Tax Audits
Recent shifts in the Internal Revenue Service’s policy have resulted in a significant increase of the number of audits conducted by the IRS. This policy shift specifically targeted small businesses for audit. Usually the taxpayer’s accountant is involved with this process, although Deininger & Wingfield, P.A., represents clients throughout the audit process, especially if the audit involves sensitive or potentially criminal matters. Typically, Deininger & Wingfield, P.A., represents clients in audit proceedings by appealing an audit determination administratively directly with the taxing authority. In cases where audit determinations cannot be settled by dealing directly with the tax authority, Deininger & Wingfield, P.A., litigates audit determination issues in the U.S. Tax Court or other courts.
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Penalty Abatement Requests
Once we have determined a taxpayer can and will likely pay the liability in full (as opposed to making monthly payments until the statute for collection expires, compromising the tax liability, or filing bankruptcy), we determine whether the penalties and related interest can be reduced or eliminated. Convincing taxing authorities to abate penalties is difficult. A successful approach combines knowledge of the taxing authorities’ procedures and rules and knowledge of existing case law with past experience and negotiation skills tailored to present the facts and circumstances of the request in the best light possible. Only a firm with significant experience in this area can bring this knowledge to the bargaining table. We compute the amount of penalties that are potentially subject to abatement, estimate the request’s likelihood of success and the cost involved to negotiate the abatement request, and present these figures to the client to allow the client to make an educated analysis of the costs and benefits of the abatement request before proceeding. A cost-benefit analysis is necessary before an attempt to abate penalties is made as, many times, the cost to abate the penalties could easily exceed the penalties to be abated, especially after factoring in the chance of success.
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Offers in Compromise
The IRS allows taxpayers to offer to settle their tax liability for less than the amount currently due through its Offer in Compromise (OIC) program. A taxpayer can offer to compromise their tax liability with the IRS using three methods: Doubt as to Collectability, Doubt as to Liability, and Effective Tax Administration. Doubt as to Collectability exists when the taxpayer cannot pay the full amount of the tax liability owed within the remainder of the collection statute of limitations. Doubt as to Liability exists when there is a legitimate doubt that the taxpayer owes part or all of the tax liability. Offers in Compromise based on Effective Tax Administration are available in limited circumstances in which the taxpayer can demonstrate that the collection of the tax liability would be unfair or inequitable.
Offers in Compromise - Doubt as to Collectability
The Internal Revenue Service has established a detailed formula for determining an acceptable amount of an Offer in Compromise based on Doubt as to Collectability. This formula is based on net assets the IRS can levy, calculated at 80% of the fair market value, less any secured debt, and the taxpayer’s disposable income for a forty-eight month period (determined pursuant to the Installment Agreement process). If a client has an ability to borrow (or otherwise obtain from a source not subject to a levy by the Internal Revenue Service) the funds necessary to pay the amount determined by this formula, this option may allow the client to reduce the amount of the tax liability and make a one-time payment to settle the same.
If the taxpayer does not have access to funds to cover the appropriate Offer in Compromise in one lump-sum payment, the Offer in Compromise amount may be paid over a period of time. However, if the Offer in Compromise is to be paid over a period of time, the amount of the Offer in Compromise will be increased.
It is vitally important to know the rules for discharging taxes in bankruptcy when negotiating an Offer in Compromise, as the threat of bankruptcy may be used to reduce the acceptable Offer in Compromise amount. For example, if the IRS would receive less in a bankruptcy proceeding than it would under the Offer in Compromise formula, an acceptable Offer in Compromise may be less than the standard IRS formula amount, but more than the amount the taxing authority would receive under a bankruptcy proceeding. Most firms practicing in this area do not utilize this strategy and, therefore, may not obtain the best result for their clients.
Deininger & Wingfield, P.A., has devised many planning techniques to lower the amount of an Offer in Compromise. We are very familiar with the Internal Revenue Manual provisions on Offers in Compromise and use these ever-changing rules written by the IRS to the taxpayer’s advantage.
A requirement of any Offer in Compromise is that the taxpayer must stay compliant on all future filing and deposit requirements for five years following the acceptance and payment of the Offer in Compromise. Failure by the taxpayer to file any return when due, including extensions, or pay any tax when due will cause a default of the Offer in Compromise and the settled tax liability will be reassessed against the taxpayer and the IRS will be given another ten years within which to collect the reassessed amount.
