Resolving Tax Issues with the IRS: 5 Outcomes You Can Expect
This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
Dealing with the IRS is rarely something a small business owner looks forward to. Whether it's a notice requiring a tax audit or another specific tax issue, the uncertainty of the outcome often makes the process scary.
Border7 Studios recently faced problems with the IRS. AmyLynn Keimach, who heads the firm, said, "We recently received an outstanding balance from the IRS for an amount just under $3,000 for the year of 2008. As a small business and with dealing with our current taxes for 2009, this was an unexpected e-mail. They sent us the notice because the IRS stated they did not receive our K-1's and sent us back our entire 2008 tax returns. The K-1 was in the Tax Return and so we sent them a letter letting them know and re-sent our tax return. After speaking with some representatives at the IRS they said that they didn't receive our letter."
Keimach's situation was uncertain for months. The IRS could have gone either way on whether the company would have to cover the $3,000 that the K-1 form addressed. Finally, it was resolved: "After talking to several different representatives over the course of two months, the situation seemed hopeless and we would have to pay the amount. Luckily the last person we spoke with decided that since it was our first tax return with this company that they would waive it."
There are certain outcomes you can expect from the IRS though, and being familiar with those outcomes can make dealing with the IRS a little less scary. Even in a worst case scenario, it's best to contact the IRS and start working out a tax problem as early as possible. If a tax dispute drags out, the process can feel incredibly punishing — and the IRS can start looking at less pleasant ways to resolve the matter. If you move quickly on a tax dispute, though, you can typically reach one of five outcomes.
1. Resolution Without Worry
The IRS is not infallible when it comes to locating tax issues and resolving them with taxpayers. The IRS, when it has all of the information pertinent to a specific tax case, may simply find in favor of the taxpayer. Furthermore, the agency handles millions of tax returns — sometimes a piece of paper goes missing and you can resolve the whole issue by sending in a copy of the missing document. When you learn of a tax problem, don't necessarily assume the worst. More often than you might think, the IRS just needs to take care of the details. You may even wind up with a refund, depending on the situation — and the IRS giving you money is the best solution you could hope for.
2. Lump Sum Payment
Most of the problems that a small business owner will face with the IRS come down to a question of money. That means resolving a tax issue may just come down cutting the IRS a check to cover tax liabilities, along with any penalties that have accrued. It may not be the resolution you would prefer, but a lump sum payment can put a tax issue in the past. If you business is in a financial position to offer up a lump sum, doing so will avoid future costs, including penalties and interest.
3. Payment Plans
A taxpayer may face a tax liability that he or she simply can't pay in one lump sum. In order to make such situations easier to resolve, the IRS will create a payment plan or installment agreement in many situations. When requesting a payment plan, the taxpayer can set the date on which payments are due, as well as suggest an appropriate amount for a monthly payment. The IRS chooses whether to accept the proposed plan on a case by case basis. In addition to paying the tax bill in full over a set period of time, taxpayers with a payment plan will pay interest. Typically, taxpayers owing up to $25,000 in combined tax, penalties and interest can qualify for a payment plan. Taxpayers with a bigger liability may still be able to qualify, but must complete additional paperwork.
4. Offer in Compromise
If the IRS determines that a taxpayer owes money, there are some circumstances in which a settlement will be accepted. An "offer in compromise" is a settlement agreement between a taxpayer and the IRS setting the conditions of repayment and the amount expected by the IRS. The IRS will typically agree to an offer in compromise if the taxpayer in question meets one of three specific criteria.
The first is a "doubt as to collectability" — the IRS is doubtful that the taxpayer can pay his or her liability either in a lump sum or through a payment plan. The second is a "doubt as to liability" — the IRS is doubtful that the assessed penalties and liability is correct. In such a situation, the IRS is essentially willing to accept a settlement rather than re-investigating the matter. Lastly, an offer in compromise may be accepted under the question of effective tax administration — to be accepted under this classification, the taxpayer must demonstrate that paying the tax in full would either be unfair and inequitable or that it would create an economic hardship.
5. Appeal
If the IRS makes a decision on your tax issue, typically not in your favor, but you think the decision is incorrect, you don't have to leave the matter at that. The IRS offers the opportunity to appeal decisions. The IRS also provides the Taxpayer Advocate Service — an independent organization within the IRS that assists taxpayers. The service is meant to make sure that all taxpayers are treated fairly, as well to help resolve situations that cannot be resolved through the methods the IRS normally uses.
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