South Carolina Tax Attorney

Question: What are my options after the offer in compromise I submitted has been rejected?

Answer: You still have a couple of options when your offer in compromise is rejected by the IRS.  I am going to have to make an assumption in order to answer this question with some specificity.  First, that you filed an offer in compromise based on doubt as to collectability meaning you owe the tax, but you don’t have the money to be able to afford to full pay. 

The first thing I would do is to look at why your offer in compromise was rejected.  Sometimes we can learn why the IRS has rejected your offer in compromise and resubmit an offer in compromise that gets around the issue that the IRS didn’t like the first time around.  Sometimes it is an issue of income and expenses and other times it is an issue of equity in your assets.  But many times, an offer examiner simply does not look at each issue as completely as we would like, or they simply do not have the discretion to vary from the IRS regulations.

The next option you have is to set up an installment agreement.  Depending on the amount of money you owe the IRS, including taxes and penalties, you may be able to easily set up an installment agreement.  If you owe over $25,000 you will be required to submit additional financial information and pay what the IRS says you should pay.  I would recommend that you speak to a professional who deals with the IRS regularly if you fall into this camp because they will be able to assist you in negotiating the best monthly payment plan with the IRS. 

Finally, there is currently non-collectable status.  This means that based on your financial situation, your necessary living expenses exceed your income and the IRS will not take any collection action against you for a period of usually two years.  As an aside, the IRS will almost 100% of the time file a tax lien against you if they haven’t already.  Basically currently non-collectable means you can’t afford to pay your taxes right now and they are giving you some time to get back on your feet financially speaking. 

Recently, our firm gave a talk at the local Rotary Club here in Greenville, SC.  After the session, one of the members who is a financial adviser to small businesses asked about a certain part of our presentation.  Specifically, he wanted to know if business owners could really become personally liable for the taxes owed by the business.

Lawyers like to call this piercing the corporate veil.  This is because one of the positives in performing your work from within a corporation is that your personal assets, etc. are protected from corporate creditors.  Therefore, if you own a contracting company that is incorporated and you tear up someone’s property, they can only sue the corporation and get damages from the corporation - not from your personal checkbook.

In some instances, creditors (including the IRS) can “pierce the corporate veil” to reach in to the assets of the owners of the business personally.

The IRS can reach into the personal assets of a business’ owners if the corporation fails to pay the payroll taxes that it holds in trust from employees’ wages.  This does not include corporate income taxes, just the portion of the taxes the corporation is supposed to withhold from the employee and hold in trust for the government.  The IRS calls this the trust fund penalty, and it allows them to collect from anyone who has authority to write checks, or who is in charge of payroll.

I have written a couple of trust fund recover penalty articles:

What is the Trust Fund Recovery Penalty

Who is Responsible for the Trust Fund Recovery Penalty

Can I Reduce My Trust Fund Recovery Penalty with an Offer in Compromise?

I just ran across this video on Youtube. Supposed to be working…oops. Thought you would like it no matter what your political stance.

I have to have this conversation with many of my corporate clients who have run into trouble with the IRS.  There are many many reasons why it is important, essential, and should be required for you to keep good business records.

Keeping good records does not mean throwing all of your receipts into a box for your accountant to decipher at the end of the year.  And speaking of accountants, if you’re in business then you need to have an accountant who is not going to just prepare forms and returns for you, but also will help you with your tax planning to make sure you get the most out of your business.

Here are the top 5 reasons to keep good financial records for your business:

1.  Keeping up with the Progress of your Business

Part of running a successful business is being able to make decisions, being able to cast a vision and reach goals.  How do you know where you are going if you can’t track what is going on with your business?  By keeping good records, you allow yourself to quickly determine how your business is doing at any particular moment.  After keeping good records for a while you will be able to notice trends in your business and work to take advantage of them or minimize their impact.  You cannot put your head in the sand and hope things take care of themselves.  They don’t.  You have to play an active role in knowing what is going on in your business.

2.  Prepare your financial statements

Most business owners would kind of like to know how much money they are making.  Regardless of the size of your business, you need to keep up with your income statement (commonly referred to as a Profit and Loss Statement by the IRS) so you know how much money you are making (or losing).  It is also important to have a balance sheet so you know about your companies assets and liabilities as well as your equity in the company.