For an Offer in Compromise request to be processable, a non-refundable down payment of 20% of the amount offered must accompany the request. The Offer in Compromise process for those taxpayers who do not have a very simple financial condition is expensive, time consuming, paperwork intensive, and results in highly variable outcomes. Most Offers in Compromise are initially denied and have to be appealed. It is important to know when an Offer in Compromise has a realistic chance of success in order not waste the client’s time and money. It is also important to protect the client’s Collection Due Process rights in order to be able to preserve the appeal of an Offer in Compromise to Tax Court, if necessary. The IRS can be highly irregular in its determinations of an appropriate Offer in Compromise; it frequently ignores taxpayer-favorable provisions of the Internal Revenue Manual and makes arbitrary determinations of the Offer in Compromise’s acceptable amount. Deininger & Wingfield, P.A., works to make sure that each element of the Internal Revenue Manual and Internal Revenue Code that favors a taxpayer is used to lower the Offer in Compromise by utilizing pre-Offer in Compromise planning, if possible, and utilizing all procedural avenues to be able to conclude the most favorable Offer in Compromise for a client.
Offers in Compromise - Doubt as to Liability
A taxpayer can offer to settle their tax liability through an Offer in Compromise based on Doubt as to Liability in circumstances in which the taxpayer disputes the liability the IRS is claiming the taxpayer owes. This type of Offer in Compromise is typically used after the taxpayer has exhausted other challenges to the liability assessment, such as administrative appeals or litigation, or where the taxpayer has waited too long to appeal the IRS’ assessments. Deininger & Wingfield, P.A., assists its clients in negotiating Offers in Compromise based on Doubt as to Liability when other challenges are not available.
Offers in Compromise - Effective Tax Administration
Successful Offers in Compromise based on Effective Tax Administration are rare. This type of an Offer in Compromise is available in situations where the taxpayer does not doubt the amount of tax owed and has an ability pay to that amount in full, but the existence of exceptional circumstances justify settling the tax liability for less than the amount owed. Deininger & Wingfield, P.A., can help clients in establishing the existence of these exceptional circumstances and proving them to the IRS in negotiating Offers in Compromise based on Effective Tax Administration.
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Installment Agreements
The Internal Revenue Service has detailed procedures for determining whether or not a taxpayer can pay their tax liability in monthly installment payments and in computing the amount of the monthly payment required. This process takes into account the type and amount of the tax liabilities, the taxpayer’s monthly income and necessary expenses, and may not require the payment in full of all of the tax liabilities. If a taxpayer enters into an Installment Agreement with the Internal Revenue Service, further collection of the tax is suspended as long as the client makes the agreed upon payments and complies with filing and deposit requirements. While an Installment Agreement is in place, various statute periods affecting the collectability and dischargeability of the tax continue to run. The Internal Revenue Service typically has ten years from the tax assessment date to collect the tax. If the tax is not collected within that time period, the liability is deleted, and any liens securing the liability are released. Further, after certain statute periods pass, some taxes become subject to discharge in a bankruptcy proceeding. Although some options for dealing with tax liabilities will cause the applicable statute periods to be tolled, an Installment Agreement, once negotiated, will not stop the collection or bankruptcy statute periods from continuing to run. Therefore, an Installment Agreement may be used to prevent collection activity by the taxing authority while a client waits out the statute of limitations for collection or the statute periods required before the tax liability may be discharged in a bankruptcy proceeding.
By knowing the peculiarities of how an Installment Agreement is determined, Deininger & Wingfield, P.A., can compute and advise how to lower the Installment Agreement’s monthly payment amount prior to negotiations with the IRS. The timing of an Installment Agreement request is important in order to obtain the best result for the client. Further, it may be possible to allocate the payments made to the most favorable tax period when an Installment Agreement has been put in place.
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Innocent/Injured Spouse Claims
Innocent or Injured Spouse claims usually arise when a Husband and Wife file a return using the “Married, Filing Jointly” designation for a year in which a majority of the income is attributable to only one spouse. After the IRS has assessed the return’s tax liability to both spouses, the other “innocent” spouse may be able to reduce or eliminate his or her tax liability that is attributable to the other spouse’s income. Most Innocent or Injured Spouse claims arise in conjunction with divorce cases. However, Deininger & Wingfield, P.A., has often utilized Innocent Spouse claims to clear the “innocent” spouse from liability and allow the “innocent” spouse to continue to work and maintain assets without fear of an IRS levy, while simultaneously negotiating a resolution of the liable spouse’s outstanding liability. Other benefits of Innocent and Injured Spouse claims can include lowering the acceptable amounts of an Offer in Compromise or Installment Agreement, obtaining refunds of amounts levied in the past, and eliminating the need for filing bankruptcy for both spouses. While Innocent or Injured Spouse claims may not provide complete relief, they may provide sufficient relief so that the remaining tax liability can be reduced, eliminated, or more easily paid.
