With the proliferation of tax software for the individual such as TaxCut and TurboTax, many people think they can file their own tax returns and bypass having a professional such as a CPA prepare their income taxes. For some people, this is okay, but for others this is a major mistake. The tax laws are complex and they are continually changing. For example, the Alternative Minimum Tax patch that was recently signed into law that we discussed.
There are some groups of people that can safely file their income taxes using the free online software or by purchasing one of the products mentioned above. This type of taxpayer is one who is an employee (meaning they receive a W-2 each year that lists their wages) and they have minimal deductions and are likely to just take the standard deduction.
People that should avoid preparing their own tax returns are those who are business owners (whether you are a sole proprietor or own a C-Corporation), if you have investment income, capital gains and losses, etc. These taxpayers should definitely seek the counsel of a tax professional to prepare their income tax returns. Not only from a liability standpoint and knowing that someone who does taxes for a living has prepared your return, but because they know more about the tax code and can save you a lot of money like taking advantage of your home office deduction, medical expenses, etc.
Unless your tax returns are extremely basic and you feel comfortable doing your own returns, I would recommend spending a hundred bucks or so and having a professional prepare your returns to make sure you take advantage of everything the Tax Code provides for your specific situation and to give you piece of mind.
One way the IRS is able to "pierce the corporate veil" and make the owner of a business personally liable for some of the business tax liability is through the Trust Fund Recovery Penalty.
The Trust Fund Recovery Penalty does not make the business owner liable for the entire business liability, but it does give them a fairly substantial responsibility for the business’ taxes. The IRS states that the Trust Fund Recovery Penalty may be assessed against someone who is responsible for collecting or paying collected income or employment taxes or excise taxes, and willfully fails to collect or pay them.
A responsible person or group of people are those who have the duty and the power to direct the collection and paying of the trust fund taxes. Many times the "responsible person" may be an officer of the company, employee in charge of the payroll or with control over the funds and the ability to direct their disbursement. For many of my clients, the "who" is the easy answer. They are small businesses and the owners wear many hats. Meaning, they run the business, market the business, get new clients, pay payroll, etc. This is usually what gets them in trouble. They have the expertise to build a house, sell real estate, litigate a complex personal injury matter, or perform brain surgery but they do not have the relevant business knowledge to know how to prepare tax returns or pay the IRS for their employees’ withholdings.
The second part of the definition is "willfullness" of the party to fail to collect the tax or fail to pay the tax to the IRS. In order for the failure to pay/collect to be willfull, the responsible person must have (or should have) known of the outstanding taxes and either intentionally disregarded the requirement to pay. The responsible person also satisfies the "willfulness" requirement by being "plainly indifferent to [the law’s] requirements."
The IRS typically holds an "interview" where they question a potential "responsible party" to determine whether they are actually responsible. After they have determined you are responsible you will receive a letter from them stating their determination and you will have 60 days to appeal that decision. Once, the appeal time has lapsed, the IRS may begin taking collection action against you personally and your personal assets.
Now that we know who is responsible for the Trust Fund Recovery Penalty, what is the Trust Fund Recovery Penalty? Next week…
Question:
I have set up an installment agreement with the IRS where I pay them $100 per month on my back taxes. I owe them about $10,000 with penalties and interest. Last month, I accidentally wrote the check out for $200. What happens to that over payment. Will I not have to make a payment next month?
Answer:
Unfortunately, you will not be able to get a refund of the additional amount that you paid the IRS last month. The good news is that it will be applied to your total tax liability. The bad news is it will be applied in the best interest of the U. S. government. What does that mean? It means that they will apply the payment to your oldest liability. The reason this is bad is because the IRS penalties and interest are charged according to your balance. The newer, most recent taxes will have more penalties that can be assessed because the penalties eventually "max out" so whatever you can do to reduce the amount you owe on newer taxes that are still being assessed, you will save yourself a lot of money in penalties in the long run.
The second part of your question asked whether you did not have to pay next month because you hope they will apply that extra payment to your installment plan rather than you liability. As we explored above, you will still need to make that $100 payment next month because they have applied that $100 to old taxes rather than your payment plan so you do not get a "credit" going forward.
The same principal holds true for those who file their tax returns and are due a refund. Even through the government keeps your refund, which may be in the thousands of dollars, this will be applied to your oldest tax liability rather than your installment agreement payments or the new tax. So even if the IRS keeps your $2,000 refund, it is applied to your liability, but you are still required to make your installment agreement payments as usual.
One of the things I strive to do in my practice when interviewing prospective clients for the first time, meeting with my staff, or talking to my wife is to listen well. You can ask my wife and find out quickly that I don’t always do so…but I’m trying to get better.
