Tax FAQs

  1. Does the IRS ever compromise their tax bill?
  2. My employer has received a notice and they told me that the IRS is taking nearly my entire paycheck. Can they do this? What can I do?
  3. I don’t have the money to pay my taxes in full. A friend told me that I should wait to file until I have the money or most of it. Does that work?
  4. My husband/wife died and I’ve been hospitalized for over three months. My tax returns were not filed and I did not pay this year by the due date. When I did file the IRS charged me penalties and interest. Do they ever forgive these penalties?
  5. I have not filed a tax return for 7 years. I’m so afraid to do it now that I just don’t know where to turn?
  6. My business is doing very poorly. We barely were able to make payroll for the employees. Two of our suppliers are demanding that we pay them or they will stop supplying us with the materials we need to run the business. The bookkeeper said if we have to, we can take the money that has been withheld from the employees’ paychecks and use it to pay our suppliers and we’ll just make it up in next week/month’s tax deposits. Can we do this on a short-term basis?
  7. I worked as a general manager for a corporation in the Silicon Valley. I was able to sign payroll checks and did so a few times when the bosses were out of town after they approved the bills. I was laid off and the company went under. Now almost three years later, I received a notice in the mail saying the IRS proposes to assess something they call the 100% penalty against me personally. What did I do? Am I liable for this?
  8. I just interviewed with a company that has told me that they are going to hire me, but they want to “treat” me as an independent contractor to save money. The monthly check is about 40% higher than I am making in my present job. I have never done this before. They want me to sign a contract agreeing to this. Could I get in trouble?
  9. I am being audited by the IRS. They are asking for a huge amount of documents and want to come to my place of business. A friend told me to just bring a wheel barrow full of all the stuff they want and dump it at the revenue agent’s desk so they’ll become intimidated & discouraged and go away.
  10. The IRS is “challenging” my automobile mileage deduction, my depreciation expenses for the office equipment and my travel and entertainment expenses. Can they make me dig out all my receipts? If I can’t find them, can’t I just use some different colored pens and draw up whatever I need? It is not as though I really didn’t spend the money the way I said I did. I just can’t find the stuff…
  11. I am getting a divorce. My accountant says I can save money on taxes if we file jointly for this last year together. My spouse and I have been estranged for years. I know nothing about his/her business and in the past he/she prepared everything and I signed it. This last year I think things really went wrong with the business and he/she told me to just sign. Should I?
  12. I can’t pay my taxes. I’ll never be able to pay them. Even on a payment plan I’ll never catch up with the interest that is accruing. I’ve heard even filing bankruptcy does not stop the IRS from collecting. Is this true?

Does the IRS ever compromise their tax bill?
Yes. You may have seen advertisements for individuals or even agencies that seem to promise that they can compromise your taxes with the IRS or the State of California, for pennies on the dollar as a routine matter. The reality of the offer in compromise programs of the IRS and California Franchise Tax Board (FTB) is completely different.
The offer in compromise programs of the IRS and the FTB are staffed by experienced revenue officers and/or collection specialists. The process of submitting and offer is time consuming and requires painstaking attention to the details. A complete and detailed financial picture must be provided and verified. The process can easily take over a year. The process bears no resemblance whatsoever to the kind of business give-and-take wrangling which most people envision.
There are several basis on which an offer can be made. The most common is doubt as to ability to pay, meaning the taxpayer will not be able to pay the liability in full within the time frame for collection action by the IRS and/or the FTB.
One common basis for making an offer is doubt as to liability for the tax. An offer made on this basis requires a detailed and legally persuasive explanation of the reasons why the taxpayer believes they do not owe the tax. This is no job for amateurs. The IRS will analyze an offer made on this basis based on their analysis of case law, the relevant statutes, and the hazards of litigation. (The risk of losing the case in court.)
Another basis is “effective tax administration”. This is a strange basis on which to make an offer that basically says: “I owe the tax. I could pay the tax in full. However due to my exceptional circumstances, making me pay in full would cause an economic hardship, or be unfair and inequitable.” At first blush it would seem just about everybody would be eligible for this route. The key is exceptional circumstances. This route is extremely difficult without just the right set of facts. It requires the same detailed financial submissions as an offer based on doubt as to ability to pay and would likely take just as long if not longer.
This office takes great care and time to formulate an offer realistically. The offer program is not a gimmick and your offer receives the serious time and attention required to increase the likelihood that it will lead to an acceptable compromise.

