TAXPAYER’S RIGHTS: WHAT IRS CAN AND CAN’T DO TO YOU
By: P. Thomas Austin
TAXPAYER PENALIZES IRS FOR LATENESS
The IRS must send your refund within 45 days of the date the return was due, or of the date you file, whichever is later. If they don’t get the refund out within the 45 days they have to pay interest, even if they’re only one day late.
WHEN IT’S SAFE TO IGNORE YOUR APRIL 15 DEADLINE
You are legally required to file a tax return (or extension request) by April 15, whether you owe extra tax or not. But since the civil penalty for late filing is generally a percentage of the tax still owed (5% per month, up to 25%), there’s no penalty unless you owe the government money. And you have two years to file for your refund.
Nevertheless, it’s advisable to file on time for these reasons:
*You get your refund faster.
*It may turn out that you miscalculated and actually owe taxes instead of having a refund coming. In that case, you’ll be charged penalties and interest for late filing.
*If you want to file an amended return later, you’ll have three years to do it in, instead of two.
*If the IRS concludes that you are willfully refusing to file a return, you may be hit with criminal penalties.
The IRS computer made a mistake and sent a family an extra $45,000 tax refund. The IRS tried to get the money back-but more than two years later. District Court: When the taxpayers notified the IRS of its mistake, they were assured that the refund was legitimate. Since the IRS had waited past the two-year limit to sue, the taxpayers were allowed to keep the money.
Source: Gene A. Bruce, 642 F. Supp 120.
FILING FOR A TAX REFUND THEY DON’T OWE YOU
Problem: Even though you’ve written the IRS an answer to its collection notice, the notices keep coming. You get a second notice, and a third one, and then one that says, “Past Due Final Notice (Notice of Intention to Levy).” This final notice (sometimes it’s the third in a series) is the one to watch out for. Trap: The IRS can seize your bank account without first having an IRS employee meet with you. They can notify you by mail and then automatically take money from your account.
Self-defense: If you get such a final notice, immediately call the phone number given on the notice and explain that you’ve already written to them and you don’t owe tax. The Collection Division employee who answers the phone at that number has the authority to put a hold on collection action if given a good reason to. Unfortunately, not all of them will take that step.
Loophole I: If the person who answers your call isn’t receptive, excuse yourself and call back. You won’t get the same person. There’s a decent chance that your second call will be answered by someone who is willing to put a hold on the levy.
Loophole II: You can delay collection action on a tax deficiency you’re protesting by filing a claim for a refund. The refund claim will cause the IRS to automatically put a hold on collection action. This is a smart move if you’ve missed the deadline for filing a Tax Court petition.
Source: Peter A. Weitsen, partner, Mendlowitz Weitsen, CPAs, New York.
The IRS is sitting on millions of dollars in unclaimed tax refunds. According to the IRS, the addresses listed under taxpayers’ Social Security numbers are no good. Those likely to be affected: Anyone who has moved during the last year; a surviving spouse who filed a joint return; unmarried taxpayers who later marry and change their names. Tax returns are identified by Social Security number. Joint returns by the first Social Security number listed. If you marry and are listed second on the return, you disappear from the IRS files. Suggestion: If you move, send the IRS a
formal change-of-address letter.
AMENDING OLD TAX RETURNS TO TAKE OVERLOOKED DEDUCTIONS
Filing an amended return generally increases the chance of an audit. And if you are audited, there’s no guarantee that the examination won’t spread beyond the item you’ve claimed a refund for there’s nothing to stop the IRS auditor from disallowing other deductions on your original return.
Loophole: The limitation period for IRS audits runs out, in most cases, three years from the date the return was filed. When a taxpayer files an original return and then an amended return, the three years run from the date of filing the original return, not from the date the amended return was filed.
How to use it: Say you forgot to deduct $5,000 worth of business expenses, but you don’t want to run the risk of having your original return audited. Wait until just before April 15 of the third year to file an amended return claiming a refund. The IRS won’t have time to audit any other items on your return. The worst thing that can happen is that the IRS will disallow your refund claim. But if you file long before the three years are up, they can disallow the refund claim and audit your return.
Bonus: If you do get a refund, the tax law requires the IRS to pay interest from “the date of overpayment.”
Caution: Your original return must have been complete. And it can’t have been fraudulent. There’s no limitation period on IRS audits if a fraudulent return is filed. The Tax Reform Act of 1984 gives the IRS an additional 60 days to audit a return, measured from the date it receives an amended tax return, if the amended return indicates money is owed. The new rule does not apply if the amended return reflects a refund.
Source: Randy Bruce Blaustein, Esq., Blaustein Greenberg & Co., New York 10017. He is the author of How to Do Business With the IRS, Prentice-Hall, Englewood Cliffs, NJ 07632.