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Appeals
The Office of Internal Revenue Service Appeals becomes involved when agreements cannot be reached regarding audits, where the Internal Revenue Service asserts a penalty against a responsible person for nonpayment of business payroll taxes (Trust fund Recovery Penalty), where a dispute has arisen regarding Penalty Abatement Requests, Offers in Compromise, Installment Agreements, or the substances of the tax liability, and Collection Due Process (CDP) and Collection Appeals Process (CAP) hearings. The latter two involve dealing with the collection function of the Internal Revenue Service. An appeal is a higher-level review of the Internal Revenue Service’s actions by an appellate officer or a settlement officer. Usually, these officers are well trained, experienced, and knowledgeable, and offer the client an opportunity to get a better deal by taking into account the uncertainty of litigation. It is helpful to know the IRS Appeals Officer or Settlement Officer with whom you are dealing, and to have established a rapport and credibility with that Officer in order to obtain the best results. Deininger & Wingfield, P.A., has a long history of successful appeals and has a very good working relationship with local appeals and settlement officers, as well as others throughout the region and country.
Collection Due Process (CDP) and Collection Appeals Process (CAP) are taxpayer-friendly procedures to ensure that the Internal Revenue Service’s collection efforts are carried out in the fairest manner. These remedies, put in place by Congress in 1998, have grown in importance since then. Recently, laws were changed and various statutes of limitation were extended regarding use of these procedures. These processes can be used to deal directly with a problem for the first time, such as an Offer in Compromise, Innocent Spouse, or Installment Agreement, or they can be used to appeal a Revenue Officer’s determination, for instance, on the amount of an Installment Agreement. It is important to know when to exercise these rights, how to exercise these rights, and how to preserve or have the rights reinstated, as the Internal Revenue Service typically issues the notices that force the exercise of these rights in a premature manner. Deininger & Wingfield, P.A. has the knowledge and experience to insure these rights are protected and used appropriately.
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Tax Litigation
Tax Court Petitions are usually associated with disputes over the amount of a tax liability. However, Tax Court proceedings can also be used as an inexpensive method to appeal the decision in a Collection Due Process hearing. It is an avenue of relief which, although used sparingly, can result in another high-level Internal Revenue Service employee, typically an attorney, reviewing the facts of the taxpayer’s case and taking another look at the actions contemplated by the Internal Revenue Service. It is important to be able to substantiate the “abuse of discretion” in earlier proceedings to be able to pursue Tax Court relief and meet the heightened standard required. While most Tax Court cases are settled prior to trial, Deininger & Wingfield, P.A., has litigated numerous Tax Court proceedings.
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Refund Claims
In the course of handling tax liabilities, occasionally, a refund on an earlier period or perhaps to a related taxpayer is a possibility. Protective claims for refunds are those which need to be filed in order to consider making a refund claim at a later date once other tax disputes have been resolved. It is important to know the limitations on refund claims and to act accordingly. Sometimes when refunds are not granted when requested by the taxpayer, this involves litigation in the United States District Court to force the IRS to pay refunds claimed.
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Criminal Referrals
Deininger & Wingfield, P.A. assists in handling matters that involve potential or actual referrals to the Criminal Investigative Division of the Internal Revenue Service (“CID”). It is important to be able to know when a referral has been made (even though the IRS will not tell you), and how to proceed once CID becomes involved. The attorney-client privilege is available, and we understand the sensitive nature of criminal investigations. Deininger & Wingfield, P.A. is knowledgeable of the different levels of a criminal investigation, and when and at what level it is most beneficial to negotiate and attempt to deflect the Service from a continuing criminal investigation, and/or begin to aggressively defend the client’s position.
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Tax Planning
There are many different methods for dealing with a potential tax collection problem when the issues are addressed before the tax liability is incurred or as soon as the taxpayer is notified of the proposed assessment. Further, a plan of action to minimize or conclude a tax liability can generally be much more effective and less painful if dealt with prior to an IRS levy on income or bank accounts. In the course of reviewing a client’s financial condition, Deininger & Wingfield, P.A., frequently finds methods to reduce or eliminate the expected or assessed tax liability or lower an Offer in Compromise or Installment Agreement; methods by which our services could be paid with funds which might otherwise be paid to the taxing authority; methods to maximize expense benefits allowed in the Offer in Compromise and Installment Agreement process; methods to rearrange a financial or business structure to take advantage of additional expenses and deductions; and to file a married couple’s return as separately rather than jointly to minimize the assets and income to which the IRS will look in concluding an Installment Agreement or Offer Compromise or plan for a future bankruptcy. Sometimes in the Offer in Compromise process, actions can be taken that will add to a liability to be compromised which might provide future benefits or deductions after a tax liability is resolved. For instance, a sale of assets which would likely result in significant tax liabilities with no income left from which to pay the liability should be timed to occur after the filing of a bankruptcy proceeding, which will cause the tax liability to be incurred by the bankruptcy trustee and avoid a liability being assessed against the taxpayer.