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My employer has received a notice and they told me that the IRS is taking nearly my entire paycheck. Can they do this? What can I do?
This is a very common situation. The IRS can levy on your wages leaving you with virtually nothing except a nominal exemption amount. The net paycheck is impossible to live upon no matter how thrifty you might be. The reason the IRS usually does this is that they typically have sent at least (5) five prior letters to you asking you to pay or contact them and they have not received a response.
For a variety of reasons people either don’t get the mail or in many cases don’t open their mail. Finally, the IRS will send a levy notice to your employer. The key is to contact the IRS promptly and arrange a payment plan. Depending on the amount you owe and the time in which you can repay the taxes we may be able to set up the plan on the phone. In many cases the IRS needs a detailed financial statement, which we can help you prepare.
Once a plan is arranged you will no longer risk having your wages levied at work. It is always to your advantage to repay the taxes as fast as you can because interest runs on the balance and it also reduces the accrual of penalties.

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I don’t have the money to pay my taxes in full. A friend told me that I should wait to file until I have the money or most of it. Does that work?
NO! This “friendly advice” has cost more taxpayers more money in penalties than just about any penalty provision in the Internal Revenue Code. Some taxpayers even go a step further, and since they don’t have the money to pay by the filing deadline they don’t file at all. Then the following year they don’t file because they didn’t file the previous year and so on, and so on.
By filing your tax return on time you automatically save up to 25% (twenty-five percent) additional penalty. If you file on time this penalty cannot be charged. If you don’t file on time an amount equal to 5% of your tax due with the return is added to the tax for every month that you don’t file up to 25%. The cost is ruinous. Interest runs on the penalty amount and the effect is frightening. File on time or arrange an authorized extension to file. The first extension request is virtually automatic. Remember, extending the time to file does not extend the time to pay.

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My husband/wife died and I’ve been hospitalized for over three months. My tax returns were not filed and I did not pay this year by the due date. When I did file the IRS charged me penalties and interest. Do they ever forgive these penalties?
Yes! There is and has always been a “reasonable cause” provision which allows the IRS to either not charge penalties in the first place or if they have charged them, these penalties can be “abated”. Requests to have penalties abated need to be thoughtfully prepared. Most people think whatever reasons they give should be considered “reasonable cause.” The IRS uses guidelines set out in the Internal Revenue Manual, the regulations pursuant to the Internal Revenue Code, and in case law that has developed over the years.
We will prepare requests that help you to utilize the established rules for penalty abatement after carefully reviewing the facts to see if you can qualify.

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I have not filed a tax return for 7 years. I’m so afraid to do it now that I just don’t know where to turn?
You just would not believe how common this problem is and what different kinds of people are in this situation. Doctors, lawyers, engineers, day laborers, computer software programmers, restaurant owners, waitresses/waiters, virtually anybody you can imagine.
The answer is to let us help you get the returns filed. There are very important long standing policy reasons why the IRS generally does not take criminal action against people who seek competent legal advice and voluntarily come forward to file and pay their taxes.
Sometimes unfortunately, people who don’t file, and who would have been paid refunds by the IRS for taxes that were withheld from their paychecks, will find that some of these refunds are barred by the statute of limitations. We’ll get your taxes filed and help you get them paid and/or compromised if possible. The way to fix this problem is to take the first step and get advice on your options. The amount of stress and pressure removed from your life is absolutely enormous.

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My business is doing very poorly. We barely were able to make payroll for the employees. Two of our suppliers are demanding that we pay them or they will stop supplying us with the materials we need to run the business. The bookkeeper said if we have to, we can take the money that has been withheld from the employees’ paychecks and use it to pay our suppliers and we’ll just make it up in next week/month’s tax deposits. Can we do this on a short-term basis?
DO NOT DO IT! Don’t do it on any basis short or long. Diversion of tax deposits by employers to pay their personal bills is a very widespread and extremely serious matter. The Internal Revenue Service instructs its personnel to deal very harshly with the failure to deposit employee taxes by employers. The California Employment Development Department (EDD) does the same thing. It is extremely difficult to prove that you had “reasonable cause” not to deposit the taxes.
The IRS seldom excuses the failure to deposit without clear proof of catastrophic loss. (Death, fire, serious illness etc.) They only excuse the failure to deposit for the time it would reasonably take to obtain help in getting the deposits made as required.
If the business is not incorporated the liability of the owners of the business who made the decision not to deposit the taxes is personal. This means the IRS can collect from you personally by seizing and selling your personal assets up to and including your home. The IRS is on a nationwide push to beef up enforcement in this area because compliance has dropped seriously during the post 9/11 economic period.
If the business is incorporated and ultimately fails and/or goes bankrupt, (as many businesses do in this situation) the IRS will attempt to assess the trust fund recovery penalty (TFRP) against what are called the “responsible persons.” Again, the liability for the TFRP is personal. Although they cannot collect the whole tax that is due the IRS can collect a healthy portion of it.
Whether or not the business is incorporated, the tax liability is not generally dischargeable in any bankruptcy proceeding except in limited circumstances where the IRS fails to file a timely claim. This means that, unless the tax amount can be compromised or paid, the IRS can proceed against you for up to10 years and will file tax liens that make it difficult or impossible to buy a home or borrow money.
In short, borrow your money from someone else, actually anyone else. Do not take out unauthorized loans from the United States Government. If you are doing this, stop now. If you have not started yet, don’t start. Lay off employees if necessary, reduce your salaries, slash expenses until it really hurts.
If you have a failure to deposit liability now, we can help you to manage the process with the IRS/EDD. The key is to get into compliance currently and work to pay off the tax as quickly as possible. If that can’t be done then we will help you submit an offer in compromise, if you can qualify. A payment plan may also be an option but again the penalties and interest are ruinous so the goal is to get the arrearage paid off as rapidly as possible.

