QUESTION:
I own a business and file my tax returns every year. I treat the people that work for me as independent contractors and not as employees so they are responsible for their own taxes. Now the IRS says that they have classified them as employees and I am responsible for all of these back tax withholdings.
ANSWER:
Unfortunately, it doesn’t matter how business owners classify their employees, even if your contract states you are an independent contractor. The IRS has a test they apply to each “employee†to determine whether they qualify as an independent contractor. If the IRS determines that your independent contractors are actually employees, you will be required to pay the taxes that should have been withheld from their paychecks. The test the IRS applies to determine the employees’ status considers the control over the work exercised by the company, the provision of equipment and supplies, ability to discharge or fire, permanency of the relationship between the parties, and which party assumes the risk of loss. Not one of these factors is determinative, but all of the factors considered in total determine the status of the employee.
I will discuss the factors mentioned above in more detail in a later set of articles on this site so you will have a better understanding of their meaning.
QUESTION:
I owe the IRS a lot of taxes and penalties. The IRS says that I have too many assets and my only income is from a pension, but the IRS believes it is too much income to have an offer in compromise accepted. I am disabled due to an illness and need my income to live on. Is there a way to submit the offer in compromise for a personal hardship?
ANSWER:
Congress has established an alternative to the traditional offers based on doubt as to collectibility and doubt as to liability when an offer should be based on effective tax administration. The IRS is authorized to accept an offer in compromise based on effective tax administration when the collection of the full liability would create a hardship, exceptional circumstances exist that the collection of the full liability would be detrimental to voluntary compliance by taxpayers, and compromise of the liability would not undermine compliance by other taxpayers.
The IRS considers several factors in determining whether to accept an offer on this basis. All of the factors are weighed, but none are conclusive for acceptance or denial. Some of the factors include: the taxpayer’s inability to work due to disability, liquidation of taxpayer’s assets would prevent the taxpayer from being able to meet basic living expenses, or the sale of assets would have adverse consequences and more than likely, the collection activity would be unlikely.
It is also helpful when you can show that you have never had a problem filing and paying your taxes in the past, you have not deliberately tried to avoid paying these taxes, and you have not encouraged others not to file their taxes.
Almost every offer in compromise that I have ever submitted for a client has been followed very shortly with a request for more information - even after we submitted a ream of paper with the offer in compromise application. Many times this extremely irritates my clients. I don’t know if it is because some of my clients are very unorganized and it is difficult for them to gather the required information, but they complain and whine a lot.
I understand it is a pain to do this, but the outcome of the offer if they do not provide that information is it will be sent back without consideration. It is very important for anyone requesting an offer in compromise to keep in mind that they will be asked to provide a lot of information to the IRS and may have very strict time limits effected after these requests.
It is also important to keep in mind that you owe a lot of taxes and we are asking the IRS to reduce (sometimes by hundreds of thousands of dollars) the amount of taxes they will accept as payment in full. I get the feeling that a lot of my clients feel that they are entitled to a reduction in the amount of taxes they owe and they shouldn’t have to do anything to get it.
I recently read an article online that quoted an IRS employee when asked what to do when you receive a notice from the Internal Revenue Service. Here’s a link. The first thing he says is that the taxpayer who receives a notice should “not panic.” I agree. However, I understand that receiving a letter from the IRS causes a lot of anxiety and worry so here is some advice to help you out if you receive one of those nice letters from the IRS.Â
Many of the notices the IRS sends out each year are just information requests to make sure they have the correct contact information for you. However, most of my clients receive notices that they owe the IRS money, their tax returns have been audited and adjusted, or the IRS has scheduled an audit.
When you receive a notice from the IRS informing you that you owe money, I would recommend that you speak with a qualified tax professional immediately. Some of these notices are not urgent, but some are. If you don’t act in time after receiving the important notices you the IRS can garnish your wages or freeze your bank account. Nobody wants that!
   How is lawyer marketing and salesmanship similar to eBay? It is the “come and get ‘it’” attitude that most lawyers have regarding their services. But why not? We went to school for at least seven years (three long years of law school) to be able to bill by the hour and make a great income. Some went on to receive an LLM particularly specializing in an area of law. Do we look down our noses at the world because we are so educated? Why don’t people just throw themselves into our offices to have us do the work for them?
The truth is, people generally don’t want to have to deal with an attorney. There are some great services attorneys provide like closing real estate loans and drafting wills, powers of attorney and other estate plans so people can rest easy that their stuff will be taken care of after they are dead and gone. But there are many other services that people don’t want to be associated with. Who wants to hire the services of a criminal defense attorney or a personal injury attorney? I know, Iknow - a criminal or an injured person. But who wants to be a criminal or hurt?
Maybe lawyer marketing needs to be more than “come and get ‘it’.” Ebay’s new commercials that state you can get “it” on eBay show that everything is available - just come to eBay and you can find what you want. Lawyers, a lot of times, tend to treat clients like eBay customers. “You know you want it, come and get it.” What is the “it”? Lawyer marketing should be more than just saying this is what I do, come and get it. I think you have do be more proactive and get involved. Give more than what you promise. Maybe you have to get involved in community activies and show how much you know. Build up the confidence of your potential clients and current clients alike. Maybe this will help change the general perception of attorneys and well as bring in more qualified, top shelf clients.
I’ve written on this blog before about how negotiating with the IRS is different than negotiating with Joe Blow down the street. They look into every situation possible and require documentation to backup our arguments and their final decisions.
Just in case you didn’t believe me, I thought I would share one of the IRS’ mottos with you:
“Service + Enforcement = Compliance.”
This motto was recently cited in a farewell e-mail to the employees of the IRS by their Commissioner, Mark Everson, who is leaving the IRS to head the American Red Cross. Clearly, their goal is compliance, but currently the Enforcement is making up a large part of the equation. Their reasoning is that this allows them to equally apply the tax laws across the board, rather than show some people favortism.
This further establishes my point that the IRS works off of numbers and equations. I thought you might get a kick out of the fact that the IRS mottos and taglines are all math related.