3.  Identify Sources of Receipts

In other words - know who is paying you.  First you want to make sure you keep up with who has paid and who has not so you can collect your money.  But more than this, know who your best customers are is one of the secrets to success.

You know the old 80/20 rule?  20 percent of your customers provide 80 percent of your profit?  Some business may be more skewed than that - like 95/5.  Anyway, by knowing who those 20 percent of your customers are, you can treat them better, market to them more effectively and further strengthen your relationship with them.  This also lets you know which customers are just draining you so you can drop them or just spend significantly less time on them until they become more profitable.

You can also apply the 80/20 rule to sources of income when we are talking about just customers but revenue streams altogether.  For example, as an attorney, I keep up with the income I receive from my tax problem clients, family court clients, real estate clients, corporate clients, etc.  You can do this as well so you can determine if there are specific areas of your practice that are more profitable.

4.  Help prepare your tax returns

This may be one of the most important reasons to keep good records.  You need to accurately be able to determine what your business earned this year and how much you should have to pay in taxes to the government.  If you have no idea about your corporate finances, then I can guarantee that you are losing money and paying too much in taxes each year.

Keeping up with good records also helps you keep up with all of those deductible business expenses that you have all year long.  You definitely want to be able to take those off the top of your gross receipts otherwise you are going to be stuck with a huge tax bill.  But if you don’t keep track of them your accountant is not going to be able to manufacture the numbers out of thin air for you.

5.  Support items on your tax return

Here is where bad record keeping kills you.  You have just been audited by the IRS or your state taxing authority and they want to see your records for those transportation expenses, materials, advertising and more.  If you don’t have anything to prove what you spent, then you are straight out of luck.  The IRS will disallow all of your expenses that you can’t prove.  So, even if they know you had some transportation expenses, if you can’t prove them, they’re gone!

Question: My husband and I got divorced a few years ago and now I am all of a sudden getting notices from the IRS. He always took care of the household finances and taxes so I had no idea that we owed the IRS. Is there a way for me to figure out exactly where I stand with the IRS?

Answer: You can find out exactly where you stand with the IRS.  If you are close to a local office of the IRS you can go to the office and request a “record of account” for the years you are concerned about.  If you aren’t close to a local office, or you just don’t want to go down there and wait in line you can print Form 4506-T.  Just fill out your personal information (name, address, social security number, etc.) in the top part of the form.

Next, under section 6, check the box for subsection (c) for an “record of account.”  A record of account is print out of your account that gives line item information about adjustments such as credits, penalties and interest.  It also shows if you have done anything that might extend the statute of limitations such as file an offer in compromise or file bankruptcy.  But the information that is most critical to you is HOW MUCH YOU OWE.  You will find the bottom line as well as how much the IRS has charged you in penalties and interest.

Sign and date at the bottom of page 1 and follow the instructions on page 2 about where to mail this form.  I would allow for several weeks for the IRS to process your request.  It has taken me over a month to receive information from the IRS in this manner in the past.

There is a way to receive this information much quicker if your circumstances require.  Since I deal with the IRS on a regular basis, once you retain me to assist you, I can file a copy of my power of attorney (Form 2848) with the IRS and have access to your records within 3-5 days.  If you are interested in retaining me to just help you find out where you stand e-mail or call me.

I met with a prospective client recently who was having their paycheck garnished by the IRS and didn’t know that it was coming.  He was mad to say the least.  Upon questioning him a little more, I found out that he had several years of unfiled income tax returns and had moved several times in the past three years.

The IRS is not required to track you down - though they probably could.  The law just requires them to give you notice at your last known address and since he had moved several times since he filed his last tax return, the IRS obviously did not have his current address.  If you have moved and haven’t updated your address recently you can send in the IRS Change of Address Form to make sure you receive notices from the IRS in the future.

Now, just because the IRS has started with a wage levy doesn’t mean that we have reached the end of the road.  There are ways to get the wage levy reduced or stopped all-together.  That’s for another post.