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Do You Have a Tax Problem?
Author(s): Lee French, TaxMasters
August 2009
The IRS is reportedly facing a 25% revenue shortfall for the 2008 tax year—that's in addition to the current $345 billion tax gap. The Obama administration announced in May 2009 that it would like to hire 800 additional IRS agents and quadruple funding for tax compliance efforts over the next five years. All the facts point to a drastic increase in personnel and operating budgets aimed at collecting additional tax revenue in 2009 and beyond.
Tax Problems Are Common
Some pundits estimate that as many as 20% of all US taxpayers have some sort of tax problem. With the number of IRS agents increasing and the enforcement budget growing at an incredible rate, it is clear that taxpayers who already have tax debt will suffer increased scrutiny and pressure to pay.
By all accounts, IRS enforcement activity is on the rise and we can expect to see more audits, increased collections, and tighter controls on people with multiple revenue streams or with cash-based businesses. 2010 will be a bad year to have a lingering tax problem.
Taxpayers Most Likely to Have Tax Problems
Taxpayers who self-prepare returns, are self-employed, and who are facing sophisticated financial transactions (foreclosures, debt forgiveness, and stock sales for gain or loss) for the first time are most likely to have an IRS tax problem. Failing to file a tax return for any tax year will most certainly result in IRS action sooner or later.
How to Know If You Have a Tax Problem
If you receive a notice from the IRS stating that you owe them money, you likely have a tax problem. The best action is to pay the amount in full if you agree with the increased tax liability. However, if you cannot afford to pay your taxes or if you disagree with the IRS, you have a confirmed tax problem.
Most Common Problems
If the IRS sends you any notices by mail or certified mail, it is highly likely that you have an IRS tax issue. The most common tax problems fall into two categories: tax compliance and tax payment.
Tax Compliance
If a taxpayer fails to file a tax return for any given tax year, the taxpayer has broken the law. Failure to file returns over several years can be considered tax evasion and prosecuted as such.
Often the IRS will complete a return on a taxpayer's behalf if he or she has not filed. This is called a substitute for return (SFR) and is used to assess a "best-guess" estimate at what the IRS thinks you owe. This estimated tax liability is a legitimate debt and the IRS will work vigorously to collect it. It is always better to file delinquent tax returns than to allow the IRS to file an SFR on your behalf.
Whenever dealing with the IRS, taxpayers must regain compliance before attempting to set up any sort of payment plan or settlement. If a taxpayer has unfiled tax returns, the first priority is to complete and file those returns as soon as possible.
Tax Payment (Tax Debt)
If a taxpayer owes the government money, the IRS will use every means necessary to collect full payment of that debt. The IRS collections process requires the IRS to first send taxpayers notices of the amount of debt owed. This equates to a tax bill and includes the addition of any penalties and interest that have accrued on the debt. When the IRS does not receive payment or response to the initial tax bill, the agency will send a number of other notices aimed at collecting the debt.
In all cases, the IRS is required to notify taxpayers of its intent to take collections action. If you fail to act after receiving a notice, the IRS can levy your bank accounts, garnish your wages and benefits, and place liens on your property.
Final Notice
If a taxpayer receives a "Final Notice of Intent to Levy and Notice of Your Right to a Hearing," collections activity is imminent. A taxpayer in this situation needs to act immediately to preserve his or her accounts, property, and income. Having a tax lien against you destroys your credit, freezes your assets, and results in even greater penalties and interest accruals. The effects of a tax lien are long-term and don't simply disappear even after the debt is paid off. If you have received a final notice, you need to act immediately to avoid the consequences.
Looking for Help with Your IRS Problem?
If you have an IRS tax problem, LegalZoom's partner TaxMasters can help you find IRS tax relief today. It is to your benefit to resolve your tax problems before the proposed increases in personnel and collections budgets at the IRS take effect.
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