WHEN YOUR STATE TAX REFUND IS TAXABLE INCOME AND WHEN IT ISN’T
Most people don’t have any trouble figuring out their income and listing it on their tax returns. Salary wages, dividends and interest income are usually fairly straight-forward. However, reporting last year’s tax refunds as part of this year’s income can get confusing. Here’s the good news: A federal income tax refund is always tax free. In other words, you never have to include a federal refund as part of your gross income on your federal return.
State and local tax refunds are another matter, though. If you received a refund last spring or summer from your state or county government, you may have to list it as income on the front of your 1040 and pay tax on it.
Dig out copies of your state and federal income tax returns for last year. Look first at your state return. Did it call for a refund? If so, look next at your federal return and answer this all-important question:
Did you itemize your deductions on Schedule A?
If you did not, then any state or local refund you received for last year is tax free. You don’t have to report it to the IRS on this year’s federal return.
If you did itemize, and if you included in your itemized deductions last year the amounts that were withheld from your paychecks for state and local taxes (plus all quarterly estimated payments you made to the state, and/or any additional taxes you had to pay when you filed your last year’s return), then you’ll have to report your state refund as part of your income on this year’s 1040.
What if, in the past, you inadvertently reported and paid taxes on state and local refunds when you really shouldn’t have? The advice is to file an amended return on Form 1040X for each year you want to change. The IRS will send you an additional refund.
Caution: The IRS now requires your revenue office to send information to the Service about state refunds. In other words, the IRS is cracking down on those people who receive refunds from their state governments but overlook reporting that money on their federal returns. Now the IRS knows who has received a refund and how much it came to.
UNDERWITHHOLDING WITHOUT IRS PENALTY
Salaried taxpayers may find at the end of the year that income taxes have been underwithheld. Possible reasons: Both spouses work (the withholding tables sometimes give this result). Or investment income was higher than anticipated. What to do: Have the employer withhold a large amount out of the year’s last paychecks. The withholding is treated as though it occurred
at an appropriate rate over the course of the year. Results: Penalties are avoided.
Source: Florence B. Donohue, tax attorney, New York City.
OWING MONEY TO THE IRS
After the IRS has made an assessment, you have 10 days to pay the owed amount in full or be subject to collection action. The Collection Division at the IRS has the responsibility of collecting delinquent accounts. Although an account is technically delinquent after 10 days, no one will show up at your door on the eleventh day. A series of threatening notices will be mailed to you, and eventually you will be contacted in person by a Revenue Officer.
What Power Does the IRS Have?
Can you merely tell the Revenue Officer that you can’t pay the tax right now? Can you avoid seeing or speaking to the officer altogether? You can, but it really will not do any good. Unlike other creditors, who must go to court to obtain a judgment against you and then go back to court to have that judgment enforced, the IRS need never go to court. The IRS is vested with the power to seize your property without a court order. The only requirement is that it have a valid assessment, give notice with a demand for payment (which has to be sent to your last known address), and give notice of intent to seize.
In addition to seizing your property, the IRS can also place a levy on your bank accounts and on your salary. This means that both your bank and your employer must turn over to the IRS all funds being held for you, to the extent of the levy. (Note: Special rules apply to salary.)
Certain types of property are exempt by law from levy:
1. Apparel and schoolbooks. (Expensive items of apparel such as furs are luxuries and are not exempt from levy.)
2. Fuel, provisions, furniture, and personal effects, not to exceed $1,650 in value (for the head of household).
3. Books and tools used in your trade, business, or profession, not to exceed $1,100 in value.
4. Unemployment benefits.
5. Undelivered mail.
6. Certain annuity and pension payments (including Social Security benefits).
7. Workers compensation.
8. Salary, wages, or other income subject to a prior judgment for court-ordered child-support payments.
9. A minimum amount of wages, salary, and other income – the amount depends on the taxpayer’s marital status and number of dependents.
10. Your personal residence (except in special circumstances).
What Do You Do If You Can’t Pay Your Taxes?
Can the IRS put you in jail because you owe it money and have failed to pay, even though the debt has been outstanding for years? The answer is no. Unless you fraudulently conceal your assets or otherwise conspire to beat the government out of its money, no crime has been committed merely because you can’t afford to pay your taxes.
The best way to approach the situation of having fallen behind in the payment of taxes is to respond immediately to all notices sent you requesting payment. Make every attempt to speak to someone at the IRS and follow up the conversation with a confirming letter. Depending upon the facts and circumstances involved, the IRS may be willing to enter into an installment agreement for payment of the outstanding taxes. Usually, such a part payment agreement requires a down payment, followed by monthly payments over a year or 18 months. If you fail to comply with the terms of the part payment agreement, which also requires that all current taxes be paid on time, the agreement becomes void and your property is then subject of levy seizure.
