IRS Penalty Removals Chapter 9
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IRS Penalty Removals, Disagreements, and Collection Appeals
Requesting Records From The IRS
You can obtain your record of account. Currently you can call any number you have for the IRS and have them direct you. We currently use 859-669-5498 for transcripts, document 10978, or copies of BMF or IMF accounts. Or call 866-860-4259. Numbers change so don’t hold me to this. With a signed power of attorney, we can pull your transcripts in three days. Or right away if we have a power of attorney filed on you. The cost is 0-0.
Should you pull your Individual Master File (IMF) or Business Master File (BMF)?
Unless you are going to court to prove certain documentation (which I really don’t recommend), I would not bother pulling any of these. I don’t pull them for my clients. If it is necessary to look something up, it usually is part of a revenue officer conversation and they are happy to fax their copy. What you should pull is the “record of account” transcripts. These will give you information as to when certain transactions have taken place. The date a return was received from the taxpayer or made up by the IRS. Dates of payments, credits, interest charges, penalty charges, statute write offs, offer in compromise filings, bankruptcy filings, etc. This is usually comprehensive enough to solve your IRS problems. Pull these records any time you are resolving what you owe for any year.
Many people use the IRS letters as reference to what they owe. The problem with this is that they only tell part of the story, and are often incomplete. They are often out of date. I call the IRS “record of account” the “Bible” of the IRS. It is equivalent to “the word of God”. If it is not on the ROA is doesn’t exist for practical purposes. You must verify this with a revenue officer however. I once pulled a record of account that was actually up to date transaction wise, but someone failed to apply the actual balance with interest and penalties. Both the revenue officer and I knew it was incorrect. She said she would have it corrected and send me a copy. Sure enough it was corrected and I had a copy! So make sure the record of account reflects what actually exists, otherwise you will overpay or you will mistakenly think that you don’t owe, do nothing about it, and then wind up with a wage levy! Make it your responsibility to see that the record of account is correct. Look up any codes you don’t understand on the IRS web site. You can always call IRS ACS general numbers at 1-800-829-7650 or 1-800-829-1040 to request documents.
IRS Penalty Removals
If you don’t want to pay the penalties pertaining to a particular year or period, you can file an 843 claim for refund, if applicable (read the instructions). Usually you can get the penalties off for the first period involved, after paying it in full, just by asking. But I would show that it was due to reasonable cause and not willful negligence anyway. There are specific wording that the IRS looks for. Consult the IRS penalty handbook information.
Instructions for filing out form 843:
- Fill out name and address etc. List the start and end of each period. Ex: 1/1/05- 12/31/05 for 2005 1040. Use a separate form for each period.
- Copy the amount from the notice.
- Type of tax or penalty and the form number. For the form 1040 select “other” and write it in.
- If not just interest and penalty from IRS error (not in this case) just leave blank.
- Put ‘see attached’ and attach your letter. Fill out the signature and date portion. Make a copy. Mail certified return receipt. Mark your calendar to follow up about 6 weeks to see if it has been processed. As with all correspondence to the IRS, take responsibility to work it through the system.
If you can’t agree with ACS, you should request that the case be sent to a revenue office (field officer). You can tell them that you want to deal with someone face to face, someone local who knows what the local living expenses are. R.O.’s are better able to make decisions concerning your 433a and 433b and the monthly payments you are to make to pay off your debt. You may have to call back a few times to get this. Each time you call back, keep trying to get the payment amount you want. Remember to argue within the guidelines I have given you. Do not argue for favors because of your hardship situation. Keep supporting your reasons for them to accept your income and expense items so that you will pay the monthly amount that you figured you should pay. If they still don’t agree, request that the case go out to a local R.O. Tell them that you will make the monthly payment that you are trying to get (the first one now if necessary), and therefore you are not asking that it go to a R.O. as a stalling tactic. If you get a lot of resistance, rethink your strategy. You may be holding out for an expense deduction that won’t stop you from meeting the monthly payment amount anyway.
More Penalty Removal
Failure to file penalty code 6651.
Check the penalty handbook for the reasons to address removal of this penalty. Some of the most common ones are:
You mailed returns and payments in a timely manner, used the wrong address, relied on information from the IRS, had an illness or death in the family, were a victim of a fire or flood, couldn’t get the information to file on time, were given wrong advice by an Attorney, etc. Prepare as you would a regular affidavit.
