Solving Tax Collection Problems
How to respond to IRS correction notices
General Accounting Office studies have shown that IRS correction notices are wrong half the time. The common correction notices include claims that made an error in your return, that you failed to file a return or underreported the income in your return. If you get a correct notice from the IRS that you do not understand, there is a good chance it was issued in error.
To prevent paying tax and penalties you do not owe, respond in writing to the notice using certified mail. Ask that the notice be canceled. Respond within the time stated on the notice to avoid any enforced collection action. As long as you are communicating with the IRS to resolve the issue, the chances of lien, levy or property seizure are greatly diminished.
If you have proof that IRS’s claims in the notice are incorrect, send the proof via certified mail to the address shown and to the person indicated on the notice. If the IRS ignores your proof, you have the right to appeal that notice just as you have the right to appeal an auditor decision. To appeal a notice you must prepare and send a protest letter asking that the decision be re-examined.
For more information on how to respond to IRS notices, order a copy of my book The IRS Problem Solver.
How to cancel IRS penalties
Each year, the IRS issues more than 30 million penalty notices to taxpayers. Few citizens realize that 100% of all penalties are subject to cancellation. Nearly every penalty section of the code includes what is referred to as a good faith, or “reasonable cause” provision.Very simply, that provision allows anyone who is issued a penalty to request abatement of that penalty when he can show that he acted in good faith and and based upon a reasonable cause for his actions.
When you get a penalty notice, you must first verify that a mistake was indeed made. If the IRS does not include an explanation of the error made, ask for one. Always communicate via certified mail, return receipt requested. Once it is established that the mistake is yours, you must communicate to the IRS that you always acted in good faith and then provide your reasonable cause explanation for the circumstances that caused the error.
The tax law is very confusing and the IRS makes as many, or more, mistakes than the average person. That’s why they cancel about half the penalties issued when a proper request for abatement is made. To learn more about the cancellation of penalties, order my book The Problem Solver.
How to cancel interest
Since many mistakes are found years after the tax return is filed, interest charges for past-due taxes can often double or triple the original tax bill. While many experts believe you cannot cancel interest, this is just now true.
To cancel interest on tax debt, you must show either IRS error or delay in making the decision that additional tax is due. It is not uncommon for the IRS to lose your case in their bureaucratic shuffle. When this happens, you can cancel interest on your tax debt. To learn more about canceling interest, order my book The IRS Problem Solver.
What is the statute of limitations on collections
The collection statute of limitations controls the amount of time the IRS has to collect a tax. The IRS has ten years to collect a tax once an assessment is made.
The actual assessment date is found on a notice of tax lien or in your Individual Master File. It is not uncommon for the IRS to try to collect a tax after the statute of limitations has expired. This is one good reason to understand how to spy on the IRS using Individual Master File information. To read more about an Individual Master File see the discussion on “How To Spy On The IRS” under the heading, “Surviving a Tax Audit.”
The statute of limitations for audits is three years from the time the return was filed. If filed before April 15, the three-year period begins on April 15. For example, if you file your tax return for 1996 in January of 1997, the IRS has until April 15th of year 2000 to audit your 1996 return. If you file for an automatic extension of time to file your return, the three years begins on the date the IRS receives your return. For example, if you file your 1996 tax return on October 15, 1997, the IRS has until October 15 of 2000 to audit your 1996 return. This is why many experts suggest you do not file your return before April 15th. It simply gives the IRS more time to audit that return. On the other hand, filing with an extension does not limit the time to audit a return.
If you omit more than 25% of your gross income from your return, the statute of limitations for audit is extended to six years. This is why I recommend everyone keep their tax records for six years from the date of filing your return. It is not uncommon for the IRS to assert an omission of income in order to audit a return. Keeping the tax records is the only way to prove the IRS wrong in this situation.
For those who do not file a return at all, there is no statute of limitations. The IRS can audit you for any year in which they claim you have not filed. Herein lies yet another reason to request an Individual Master File on a regular basis. Record of filing a return is made in this file. If you have the record, the IRS can never claim you did not file a return or bluff you into enduring an unnecessary audit.
These are the general rules. Under certain circumstances these statutes may be extended as a result of actions taken by the IRS or you. For example, you may have unknowingly signed a waiver that extends the statute.
How to eliminate liens
A tax lien is the process the IRS uses to claim a security interest in any assets you hold. When left unattended, liens can lead to levy of wages and bank accounts or seizure of property. A tax lien can usually be eliminated by eliminating the tax debt. For details on handling tax liens, order my book, How to Get tax Amnesty.
For some people, the tax debt might impossible to pay because of interest and penalties. That’s why it’s important to always consider seeking abatement (cancellation) of penalties. For information on how to eliminate penalties, order my books How To Get Tax Amnesty or The Problem Solver Book.
In other cases, the tax debt is impossible to pay regardless of penalties and interest, just because it is so great. In this case, you must consider using one of the tax debt forgiveness programs operated by the IRS. The ability to be forgiven of tax debt you cannot pay is perhaps one of the biggest secrets the IRS has. There are a number of programs that the IRS tries to hide behind red tape and bureaucratic terms. But they are all explained clearly and simply in my book How To Get Tax Amnesty.
Spousal tax relief
One of the biggest problems faced by divorced couples grows from the audit of joint tax returns that were filed while their were married. In many cases, one spouse (usually the wife) has no idea how returns were prepared. And if it turns out that there is an error in those joint returns, the innocent spouse is forced to pay taxes when she had no role in either earning the income or making the error that caused the debt.
But IRS attempts to collect tax from both parties because the return was filed jointly. When this happens, the innocent spouse has to assert the innocent spouse defense in order to avoid paying tax, interest and penalties for taxes that she had no control over.For more information on the innocent spouse defense and how to assert it, order my book Taxpayers’ Ultimate Defense Manual.
How to stop a wage or bank levy
A wage or bank levy are commons steps the IRS takes to collect taxes that have been owed for period of time. Wage and bank levies can cause serious financial hardship because the IRS steps in and helps itself to your money without regard to your personal and family needs.
You can get relief from a wage or bank levy by contacting the Taxpayers Advocate (TA) located in you local IRS office. You can send a letter or file Form 911 to get the TA involved in your case.
When you show that a wage or bank levy will cause economic hardship, the TA can lift that levy and assign a revenue officer to your case. From there you can explore one of the tax debt forgiveness programs discussed in this web site. For information on how to use TA, order my books How To Get Tax Amnesty or Taxpayers Ultimate Defense Manual.
How and when to use the Office of the Taxpayer Advocate
The Office of the Taxpayer Advocate (TA) can be used to intervene any time an IRS action is causing or is about to cause economic hardship. Removing wage and bank levies are examples of actions the TA can take. In some cases, the TA can even establish installment agreements that in turn, stop enforced collection action.
If you are currently involved in an IRS dispute, it would be to your benefit to find the TA in your area and keep the number handy. Also, get a copy of Form 911 and keep it handy. That is known as an Application for Taxpayer Assistance Order.