The best time to try to get the IRS to offer you an installment agreement is at the beginning of the collection process. If you have ignored IRS attempts to work out an arrangement and it is now at your door with a Notice of Seizure, it is extremely unlikely that a part payment agreement will be offered.
How To Negotiate a Settlement When You Owe Money
The first step in negotiating a settlement of taxes owed is to provide the IRS with a current financial statement. Without a statement it can verify, the IRS will not even consider a settlement. What should you do if you don’t want the IRS to know about certain assets you own! Just don’t furnish the financial Statement. It’s better to offer no statement at all than to offer one that is misleading or fraudulent.
If the IRS already knows about all of your assets and there is no disadvantage in providing a financial statement, go ahead and submit the statement. The IRS will be interested in knowing how much money you receive each month, how much is spent, and where. When you complete the personal living expense portion of the form, it is generally a good idea to arrange for some money to be left over each month to pay taxes. The IRS is more inclined to go along with a part payment offer if it feels confident there is money available to make the agreement work.
If you have no assets and no income, there is nothing the IRS can levy. If you are in this desperate predicament, it does provide an opportunity to discuss an Offer in Compromise.
An Offer in Compromise is a little-publicized procedure whereby the IRS will accept a one-time payment of as little as 10 cents for each $1 owed in settlement of your tax debt. If the IRS feels it will receive more money from you in the long run by entering into an Offer in Compromise and a collateral agreement (an agreement whereby you agree to pay a certain percentage of your income for five to 10 years), it may agree to the compromise.
The best chance of successfully using the Offer in Compromise route is when the tax debt has been on the books for a number of years. The IRS must be convinced that conventional collection procedures won’t work. That’s why a relatively recent tax obligation will not be settled this way. But if the IRS has had a chance to collect and hasn’t succeeded, it is likely to accept your compromise offer.
Here’s a tip you should bear in mind: Always use a tax pro to get you through the Offer in Compromise procedure.
Source: How to Beat the IRS by Ms. X, Esq. a former IRS agent, Boardroom Books, Springfield, NJ 07081.
Tax refunds are expedited by the IRS when returns are filed by computer. The IRS is encouraging electronic filing because it cuts the labor cost of processing returns by more than 90%. Drawbacks: Electronic returns can be filed only through IRS – approved return preparers, who charge $25 to $40 for the service. And papers supporting your return (such as your signature
and W-2 forms) must still be filed by mail.
INSIST ON YOUR RIGHTS
Suppose you owe the IRS $10,000 for 1990 taxes, but the IRS owes you $2,000 from 1989. Must you pay the $10,000 first and then wait for a refund? Absolutely not! You have every right to pay only the net amount – $8,000. Don’t let a revenue officer press you into paying more. The revenue officer simply wants to close the case in a hurry and doesn’t want to wait for the service center to process your refund. Even though the officer may threaten to seize your assets or levy your salary if you don’t pay the gross amount owed, you should continue to offer to pay only the net amount, Tip: If the pressure gets hard to handle, ask to meet with the officer’s group manager or branch chief. Bring a check with you for the net amount owed.
Source: Ms. X, a former IRS agent, still well-connected.
SMART TAX POINTER
A person who hasn’t filed returns for a few years may be worried about getting caught by the IRS.
Recommended: He should file before the IRS catches him. If he files the overdue returns before he is contacted by the IRS, there is almost no chance that the IRS will press criminal charges (although it has full legal right to do so).
Special: Delinquent filers should mail the return for each year in separate envelopes. This increases the chance that a different person will open each envelope. Different processors probably won’t realize that other returns have also been filed late. Source: Ms. X, a former IRS agent who is still well-connected.
WHEN NOT TO TRUST A BILL YOU GET FROM IRS
When the IRS comes up with a deficiency as the result of an audit, the taxpayer is given a waiver to sign and mail back to the Service. It’s called Waiver of Restrictions on Assessment and collection of Deficiency of Tax, either a Form 870, a Form 4549, or a form in the 1902 series. (These are not to be confused with waivers to extend the statute of limitations, Form 872, or with a waiver issued by the appeals office, Form 870 AD, which does not stop the interest from running until it is approved.)
By signing one of these forms, you give up your right to contest the deficiency in Tax Court. According to the tax law, interest on the deficiency stops running 30 days after the waiver is received by the IRS. They can’t start charging interest again until they issue you a written demand for payment of the tax.
Problem 1: Wrong date. The IRS has been known to charge taxpayers interest from the due date of the return right up to the date of the notice demanding payment, which is often several months after the date the waiver was received by them. This extra interest can be a lot more than you should pay.