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Lien/Levy Negotiations
While the most inadvisable time to visit with our firm is after a levy has been instituted, the fact is that exemptions are allowed in determining an amount of a levy, and the presentation of a financial statement in a timely manner will cause the levy to be released or reduced to the amount the IRS determines is appropriate. Expediting the completion and review of a financial statement and negotiation of an appropriate Installment Agreement and Offer in Compromise is critical to terminating the levy. Many times a levy is not procedurally proper or has been instituted wrongfully and can be rescinded, such as a levy when an Installment Agreement has been requested, a bankruptcy filed, or when required procedures have not been followed, such as a levy of more than 15% of Social Security income.
Likewise, a lien may be rescinded when improperly filed, can be avoided or rescinded when substantial justifications exist, can be released as to certain items being sold, or may not attach to certain property or may not attach to all of the taxpayer’s property because of another person’s interest in that property. Deininger & Wingfield, P.A., has intimate knowledge of the lien and levy procedures, their effect, and how to deal with them in the course of resolving a tax collection problem, including knowing the proper place for filing as well as how to determine priority between the Federal and State governments.
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State Tax Liabilities
The many national firms who offer advice in this area are unfamiliar with Arkansas tax laws. Deininger & Wingfield, P.A. has an expansive knowledge of state tax procedure, which differs significantly from the procedures of the Internal Revenue Service. Usually, taxpayers who have outstanding federal tax liabilities also have similar state tax liabilities or potential tax liabilities. Our firm knows which potential tax liabilities are likely to become a reality and need to be dealt with, and which liabilities may not become a collectable tax against the taxpayer. In addition, the state’s procedures for Penalty Abatement, Collection, Installment Agreement, Offers in Compromise, Innocent Spouse and Injured Spouse, are significantly different from those used by the IRS.
It is of no benefit to a taxpayer to compromise a large IRS tax liability without simultaneously compromising a usually smaller related state tax liability. Taxpayers need complete relief from their tax problem and a coordinated effort in resolving State and Federal tax liabilities. Deininger and Wingfield, P.A. has an intimate knowledge of state tax laws and the procedures by which to assist a client with a coordinated effort in resolving both IRS and state tax liabilities while minimizing the impact of collection as that process is being undertaken.
Deininger & Wingfield, P.A., has an intimate knowledge of the Offer in Compromise process, the differences between Installment Agreements at the federal and state levels, the ability to request the abatement of penalties and interest and the procedures required for each. These are all major benefits Deininger & Wingfield, P.A., can provide to taxpayers with state tax problems.
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Tax Bankruptcies*
If a taxpayer is unable to pay his or her taxes due, or unable/unwilling to pay the amount the Internal Revenue Service Installment Agreement or Offer in Compromise rules might dictate, and the taxes are or will be dischargeable in bankruptcy, we offer advice on the benefits of bankruptcy and the methods available for waiting out the required statute periods in anticipation of a future bankruptcy filing. Waiting out statute periods in anticipation of a future bankruptcy filing may involve the use of procedural avenues provided by the Internal Revenue Code to delay collection (if the taxpayer has legitimate contested issues) while the time frames to discharge taxes in a Chapter 7 bankruptcy run. Deininger & Wingfield, P.A.’s competitors frequently fail to consider bankruptcy in order to obtain the best resolution of the tax liabilities.
Knowing the technicalities of when and how bankruptcy can be used to resolve a tax liability or to reduce an Offer in Compromise is a valuable asset which is very under-utilized by others, such as CPAs or those who only use Offers in Compromise to resolve tax liabilities.
Some taxes are not dischargeable in a Chapter 7 bankruptcy proceeding (direct liability for employment taxes as a sole proprietor or single member LLC, sales taxes, or trust fund taxes personally assessed against the taxpayer, etc.), but may be successfully dealt with under a Chapter 13 bankruptcy plan, which generally requires payment of the tax liability in full through payments made to the Bankruptcy Trustee over a period of time up to five years. During the time a Chapter 13 bankruptcy proceeding is pending, no further penalties or interests are assessed.
Deininger and Wingfield, P.A. also uses bankruptcy to efficiently resolve disputes as to the amount of tax liability. This is done by filing a lawsuit inside the bankruptcy proceeding, called an Adversary Proceeding. Many times, this is the only option available to force the IRS to accept the taxpayer’s position. This forum is one of the most efficient forums for resolving tax disputes, as the goal of the Bankruptcy Court, unlike the Tax Court or the U.S. District Court, is to give the debtors a “fresh start.”
As of October 17, 2005, the bankruptcy laws in the U.S were significantly altered to reduce the availability of a Chapter 7 debt liquidation proceeding and to force taxpayers into Chapter 13 deferred payment plan, increasing the costs to debtors of a discharge in bankruptcy and increasing the time required to obtain the discharge. However, significant opportunity still exists to utilize the bankruptcy laws to discharge taxes and to pay less than the amount that the Internal Revenue Service would determine is due under an Offer in Compromise or an Installment Agreement.
* Deininger & Wingfield, P.A., is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
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