Travis W. Watkins Tax Resolution & Accounting Firm's principal, Travis Watkins, has some curious advice for taxpayers in IRS trouble. These tips may prevent an IRS problem before it begins.
1. Don't extend your filing and payment deadlines, if you can help it. If you want to avoid tax problems, file your returns on time. I often hear small business owners complain, though, that they must extend their personal filing date for one reason or another. Perhaps they are waiting on K-1 partnership income statements. Sometimes, this is just out of their control. However, your deadline to pay cannot be extended. How are you going to know how much to pay on April 15th, if you don't prepare those taxes (or a pro forma of your return)? A lot of these small business owners that extend are the very ones that have the ability to control when the K-1 gets filed in the first place, if you're a partnership or company of one or a few, you can control when you send out the K-1 to yourself and this is just the best practice. Don't prolong the inevitable! You're just racking up crippling penalties and interest and essentially lining the government's pockets by waiting.
2. You can do some things yourself when it comes to IRS paper audits. The IRS routinely sends out paper notices to taxpayers that say, "explain to us why your return doesn't match what third have told the IRS that they have paid you this year." If you have minor mistakes or things that need to be "shored up" with the IRS, such as a simple reporting error, then you can certainly discuss those things with the IRS. However, if you've underreported 20% or more of your income, now you're starting to look at significant penalties and fraud concerns start to emerge. That would be a good time to hire a tax professional to talk to the IRS on your behalf.
3. If you can pay back what you owe the IRS within 120 days, you may not need a tax resolution specialist to assist you with a formal payment plan., You can call the IRS in those situations and obtain a reprieve of 120 days to pay your taxes. They will do that routinely if you can convince them that you have a windfall coming or a third-party is going to assist you in paying off that debt soon. If you haven't been in tax trouble before, you can call them up and just tell them, "please give me 120 days to pay this." Now, that doesn't stop penalties and interest from running and it doesn't necessarily stop the IRS from filing a lien. However, all things considered, you don't need a tax professional to do this.
4. If you owe the IRS less than $10,000, you're probably not getting a good "bang for your buck" by hiring a tax resolution firm. This is mainly because tax resolution outfits, mine included, charge taxpayers an industry-standard 10% of what a taxpayer owes as a resolution fee. Most tax resolution firms are also going to set a "floor" on that fee, a $2,500 fee, for instance. So, if you owe $10,000 and you're paying $2,500 or more to a specialist, then it's not feasible, nor logical situation. If you're in that situation, there's a plethora of things on the IRS' website and free YouTube videos on my channel to assist you.
5. You may be a candidate for the IRS' First-Time Penalty Abatement Program, so you can make that request on your own. If you have a good track record of filing and paying on time, let's say for five years, then you may be able to call the IRS yourself and ask them for this First-Time Penalty Abatement. If you just had one tax year "hiccup," the IRS will often forgive that one year of penalties and associated interest. They never forgive straight interest on these things, unfortunately. Here's a tip I said that if you've been good, they may do that for you "as of right," without having to explain a whole lot of circumstances of why you got into trouble in the first place. However, even if you haven't been good, you can call up the IRS and get that one year first-time penalty abatement, and it goes through sometimes.
6. don't hire a tax professional if you can pay your IRS debt, but you just simply don't want to do so. Tax resolution is not tax evasion. There is a lot of misinformation out there that the U.S. is a "voluntary tax system" and paying taxes are somehow illegal. Don't call for it! If you're a tax protester, then you may not need a tax professional. You may need a criminal lawyer because these arguments incite the wrath of the IRS. More importantly, these arguments just don't hold water.
7. Finally, if you have the time and guts to call the IRS' collection officials,you may not need a tax professional. At our office, even when calling on the taxpayer professional priority hotline, we may wait hours to talk to the person that we want to talk to at the IRS. Most taxpayers don't have that kind of time. Most importantly, if you have the ability when under pressure to ask the IRS for more (more time to file or pay, for instance), then that may be a situation where you may feel comfortable on your own. The IRS' reputation for intimidation is well documented, though. We stand in the taxpayer's shoes and negotiate on their behalf, which can lessen that intimidation factor. We can, in many circumstances, buy you some more time.