to this situation that had plagued her for so long.

The very next day Ms. B contacted me just to thank me again and to let me know she had the best night of sleep she had in years since her troubles with the IRS began. I still hear from her every so often with more thanks as her final IRS debts are getting close to expiring. 

I will never try to tell somebody that they must get representation such as from us. In fact, I advise so many potential clients in situations like hers to try to deal with the IRS on their own first. Unfortunately, there are too many stories like Ms. B’s. 

 

We Protect Your Rights With the IRS

It is so important for people to know their rights when it comes to owing money to the IRS. If the IRS is not willing to work with you and you are falling behind on other bills and debts, please reach out to a true tax professional. We will do everything possible to make our process affordable for you and do everything legally possible to get you into an affordable situation with the IRS where you will most likely save a lot of money not to mention eliminate the stress from your life.

If you have been losing sleep worrying about your tax problems, we can help. Contact us for a free tax relief consultation today.

 

Case Study: $130,000 Saved and Levied Money Returned

a middle aged male business owner

Over my years in this industry, I have always hated the conversations with taxpayers that I know I could have helped but they have either gone too far on their own with the IRS or the IRS has already taken the full amount of the debt owed through a garnishment or a levy. It is difficult to get money back from the IRS once they have it. 

When it comes to hiring IRS representation, it is greatly beneficial to be proactive instead of being reactive. I recall one case where we were able to get some of the money taken back for the client

 

The IRS Takes $165,000 From Mr. H’s Business Account

There is a very slim chance of getting funds back from the IRS once it has been garnished or levied. One way in which this might be done is to prove that the money is needed to either afford monthly bills on a personal level or in order to make payroll or cover expenses on a business level. In this case, $165,000 was levied from the operating account of my client’s business. To respect his privacy, we will call him Mr. H. 

Mr. H was quite frantic when he called us since this large amount of money was needed to cover payroll and other expenses. He was also afraid to deposit any other checks into his accounts fearing that the IRS would take that money as well.

He admitted he had tried to deal directly with the IRS in the past but it was way too much to deal with, so he had just been ignoring the letters from them. He admitted that he knows this was the wrong way to handle it but felt he had no remedy or solution to his tax problems. He said at this point he did not even know how much he owed but he knew it was a lot. He assumed that his bookkeeper had been keeping up with the tax filings for the business but unfortunately that was not the case. 

 

We Get Involved to Help

I explained to him in a case like this we want to get all of his information directly from the IRS first. Our Enrolled Agents were able to put a rush on his file which we can do since the IRS had begun an involuntary action of collections.

Within a few days, we received his personal and business IRS transcripts. His was a very serious case. He owed almost $500,000 to the IRS for payroll taxes from the business. He also had been assigned an IRS revenue officer who seemed to be out for blood since he had willfully been ignoring her for quite some time. 

Since payroll taxes are withheld from employees, and in this case, he never forwarded the tax money to the IRS, many IRS officers view this as outright stealing. To make matters worse, his bookkeeper had not kept up-to-date with filing taxes for his business. There were many years of quarterly 941 payroll taxes that needed to be filed.

Fortunately, after we got involved, the revenue officer saw that the client was finally getting serious about remedying the situation. The revenue officer made us aware that she had plans of continuing attempts to levy more funds but was willing to give us an extended hold on collections so that we could work together on finding a solution. Our client was thus able to continue depositing checks into his business accounts to keep the business functioning.

 

Negotiating With the IRS to Get Some Money BACK

We began negotiations with the IRS revenue officer in attempts to try to get some of the levied funds back. We were able to show that $50,000 of the levied money was necessary to cover payroll and immediate expenses, so the officer agreed to release those funds back to the client. 

This, mind you, did not involve a simple phone call; all of these expenses had to be proven through documentation and submitted to the revenue officer. We made sure the remaining $115,000 was applied to the tax debt correctly. 

Typically, the IRS will not negotiate on anything unless the taxpayer is compliant with filings. In this case, our client had the missing tax filings but had not submitted them yet, so the revenue officer was willing to negotiate with us because of our enrolled agent’s involvement in the case along with basically a good faith promise that we were going to submit the filings for him.

Since our agents had given their commitment both to the client and the IRS, we had to begin work immediately. We had to file complete business returns for the company for the past 2 years along with the 941 payroll tax filings. Our case managers worked directly with his so-called bookkeeper to piece the last few years back together. 