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I worked as a general manager for a corporation in the Silicon Valley. I was able to sign payroll checks and did so a few times when the bosses were out of town after they approved the bills. I was laid off and the company went under. Now almost three years later, I received a notice in the mail saying the IRS proposes to assess something they call the 100% penalty against me personally. What did I do? Am I liable for this?
The answer to these questions is directly related to FAQ # 6 immediately above. The IRS is attempting to assess the TFRP against the “responsible persons”. In the first instance the personnel at the Internal Revenue Service use a simple series of tests to determine who they believe may be the responsible persons. These tests are driven by administrative necessity. The IRS has a limited time to try to recover the taxes that were not deposited. They need to isolate a pool of persons who were potentially responsible for not depositing those taxes. From that pool they want to be sure one or more people will be found under the statutes and case law to be responsible for the taxes.
The law says that there is never a case when no one is responsible. There is always at least one responsible person and there can be many people responsible. But just because you received the notice does not mean you are responsible. We can help you prove that you are not one of the responsible persons according to the Internal Revenue Manual, the Internal Revenue Code and regulations, and the case law that has developed in this area. If you qualify as not being responsible the IRS will require strong convincing proof. This is not an area you should try to handle yourself.
If the case law indicates that you may or may not be liable this might be a situation where an offer in compromise based upon doubt as to liability can be tendered for you. Again this is not an area you should attempt to handle without help. The biggest mistake taxpayers make is failing to respond timely to the TFRP notice which can then become a legally collectible bill.

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I just interviewed with a company that has told me that they are going to hire me, but they want to “treat” me as an independent contractor to save money. The monthly check is about 40% higher than I am making in my present job. I have never done this before. They want me to sign a contract agreeing to this. Could I get in trouble?
The company that hired you can definitely end up owing a huge amount of delinquent employment taxes to both the IRS and EDD if you are in fact reclassified as an employee instead of an independent contractor. Unless you are careful and make your quarterly tax deposits, you may end up at year-end owing a huge amount of income tax with absolutely no money left to pay it. Lots of wage earners who have never worked as an independent contractor do not have the discipline to pay over their taxes quarterly. Unless the taxes have already been taken out of their check before they get the check, they spend all the money.
If you are an employer considering hiring one or more people as independent contractors seek competent legal advice before doing so. Many people think an “iron clad” contract between the business and the independent contractor will protect them. The contract is completely worthless for actually determining whether the person hired is an employee or an independent contractor.
If a person or persons working for you as independent contractor(s) are reclassified by the IRS/EDD as employees, you may owe a huge back tax liability with enormous penalties and interest. It can ruin the business. This is an area of extreme abuse by businesses and rooting it out produces large amounts of additional revenue for the IRS and EDD. We can help you decide the right way to proceed before you become an independent contractor or before you hire one. This is time and money very well spent considering the alternative. (The State of California has criminally prosecuted people running businesses who have persistently treated what should be employees as independent contractors to avoid paying the employment taxes required.)

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I am being audited by the IRS. They are asking for a huge amount of documents and want to come to my place of business. A friend told me to just bring a wheel barrow full of all the stuff they want and dump it at the revenue agent’s desk so they’ll become intimidated & discouraged and go away.
This is probably the biggest all-time urban tax myth. Taxpayers just like to dream that this is true. It isn’t true. It never was true. The type of audit you are about to experience is called a “field audit” because it is conducted in the field as opposed to an office audit where you are invited to go to the IRS’s local office and sit down with a revenue agent to go over some issue with a tax return you have filed. We can help you get prepared for either kind of audit. In either case there is a premium placed on being prompt, being polite, and being organized.

