IRS Appeals’ Fast Track Solutions

The IRS Appeals Office plays an important role in seeking the resolution of federal tax issues before taxpayers have to pursue expensive court remedies. Indeed, the Appeals Office’s primary purpose is to promote compromise and settlement. An historical problem has been that once a case gets to the Appeals Office, it often languishes for months.  One strategy to avoid delay would focus on Appeals’ Alternative Dispute Resolution (ADR) Program.  The (ADR) Program includes “fast track” settlement and mediation procedures closely monitored so that they can ideally be completed within two to four months after referral. When cases qualify, and a number of types of cases do not, taxpayers and the IRS may begin either the settlement or the mediation process after an audit is largely completed and the issues developed, but before a 30-day letter is issued. This hastens the resolution process and avoids the long delays inherent in preparing a protest and awaiting assignment to an Appeals officer and an eventual conference date. During fast track settlement, the taxpayer, an examination division manager and an appeals officer work closely together to craft a settlement. For fast track mediation, the Appeals Office assigns a representative with mediation expertise. As a practical matter, efforts to settle may start with mediation to bring the parties together and then continue toward eventual settlement. Appeals officers are authorized during the fast track settlement process to offer a settlement. A taxpayer’s agreement, or request, to seek fast track resolution does not bind him to one process or the other. The taxpayer may decide at any time to opt out of the mediation or settlement effort and thereafter pursue his normal Appeals remedies.

 

SPEAK UP

Common reactions to receiving a bill, a notice of intent to levy or some other intimidating message from the IRS or the state tax agencies are fear and silence. We typically do not want anything to do with those we perceive to be our enemies. In fact, if you have a tax problem that is not criminal in nature, a good thing to do is to contact the relevant agency before it contacts you. That’s the best way “to take responsibility”, and in my experience, those that do so are usually treated pretty well. However, if the IRS or state acts first, a quick response can be the start of constructive communication – a pleasant alternative to what will lead eventually to one or more property seizures “to get your attention.”

 

IRS Offers Another Deal

A problem common to employers is how to classify the people who work for them. Certainly, someone who works full time for a particular business owner who controls what he or she does is most probably an “employee.” Someone else who operates on his or her own schedule and provides services to a number of different persons and entities is likely an “independent contractor.” In between those poles is a large gray area where identifying a worker as an employee or independent contractor can be problematic. Make the mistake of misclassifying a worker as an independent contractor when he or she should legally be treated as an employee, and the IRS can seek several years of back withholding taxes, as well as unpaid Social Security (FICA) and Medicare taxes, plus penalties and interest. Minimum wages, overtime, workers compensation, unemployment insurance, medical care coverage and other employee benefits under federal and state law could also enter the mix.

The IRS recently announced a Voluntary Classification Settlement Program. Under this Program, a business owner may agree to reclassify independent contractors as employees. The employer’s reward is that it will have to pay only 10% of the payroll and Social Security taxes due for the most recent tax year and determined at reduced rates, with no interest and penalties. Compare that result with paying all payroll taxes at regular or increased rates accrued over periods of at least three years, plus perhaps other employee benefits, plus interest and penalties. The potential savings offered by the Program warrant the review of every business owner. Employers eligible to participate in this program:

1. must have consistently treated the subject workers as non-employees;
2. must have filed all required Forms 1099 for the previous
three years;
3. cannot be under audit by the IRS;
4. cannot be undergoing a worker classification audit by the Department
of Labor or a state government agency; and
5. must be compliance with any prior classification audits conducted by
the IRS and the Department of Labor.

For further details, please visit the IRS website at irs.gov.

 

Audits – Don’t Be a Victim

The IRS and most states initiate audits by contacting a taxpayer by phone or letter. Taxpayers will often respond to the initial contact with a mixture of fear and intimidation. They may not want to communicate at all. Alternatively, the inclination may be to do whatever the auditor or examining agent wants to do and whenever they want to do it. Audits characterized by distrust and one-sidedness may prove to be disjointed and unnecessarily time-consuming and stressful.

Any audit should be a cooperative exercise. Taxpayers can exercise a fair amount of leverage to insure that tax records examinations are conducted expeditiously and fairly. First and foremost, a taxpayer will have most, if not all, relevant tax records. If the examiner is not courteous or cooperative, any taxpayer has the option to produce records only in response to a formal summons. Tax agencies do not like to proceed by way of summons primarily because enforcing one through a federal district court takes a lot of time. Another option, always available, is to address complaints to the examiner’s manager. However, always try to work out disagreements with the examiner first.

Both the tax agency and the taxpayer will benefit if the audit is well-planned ahead of time. The planning should start with the examiner’s identification of which tax returns and tax return line items he/she wants to review. The taxpayer and the examiner should agree on consecutive dates so that the audit can proceed and be completed within the shortest possible period of time. The taxpayer’s responsibility is to have the necessary records available at the beginning of the audit. The examiner’s responsibility is to conduct the audit fairly and as quickly as possible. It’s not uncommon for an examiner to identify additional items to review after the audit begins. If the items are ones that should have been identified and disclosed before the audit began, the taxpayer may object.