This is probably the only time when it is beneficial to have revenue officer involvement. She processed the older tax filings very quickly. In a normal situation, it can take months for the IRS to process older year filings. Once she finished assessing the filings, she notified our agents verbally and sent letters to us and the client. Unfortunately with these new filings, an additional balance was added to the debt, approximately another $66,000.

Now that our client was compliant, we could begin the process of negotiating the actual tax debt itself. The debt was now close to $565,000.

 

Getting the Business Tax Debt Reduced

The first step in negotiations was working with the revenue officer to prove the viability of the business. This was a pivotal part of the process because the client absolutely wanted to keep the business open and wanted to do the right thing moving forward. Through the negotiation process, it was determined that the business could stay open and was able to pay back some of the tax debt. 

The IRS very rarely allows settlement at the business level but they do the personal level. So, in this case, the goal was to get as much as possible of the tax debt transferred or “trust funded” as they call it to our client’s personal tax debt. 

It was deemed that the business could sustain payment of $1100 a month. But there is a statute of limitations on a tax debt. In this case, the final tax debt would expire within five years. So, the Revenue Officer and the IRS were essentially holding the business responsible to pay back only approximately $66,000 of the tax debt. 

The remainder of the debt would then be divided up among the owners of the company and they would become personally responsible. Our client had 2 other partners in the business, so the remaining debt was divided evenly among them and they were now personably liable for approximately $166,000 each. 

 

Getting His Personal Tax Debt Reduced

When it comes to owing money personally to the IRS, a taxpayer has a lot more rights than a business does. So when a client has a substantial personal tax debt, we do what we can to financially protect our client and make sure he can pay his monthly bills and keep a roof over his head. 

The company was not making as much as it used to and his personal income from the business had been drastically reduced. Using this tight financial situation, we were able to negotiate what is called a partial payment arrangement. A major right that a taxpayer has with the IRS is to be able to afford their allowable monthly expenses. So we were able to get Mr. H into a payment much lower than the IRS would typically require. 

With this new payment arrangement, our client was responsible to only make a $600 a month payment. Just like with the business, the same statute of limitations applied, so our client would end up paying back only around $36,000 of the $166,000 dollar balance. In this case, not only was the business allowed to stay open but by going through the process and enforcing all of our client’s rights throughout the process, we were able to save him around $130,000 not to mention all the additional penalties and interest that the IRS typically accrues during the repayment of tax debt.

 

Helping Mr. H Stay on Track

Despite those great results, our job was not done just yet. To keep the benefits and make sure that our client gets these savings, we had one more thing to do to help our client: we had to do some future tax planning with him. 

During this repayment period with the IRS, our client must make sure to stay compliant with his filings and he cannot accrue a further tax debt. We worked with the client and his bookkeeper to set up estimates with the IRS for his quarterly taxes due to prevent him from having a new tax bill. 

Mr. H was so happy with our services and wanted to make sure that everything was done correctly moving forward, so he hired us to file all his personal and business taxes from this point on. If he keeps up his end of the bargain with the IRS, he will save tens of thousands of dollars and he never owes the IRS again.

If you have unfiled taxes or tax debt issues that you are unsure what to do about or where to even begin, we can help. Contact us right now and request a free tax relief consultation with one of our experienced tax experts.

 

What Is the Innocent Spouse Relief Program?

divorced woman stressed over her ex's tax debt

Going through a divorce or losing a spouse is a horrible experience to deal with. The emotional toll on any person is more than enough to deal with let alone the task of dealing with assets and liabilities. This situation becomes much worse if one of those liabilities is IRS tax debt

Assets and other liabilities can be dealt with and dictated through a state divorce decree. IRS tax debt is a federal debt and federal law supersedes state law. So, in a divorce decree, you can include IRS tax debt, but this does not stop the IRS from coming after you. Having the debt in a decree will allow you to go after the spouse through the state courts though if the IRS collects against you. 

The IRS offers a program that can possibly provide a spouse some sort of relief from tax debt when it is coming from a spouse’s or ex’s income. This program is called Innocent Spouse Relief.

 

What Is the Innocent Spouse Relief Program?