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The IRS is “challenging” my automobile mileage deduction, my depreciation expenses for the office equipment and my travel and entertainment expenses. Can they make me dig out all my receipts? If I can’t find them, can’t I just use some different colored pens and draw up whatever I need? It is not as though I really didn’t spend the money the way I said I did. I just can’t find the stuff…
NO! This one of the areas that is most thoroughly misunderstood by the average taxpayer. Generally you do not have some kind of “constitutional right” to a deduction on your tax return. Deductions must be justified and documented. The burden to prove that you are entitled to any deduction is on you the taxpayer, NOT on the IRS. The IRS does not have to prove that you are not entitled to take an expense. They need only ask you to provide documentation of the expense and if you do not do so, they can disallow the deduction for lack of substantiation.
Absolutely never prepare any document to give to the IRS that is not exactly what it purports to be. As an example if you did not keep a mileage log or have an electronic record of your mileage, do not make one up after the fact and give it to the IRS as though it was a log you prepared a year ago. This is forgery. It is a very serious crime. Never backdate a document or sign any document you believe to be backdated. The crimes of forgery, perjury and conspiracy can all form here out of the simplest of actions.
If you don’t have a log for mileage but you do have receipts for the places you traveled on business and repair/service receipts, submit these with a written explanation. The revenue agent may allow some or even all of your claimed expenses based on the other documentation you have provided if it clearly proves to him/her that the expenditure was validly incurred.
What is worse is that people routinely backdate documents when it would be perfectly acceptable to sign a document dated currently and present it to the IRS. As an example, a taxpayer may be asked for a copy of a partnership agreement in an audit. It is perfectly legal and acceptable to draft a partnership agreement and sign it and date it currently with the express provision in the agreement that it memorializes the existing agreement that has existed between the partners since 1997 and is expressly agreed to be effective as of that date.
The taxpayer should also provide any other documentation of the partnership such as business letters over the intervening years that have mentioned the partnership, and if the IRS requests it, signed affidavits from persons who have dealt with the partnership or the partners over the intervening years. If you present clear evidence to corroborate the terms of the partnership as shown in the written agreement, the document will be useful to everyone including the IRS. A forged document is a nightmare.
All the IRS is seeking to do in the vast majority of examinations is collect the right amount of tax due. Once you commit perjury, forgery or conspire to do so, the IRS will discontinue the examination. The next actions taken will involve you being read your rights. Nothing is worth this.

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I am getting a divorce. My accountant says I can save money on taxes if we file jointly for this last year together. My spouse and I have been estranged for years. I know nothing about his/her business and in the past he/she prepared everything and I signed it. This last year I think things really went wrong with the business and he/she told me to just sign. Should I?
Never sign a tax return in the last year of a marriage without getting thorough competent counsel BEFORE you sign. Even if a family court judge requires you to sign a joint tax return as part of the divorce order, do not do so until you get competent legal advice. Ex-spouses have to live with this choice for decades. It can ruin your life. A joint return means that you are liable for all the taxes owed personally even though you did not actually earn or even control any of the money earned. The IRS can collect all of the tax from you or part of it regardless of any court order you have that says your spouse is liable to pay all of the taxes.
There are a variety of approaches we can take to prevent you from becoming a post divorce tax casualty. After you have signed a joint return your options to escape liability are very limited and very difficult to substantiate.
Never assume that you can qualify for so-called “innocent spouse relief” under the Internal Revenue Code. This “relief” provision has been so ridiculously narrowly interpreted by the IRS that it can be usefully called a faint hope at best and a cruel joke at worst.
The best approach is to avoid filing a joint return for the last year of a marriage unless you are fully and completely informed about the income and the deductions and understand fully what is being done.

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I can’t pay my taxes. I’ll never be able to pay them. Even on a payment plan I’ll never catch up with the interest that is accruing. I’ve heard even filing bankruptcy does not stop the IRS from collecting. Is this true?
Some taxpayers can’t qualify for an offer in compromise and cannot even make a dent in the taxes they owe with a payment plan. What many people do not realize is that bankruptcy does stop the IRS from collecting during the period from the time of filing until the bankruptcy is closed. What is even more significant is that a bankruptcy carefully timed and filed can and does discharge many kinds of different federal and state taxes.
Income taxes can be discharged in bankruptcy . The key is painstaking attention to analyzing the time periods that are required by the Federal Bankruptcy Code to have elapsed before the bankruptcy is filed . The other key is to consider what type of bankruptcy to file because the timing rules are radically different for different types of bankruptcy. If the bankruptcy is filed after the required periods of time have elapsed, the income taxes will be discharged. But if the bankruptcy is filed one day too soon, the taxes are not discharged and when the bankruptcy proceeding ends the IRS will commence collection.
We carefully analyze the time periods required for discharge of your taxes. For those kinds of taxes that are dischargeable in bankruptcy, if this appears to be the best course, we will refer you to a bankruptcy specialist to file your bankruptcy and get the taxes discharged.