What happens when you don’t listen well is you might miss the boat. When negotiating over something important, you might "think" the opposing party wants one thing, but if you listen and read between the lines you may find out that what you think they want is not correct at all and you will be able to come to an agreement much quicker. In my job, listening is required so I can try to figure out what my client really wants, and it allows me to pick up on things that will be possible pitfalls down the road.
The IRS is trained to listen to you…every word you say. When you are meeting with them, in person or on the phone, they are listening. They are trained to be quiet because quiet makes people uncomfortable and makes people talk. If you are engaged in a negotiation with the IRS, I would recommend that you do some listening. You may find that the revenue officer is trying to give you a hint or a new direction that may be helpful to you. I find that this happens fairly often. Sometimes, you have to read between the lines because they don’t come out and just say it, but just listen. You may be surprised at how much further you get in your everyday negotiations as well as with your dealings with the IRS.
Another busy week. I attended a networking lunch this week and the speaker’s topic was "How to Legally Beat the IRS." Now the speaker was a "former CPA" and has done a lot of tax work in the past. His advice was to small business owners and his point was to illustrate to them how much money they may be leaving on the table each year to pay the IRS in income taxes (or the dreaded self-employment tax) when they could be writing more off in expenses and keeping more money in their pocket.
Now, I was inspired to try to save myself money, however I noticed that some of the "tactics" are what get a lot of my clients in trouble so I would not go forward with some of them without the assistance of a good CPA. I would definitely recommend that all business owners contact a CPA and get their help and advise on tax planning within their business. Make sure the CPA advises you and does not just perform a "fill out the correct forms" function. The main objective of these meetings with your CPA is so that you properly plan for your business so you can succeed. Most of the time it is when people fail to plan that they fall out of compliance and when they need our help.
Now on to the review of this blog. Monday we hit on a related topic. It was about some common "tax goofs" that cause people to miss the mark and get into trouble with the IRS. Some of the goofs are pretty funny, and you wouldn’t expect them to ever be done in real life, but others are far too common and could be pre-empted if the taxpayers got better advice.
We also talked about trying to negotation what the IRS believes is TheIRS. I guess you will have to go to that post to really get what that means.
Wednesday, we hit the basics again to discuss what is Currently Not Collectable Status (or uncollectable status). This is a great place to be in if you can get the IRS to see things from your perspective and if you don’t have the money to file an offer in compromise. I would generally recommend an offer in compromise over currently not collectable status because if the offer in compromise is accepted, you are done with the IRS, however when you are in uncollectable status, the IRS will come back and revisit your financial status about annually to see if you should remain in uncollectable status or to see if your financial status has changed that would allow you to begin making payments to the IRS on your tax liability.
Finally, on Thursday we looked into another common mistake people make when filing their income taxes. They file an extension and believe that is also an extension of time to pay. Read on to see what’s wrong with this picture and another side to this story.
Stay tuned next week to find out more about negotiating with the IRS and your options in settling your outstanding tax debt. If you have run into some trouble with the IRS and need help, please use our contact form and let us know a little about your situation and we will contact you about how we can help and what your fee may be for the representation. If you are interested in filing your own offer in compromise, I would invite you to fill out a short survey that will help us in determining the exact format and type of product you would like to see. Everyone who helps with the survey will get a great discount on the final product just by entering their e-mail address.
Taxes: Of life’s two certainties, the only one for which you can get an automatic extension. ~Author Unknown
It’s true, you can get an automatic extension of time to file your income tax returns each year. However, when you file that extension, it does not give you more time to pay your taxes. Many taxpayers (and many of my clients) have gotten themselves into trouble in the past because they didn’t pay their taxes that they were going to owe.
In the past we have discussed on this blog how you can save yourself a lot of unnecessary penalties just by filing your tax returns on time. You will not be receive a late filing penalty if you file an extension so long as you file the return before the extension expires. Where you can save yourself a late payment penalty from the IRS is by paying the tax that you will owe by April 15 each year regardless of whether you are going to file an extension.
If you find that you will not be able to afford the taxes you will owe, you will need to work toward some sort of resolution. The IRS has greater collection powers than any other creditor you will ever encounter. Therefore, I would encourage you not to "stick your head in the sand" and pray that the problem goes away, but rather you should actively try to resolve your case before the IRS has to actively collect the money you owe them through not-so-good ways like a wage levy.
This blog discusses many different alternatives and ways you can resolve your case with the IRS. Please let me know if you have specific questions you would like to see answered on this blog. Also, if you would like to discuss your specific case and how my firm could help you, I would encourage you to fill out the short contact form and I will contact you about what we can do to help.