Innocent Spouse Relief is a program where you can be relieved of responsibility for paying tax, interest, and penalties if your spouse or former spouse improperly reported items or omitted items on your tax return. Generally, the tax, interest, and penalties that qualify can only be collected from your spouse or former spouse. 

However, you are still jointly responsible for any tax, interest, or penalties that do not qualify for relief. Innocent spouse relief only applies to individual income or self-employment taxes. These programs apply to tax debts from a spouse not reporting or incorrectly reporting income or improperly claimed tax deductions or credits.

 

How Do I Qualify For Innocent Spouse Relief?

To qualify for this program, you would need to be able to prove that you did not know or had no reason to know about the liability. This may be provable in situations of unreported income, or an incorrect tax deduction, credit, or basis claimed by your spouse. You would seek Innocent Spouse relief from the IRS when you become aware of the tax liability and believe that the tax debt is not yours. In most cases, the taxpayers who are approved for this program are no longer married.

 

The Injured Spouse Allocation Program

There is another program with a similar name that brings a lot of confusion as to which type of situation leads to approval. A lot of people confuse Innocent Spouse with Injured Spouse. These are two separate programs. 

The Injured Spouse Allocation program is a program available for spouses in jeopardy of losing a refund towards a spouse’s tax debt. If you are entitled to Injured Spouse relief, you may be able to get your share of the refund released to you.  

Despite their names, these programs have nothing to do with situations when a person is a victim of spousal abuse.

 

Qualifications for Innocent Spouse Relief

The IRS requires that a taxpayer must meet the following conditions to qualify for Innocent Spouse Relief:

  • You filed a joint return which has an understatement of tax due to an erroneous item, defined below, of your spouse or former spouse.
  • You establish that the time you signed the joint return you did not know and had no reason to know, that there was an understatement of tax. See actual knowledge or reason below.
  • Considering all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax. See indications of unfairness for Innocent Spouse Relief below.
  • You and your spouse have not transferred the property to each other as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

If you knew about the erroneous item that belongs to your spouse or former spouse, the Innocent Spouse program does not apply to any part of the understatement of tax due to that item. If you had reason to know about the erroneous item, then you would also not qualify. When determining this the IRS will take into consideration a few different factors.

  • The nature of the erroneous item and the amount of the erroneous item relative to other items
  • The financial situation of you and your spouse
  • Your educational background
  • The extent of your participation in the activity that resulted in the error.
  • Whether you failed to ask, at or before the time the return was signed about items on the return or omitted from the return that a reasonable person would question.
  • Whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns.

 

What Is Not Covered Through the Innocent Spouse Relief Program?

Unfortunately, the Innocent Spouse Program does not cover every type of tax debt that may result from errors on a tax return. There are many types of taxes that do not qualify for the Innocent Spouse Program which include any tax debts that come from individual shared responsibility payments, business taxes, trust fund recovery penalties for employment taxes, household employment taxes, and any other taxes deemed outside of your relief.

 

Other IRS Tax Relief Programs Available

If you do not meet these parameters there are other programs available for situations similar. One of these programs does not relieve of the tax debt but at least you would only be responsible to pay your own share. This program is called Separation of Liability Relief. To qualify for this program, you must be divorced, legally separated, or widowed to qualify and cannot have lived with the person for the 12 months prior to your request for relief.

If you do not qualify for the Innocent Spouse Program, you may qualify for another program called the Equitable Relief Program. As you have seen, the Innocent Spouse program is very specific on what tax debt can be forgiven through the program. The Equitable Relief Program is the only program where you can seek relief from underpayment of tax debt. This would be a situation when mistakes were not made and your spouse filed their taxes, knew that they owed a tax debt but failed to pay the debt. 

To qualify for the Equitable Relief Program, you would need to prove to the IRS that it is unfair to hold you liable for the debt. This is the program that a victim of spousal abuse could utilize to separate themselves from the ex-spouse’s liability. 

 

How to Apply for the Innocent Spouse Relief Program

To seek Innocent Spouse Relief, you should complete the IRS Form 8857, Request for Innocent Spouse Relief. The IRS will accept a written statement as well as long as it provides the same information the form requires.  You should fill out this form as soon as you become aware of a tax liability for which you feel you should not be held responsible. 