 

IRS 2011 Voluntary Disclosure Initiative

Begun in February, 2011, this voluntary disclosure program is scheduled to end on August 31, 2011. That date may be extended, as was the 2009 voluntary disclosure program’s initial termination date. But, don’t count on it. This Initiative reflects the success of the 2009 program, which promoted over 15,000 voluntary disclosures. The Initiative’s purpose remains the same, to battle tax evasion attempted primarily through parking untaxed funds in foreign accounts where the IRS might not find them. A harsh option also remains the same: Either make a full disclosure and incur a variety of civil penalties, or bypass the opportunity and risk more severe penalties and the real possibility of criminal prosecution. The IRS website home page at www.irs.gov provides links to a full description of the 2011 Initiative’s provisions, as well as relevant questions and answers.

 

Washington State’s temporary amnesty program

If certain conditions are met, taxpayers who owe State business and occupation tax, State and local sales and use taxes and State public utility tax may obtain waivers of penalties and interest. Unlike the State’s voluntary disclosure program, which is limited to unregistered businesses, this amnesty program is open to both registered and unregistered businesses. By April 18, 2011, taxpayers must file all returns with respect to which waivers will be requested, and as well an application available at www.dor.wa.gov. By April 30, 2011, taxpayers must pay all outstanding tax liabilities, and penalties and interest due on taxes outside the program. Returns and payments due during the amnesty period must be timely. Related tax warrant fees must be paid, and any right to contest a related liability or apply for a refund must be waived.
Taxpayers in bankruptcy may be excluded if their participation would violate bankruptcy law. Also, any taxpayer penalized for evasion or misuse of a reseller permit or resale certificate, or “prosecuted” for failing to collect or pay a State tax, may not participate. See the Department of Revenue’s website for further details. The Department will provide payment and savings quotes upon request.

 

Don’t Be Shy

Certainly it is unpleasant to receive a bill from the IRS or a state tax agency. It’s even worse if bank account or other property seizures are being threatened. Threats of seizure typically result when taxpayers do not respond to the billings. With property seizures, tax agencies usually just want to “get your attention.” The lesson, then, is to be responsive to tax correspondence, even when the situation seems hopeless. The worst thing one can do is react to any fear and intimidation by doing nothing. In my experience, taxpayers who are willing to communicate in an effort to work out any problems are almost always treated well. The best option for any tax agency is to solve account problems without their becoming a burden on agency resources. That also happens to be the best option for the taxpayer.

 

Corporate Director Compensation

Washington State taxation of corporate director fees and other compensation is subject to rules one might not anticipate.  Taxable director compensation includes not only cash and checks, but also stock options and other property, bonuses, awards, etc.  Directors must also include in reported fees reimbursed expenses for  meals, travel and other related personal expenses.  If compensation equals or exceeds $12,000, a director must register with the Department of Revenue and receive a Master Business License.  All compensation is subject to Business and Occupation tax under the “services and other activities” classification.  The tax rate is currently 1.8%.  The good news includes the fact that corporations  may report and pay their directors’ taxes, but directors are always responsible for assuring payment.

 

Offers in Compromise tip

Taxpayers may qualify to participate in the IRS Offer in Compromise program to settle a federal tax debt. While there are three types of Offers, the “doubt as to collectibility” Offer is by far the most common.  Taxpayers file collectibility Offers when they cannot afford to pay the tax, penalty and interest amounts due.  A collection information statement, Form 433-A,  describing assets, liabilities, income and expenses, must accompany the Offer.  I do not believe that tax counsel  is able to advise a taxpayer regarding whether he or she may qualify to file a valid Offer until he solicits and reviews a draft Form 433-A, or the same information in another format.   I do not charge clients to make that preliminary review.

 

Audits – Don’t Be a Victim

The IRS and most states usually initiate audits by contacting a taxpayer by phone or letter. The taxpayer will typically respond to the initial contact with a mix of fear and intimidation. He or she may not want to communicate at all. Alternatively, the inclination may be to do whatever the auditor or examining agent wants to do and whenever they want to do it. Audits characterized by distrust or one-sidedness can readily prove to disjointed and more time consuming than necessary.

Any audit should be a cooperative exercise. Taxpayers can exercise a fair amount of leverage to insure that tax records examinations are conducted expeditiously and fairly. First and foremost, the taxpayer will have most, if not all, relevant tax records. If the examiner does not appear to be courteous or cooperative, any taxpayer has the option to produce records only in response to a formal summons. Tax agencies do not like to proceed by way of summons primarily because of the inherent delays. Another option, always available, is to address complaints to the examiner’s manager. However, always try to work out disagreements with the examiner first, looking for compromises.

Both the tax agency and the taxpayer will benefit if the audit is well-planned ahead of time. The planning should start with the examiner’s description of which tax returns and tax return line items he/she wants to review. Consecutive dates available to both the examiner and taxpayer should be determined to allow the audit to proceed and be completed within a reasonable period of time. The taxpayer’s responsibility is to have the necessary records available at the beginning of the audit. The examiner’s responsibility is to conduct an audit fairly and as quickly as possible.

It’s not uncommon for an examiner to identify additional items to review after the audit begins. If the items are ones that should have been identified and disclosed before the audit began, the taxpayer should object. If new items are addressed, agreed review, response and conclusion time limits should be established.