By now most people have filed their tax returns or asked for an extension. While this provides a momentary respite from tax worries, nagging thoughts lurk in the back of many business owners’ minds: Will I get audited? Will the IRS dispute the amount I owe? For most people this is just normal anxiety associated with the unpleasantness of taxes. But for many people—especially small business owners—this mantra becomes reality.
In 2009 the IRS audited 1,425,888 returns which represent a little over 1 percent of total returns filed. 99 percent of these audited returns were for individuals, including those that don’t file a separate return for their business but instead attach a Schedule C to their returns. If you are audited or if the IRS arrives at a different conclusion than yours with respect to your tax bill, you have a problem. You could owe thousands of dollars and may not have the means to pay. What do you do? Most people would try to find a solution. Enter the tax resolution industry.
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What the tax resolution companies promise
Tax resolution companies—TRCs—promise to represent you and negotiate on your behalf with the IRS. The implicit promise is that by engaging one of these companies you will pay the IRS far less than the amount you actually owe. Many claim that they can negotiate your liability down to “pennies on the dollar.”
These claims are unrealistic. In many cases the tax resolution companies are engaged in fraudulent activities. Either way, it is very difficult for them to justify their exorbitant fees. Most recently Tax Masters, a leading tax resolution company based in Houston, was sued by the attorneys general of Texas and Minnesota for deceptive business practices. The company charges customers between $2,000 and $8,000 in fees to “stand between them and the IRS.” In 2010 they generated over $45 million in revenues.
Offer in compromise
It’s important not to confuse TRCs with legitimate accountants and attorneys that can represent your interests when dealing with the IRS for an audit. That is advisable, especially if the amount in dispute is significant. The TRCs aren’t offering to do this for you but instead are trying to negotiate the amount owed.
The TRCs supposedly try to negotiate what is known as an Offer-In-Compromise or OIC with the IRS on their clients’ behalf. They are requested on Form 656. An offer in compromise is “an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed.” The IRS approves OICs in three cases:
- There exists doubt as to the collectability of the full amount
- There exists doubt as to whether or not the tax liability is really due
- There exists a special circumstance that would make collection of the tax liability unfair or inequitable to the tax payer
The IRS only approves OICs if the OIC amount is greater than the “reasonable collection potential,” which is the amount the IRS believes they can collect if they deny the OIC. While an OIC sounds great, having one approved is extremely rare. It also carries risks. The IRS has only ten years from the date of assessment to collect taxes owed. It’s basically a statute of limitations on the collection. But during the period under which they are considering an OIC this statue of limitations is suspended.
What is more realistic is to have the IRS accept an installment plan which would ease the burden of having to pay your tax liability in a lump sum. Installment plans can be requested using Form 9465.
If you owe money to the IRS and can’t afford to pay, your judgment may become impaired due to the stress. Don’t let yourself believe in promises that can’t be kept.