Generally, you must fill out this form and submit it no later than two years after the IRS’s 1st attempt to collect a tax debt. Do not file your Form 8857 with your tax return or submit it to tax court. You may mail it to the IRS directly at:

Internal Revenue Service
PO Box 120053
Covington, KY 41012

Or you may fax the form and attachments to 855-233-8558.

Whether you mail or fax your application, be aware that the IRS will contact your spouse. Unfortunately, there are no exceptions to this rule and the spouse will be informed of the request and the preliminary and final determinations regarding the requested tax relief

If determined that you are not liable, the IRS will collect the tax, interest, and penalties from your spouse or ex. If you have already paid some or all the tax debt, the IRS will refund only the tax payments that you made with your own money. If any part of the tax debt does not qualify for the program, then you will still be held liable for that portion of the tax debt.

In conclusion, when dealing with this type of situation it is especially important to understand not only the qualifications of the programs to see if this is something you could utilize but also how the process of applying for a program works. In a situation like this, it is especially important to hire a true tax professional. An Enrolled Agent or CPA are both tax professionals that hold the licensing that requires knowledge of these programs and how to assist the taxpayer. If this is not the right program for you, having such a tax professional in your corner is a must.

You do have a lot of rights when it comes to owing taxes. Having someone who not only knows these rights but can help you enforce them is especially important. As long as you are a compliant taxpayer, meaning you have filed all required years, there is likely a program that meets your financial situation.

 

Is an Offer in Compromise Right for You?

man writing a check to the IRS for his Offer in Compromise payment

Everybody out there has heard an advertisement on the radio while driving or on TV late at night for the IRS programs where you can settle for pennies on the dollar or get forgiveness of your tax debt. The program that they are referring to is called the Offer in Compromise. This is a program where you can see a reduction in the tax debt, sometimes a substantial reduction. 

But what is an Offer in Compromise, how does it work, and is it a good option for you?

 

What is an Offer in Compromise?

The actual definition from IRS.gov is an offer in compromise is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s liability for less than the amount owed. Obviously, this is a great program, but it does not mean that everybody can settle their debt for less just because the program exists.

Taxpayers who can pay the tax debt in full or can pay the tax debt through an installment agreement typically wouldn’t qualify for the Offer in Compromise (OIC). 

To qualify, a taxpayer must be compliant in terms of filing requirements. This means all required years with income have been filed up to date. Also, they must have proper withholdings or estimated payments set up for the current tax year. If the debt is business tax debt, the business must have made all required federal tax deposits for the current quarter.

 

How Does the IRS Decide Whether to Accept or Reject an Offer in Compromise?

The IRS bases its decision for an Offer in Compromise on a taxpayer’s “RCP”, or “reasonable collection potential”. The reasonable collection potential is how the IRS measures the taxpayer’s ability to pay. The RCP includes the value of the taxpayers’ assets such as real estate property, automobiles, bank accounts, and other property. In addition to the property, the RCP also includes future income less certain amounts allowed for basic living.

So in short, the person who qualifies for the Offer in Compromise truly cannot pay the tax debt back and does not have assets more valuable to the debt. 

One major right that a taxpayer has is the right to pay their allowable monthly expenses. If you are somebody who is paycheck to paycheck and could not afford the amount required for an installment agreement, then you may qualify for the Offer in Compromise. This is the main reason the IRS would accept a compromise on the debt. The IRS officially calls it “doubt as to collectability”. 

The second reason the IRS may accept a compromise is “doubt as to liability”. This is when there is a valid dispute over the existence or the amount of the tax debt. 

The third reason the IRS may accept a compromise is called “effective tax administration”.  This is when there is no doubt that the tax is legally owed and that the full amount could be collected but requiring a payment would create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

 

How is an Offer in Compromise Paid?

There are two types of ways to pay an Offer in Compromise: as a lump sum or in installment payments. A lump sum is defined as an offer payable in five or fewer payments over five months. To apply for a lump sum offer, the taxpayer must submit a 20% nonrefundable deposit with the application. If the IRS rejects the offer, the 20 percent payment is not returned but applied to the full balance of the tax liability. 

The second type of offer is called a “periodic payment offer.” This consists of an offer paid over 6 or more monthly installments within 24 months of when the offer is accepted.