Problem 2: Timing question. It’s very difficult to determine whether the IRS has billed the correct amount of interest on a deficiency. They don’t tell you the specific dates interest was charged for or the interest rates that were used in the calculation. They just give you a total interest figure. Over the last few years, the IRS interest rate has varied from 6% to 20%. More complications: If you’re dealing with a deficiency on a tax-motivated transaction (for example, a tax shelter) the interest is 120% of the going rate. Furthermore, interest in recent years is compounded daily.
What to do:
*Carefully check interest period before paying the deficiency bill. Interest should be charged for the period beginning with the due date of the return and ending 30 days after the IRS receives the waiver form. If the IRS delayed sending you a demand for payment, interest can’t pick up again until you received the written demand. So the first thing to do is check the dates carefully to determine the period for which interest should have been charged.
*Check the interest calculations. You really need a calculator with a financial mode including compound tables. Your friendly banker could check it for you. Better: Have the figure checked by an accountant who has a computer program designed to calculate IRS interest.
*Pay the tax you owe and the interest you determine to be correct. Clearly explain in an accompanying letter how you arrived at your figures, including a detailed computation of the correct interest.
Warning: Pay the deficiency bill within 10 days. If you don’t, interest will start again. To be on the safe side, mail your check return-receipt-requested.
Source: Peter A. Weitsen, partner, Mendlowitz Weitsen, CPAs, 2 Pennsylvania Plaza. New York 10001.
Be careful of what you say to your accountant… if you have something to hide. Suppose that for years you consistently neglected to tell your accountant about a certain source of income. If you now tell the accountant about it, he can be called on by the government to testify against you in court, since accountant-client communications aren’t privileged. But conversations you have with an attorney are privileged. An attorney can’t be compelled to testify against a client who has admitted that he committed a crime. Best advice for someone in this position: Hire an attorney, who
can then hire the accountant and include him under his umbrella of privilege.
Source: Ms. X, a former IRS agent, who is still well-connected.
DOES YOUR ACCOUNTANT HAVE THE RIGHT STUFF?
Far too many accountants are intimidated by aggressive revenue agents. Some let themselves be pressured into giving damaging information about their clients. Any number of practitioners who hold themselves out as capable of representing clients before the IRS are more nervous about a confrontation than their clients are. Best question to ask your accountant before an audit:
If I told you that I didn’t report all my income, how would you respond to the agent when he/she asks? The kind of answer you would want your accountant to give is a noncommittal one, such as Why do you think my client hasn’t reported all his income? or I’ll get back to you later with an answer to that question. You don’t want an accountant who lies, nor do you want one who would incriminate you by telling the truth.
Source: Ms. X, a former IRS agent, who is still well-connected.
TAPE-RECORDED PHONE CALLS
The use of eavesdropping devices, such as tape-recording telephone calls, is quite legal if the IRS is participating in the conversation. The only requirement to legally record a conversation is the consent of one of the parties to the conversation – it’s usually the IRS that does the consenting -and the approval of IRS higher-ups. A court order is only required in cases where none of the parties to the conversation consent to the eavesdropping.
What this means to you: Listening in to conversations is not uncommon in criminal investigations. If you’re a target, assume your telephone calls with the IRS are being recorded by the IRS.
Source: George S. Alberts, former director of the Albany and Brooklyn IRS districts.
BETTER THAN CERTIFIED MAIL
Sending a letter via certified mail, return-receipt requested, provides proof that the letter was received… but does not verify the envelope’s contents. Trap: The recipient can deny having received the information you claim to have sent.
Example: The IRS can claim that it never received necessary tax information from you, and charge heavy penalties as a result.
Better than certified mail: Notarized mail.
How it works: You bring the document you want to send to a notary public. He/she photocopies it, notarizes both the photocopy and the original document and then attaches an affidavit to the copy attesting that it is a true and legal copy of the document mailed The notary then institutes a jurat, which the originator signs. The notary public keeps a copy of the document -the jurated copy- and sends the original document certified, return-receipt requested.
Cost: Notary fees vary by state.
Source: Irene Kelly, notary public and owner, The Branch Office, 3111 S. Valley View Blvd. B106, Las Vegas 89102.
New rules enable the IRS to hire outside contractors to process tax return information for it. The new rules state that providing tax return information to the outside companies will not violate taxpayer confidentiality.
Source: Regulation 301.6103(n)-1, amended.
IMPACT OF BANKRUPTCY ON DEBTS TO IRS
Property attached by the IRS, but not yet sold at tax sale, is still legally the taxpayer’s property. If he goes bankrupt, it can be taken by the trustee, under the turnover rules of the Bankruptcy Law.
Source: US v. Whiting Pools S. Ct. No 82-215.
(The above material was published by Boardroom Reports, 1991.)
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