When applying for the Offer in Compromise it is especially important to know the ins & outs of the program before applying. Especially with the fact that a 20% non-refundable deposit must be included with the offer, it is important to have somebody who knows these programs. There is nobody better to help you with this than a federally licensed IRS Enrolled Agent

Typically, an enrolled agent will have worked for the IRS or at least have demonstrated knowledge equivalent to such a level through testing. This knowledge of what the IRS is looking for is especially important not only in the prequalification process, making sure that it is worth applying for, but also in the presentation of the financial situation to get you approved. 

 

Drawbacks to Applying for an Offer in Compromise

There are some drawbacks to applying for the OIC in terms of collection law. During the period while the IRS is determining whether to accept or deny your offer there is a hold on collection activities. Since there is a hold on collections, there is also an extension on the legal assessment and collection period for the tax debt. 

Also, during that time a Federal Tax Lien may be filed on your person or properties. It is so important to know these things and consult with a true tax professional before applying. A good example of why is if you are planning to sell a property and hope to settle your tax debt before selling since a federal tax lien will remain in place for some time even after the Offer in Compromise is paid in full. 

Also, many other avenues and hardship programs can have better results than the Offer in Compromise that are based on your ability to pay and make good use of the tax debt statute of limitations. If you apply for the Offer in Compromise, it puts that statute on hold and gives the IRS longer to collect against you. With a tax professional doing an investigation of your situation, a strategy can be laid from start to finish with a way to get you out of as much of the debt as quickly as possible using all these different rules to your benefit.

 

Should You Deal With the IRS Directly?

While you certainly can deal directly with the IRS, the following is a great example of why it may not always be wise to do so. A client that I helped last year had been trying to work with the IRS for several years on settling a $100,000 tax debt he owed. He felt he had rights to the Offer in Compromise and had applied for it 3 different times over the course of a 5-year period. He had also tried many payment arrangements with the IRS over a period of about 5 more years but was never able to afford them. This gentleman was just on social security income with a small pension and could not afford to pay his tax debt balance. While this is a major contributing factor for qualification with the IRS for the OIC, other factors do go into as well. 

The reason he was repeatedly denied was because he owned a home. He finally reached out to us for help and while we could certainly step in and give him an end date to all of this, it wasn’t an end date as soon as it could have been if he had contacted us sooner. 

By showing his inability to pay, we were able to get him into smaller payments on the tax debt. With this partial pay arrangement, he will only have to make a small monthly payment until the debt expires after the 10-year statute of limitations. Due to applying for the Offer in Compromise so many times, the statute date had been extended by a little over 3 years which unfortunately added to the payment term for these small payments. 

Sad to say, he always qualified for this partial payment arrangement and had forked over thousands of dollars that he could not afford as he struggled with the payment arrangements the IRS had offered him. While he was extremely happy that we could step in and save him so much money and finally give him an end date to his tax debt and payments, we both agreed that we wished we had spoken years ago and saved him the money and the aggravation of trying to deal with this on his own.

 

Beware of Offer in Compromise Scams

Unfortunately, in every industry, when someone is in a vulnerable situation, you have companies that prey on them. Some companies operate what the IRS calls “Offer in Compromise Mills”. These are companies that will get you on the phone with a salesperson and right off the bat he or she will make promises of settlements pennies on the dollar without really knowing anything about your situation. 

The only way to know if one could qualify for the Offer in Compromise is by doing not only a careful full review of one’s financial situation but also accessing IRS records before ever relaying to clients what the possible outcomes could be. While the OIC is real and it’s a great provision, not everybody qualifies for it. 

Fortunately, in this day and age of the internet, if you investigate these companies through Google or research their BBB ratings, it will quickly become clear if they’re a company you should stay away from. The good thing is that there are many honest and ethical tax relief companies that will look out for your interests first. 

 

What If You Don’t Qualify?

In conclusion, the Offer in Compromise is a great program if you can qualify for it. And like everything else in life, you can certainly try it on your own. But if this is not something that you have studied or done hundreds of times, it would probably financially benefit you to seek representation when dealing with the IRS. 

As mentioned earlier, even if you do not qualify for the miracle cure of the Offer in Compromise there are many other tax relief programs available that can at least limit your exposure to the tax debt. With these programs, you may not see the steep reduction that you had hoped for but at least you won’t significantly overpay on the tax debt with penalties, fees, and interest.