This is a big penalty. 5% per month for up to 5 months from the date the return was due. It is 5% of the tax liability at the due date. So let’s say you owe ,500,000 as of the due date. Then two months later you pay the whole thing, but do not file the return until 8 months later. You may think that the penalty is only for two months because the liability was paid off. How can they charge a penalty based on a liability that doesn’t exist anymore? Well the IRS says they can. I encountered just this very case. I even did an appeal based on the fact that I told taxpayers that they could file the return late since it was paid and they didn’t have to worry. Since this is not something that the taxpayer should or would have known, and is complicated enough to seek professional advice, they should have had the penalties removed. This is a great example of how the IRS will force issues to tax court. This is why you must try to head off IRS problems by first by filing and paying in a timely manner, making sure the IRS has your correct address, and contesting letters at the time you receive them.
Negligence And Substantial Understatement Penalties
IRS code 6662 and code 6664
The IRS will charge this penalty in addition to late filing and late paying penalties. They charge it for negligence or intentional disregard of the rules or regulations, and for substantially understating the tax liability. You can’t be reckless when preparing your return. Which is why you should chose your tax preparer wisely. You could pay penalties far greater than any savings in preparation fees. These are easier to beat than the other penalties.
- Consult the IRS penalty handbook.
- Demonstrate in affidavit form that the above situation does not exist.
Try to work with your auditor and their manager. It is rare that I have to appeal an audit I handled from the start. My audit appeals are usually to bail out people who missed audit appointments, or who were not cooperative during the audit. Most auditors (unlike the collection division) , tend to be very logical and understanding about your situation. Audit appeals are a little more loose than the appeal below for trust fund. They understand that not everyone has an adequate chance to provide the necessary documents to avoid adjustments against them. Do the following…
- File a timely appeal. Read the instructions carefully. You have 90 days if issued a notice of deficiency, otherwise you have 30 days.
- Look up the tax law involving the items disallowed or added to the return. Become familiar with the reasons why an item may not be accepted and prepare to defend it.
- As with all appeals, look up cases that support any items you think may be a problem, and obtain notarized statements from anyone who can support your claims.
Appeal Of The Trust Fund Or Civil Penalty
If you can’t convince the revenue officer that you are not liable, you must file an appeal before the 30 days are up. An appeal should cite to the court cases and other documentation that went into your research, but if time is running out, you can file a short summary version with a request that a more detailed version will follow later. This is an area that relies heavily upon court decisions in your region of the country. Find out what federal circuit court your state is in and pay attention to decisions in your favor from that circuit. You will have to do the following to win. Remember that if the revenue officer and manager didn’t agree with you, they feel that they have a case.
- Become familiar with exactly what constitutes liability for the trust fund.
- Find out how the courts in your circuit feel on distinguishing items that make someone liable.
- File your appeal, even the short version, on time and with as much detail as you can, so it isn’t turned down.
- When the appeals conference is scheduled, call up and request that you look at the files they have. This is your right, and they don’t mind, so use it any time you file an appeal. In my earlier days I used to do appeals without examining their records and went blindly to the appeal. Then one day an appeals officer said” Why didn’t you look at my records before, then you would have been aware of my arguments?”. Well from that day forward I did. It makes appeals a lot easier when you know ahead of time what their arguments are!
- Make sure you do a lot of case research. Appeals is looking for you to prove that if they error, you will win in court. That is their main objective, so you may as well know it now. This is not an appeal for sympathy based on hardship. This is a question of you being able to prove to them that if they still want to make you liable, it will be a waste of the IRS’s time and money to take you to court, because you will win! Got it ?
- Don’t forget witnesses. Get signed notarized statements from people who worked with you, have witnessed, and have first hand knowledge, etc. of anything that helps prove you case.
When appealing the Trust Fund, I highly recommend that you hire a professional representative.
Independent Contractor Disputes
If the IRS is trying to say you paid someone contract labor (no withholding tax taken out) instead of on a salary (withholding tax taken out) and you feel that you are in the right, you should fight it. Proof can be found by using your local state’s unemployment or workforce office’s rules for determining whether or not someone should/could be paid contract labor. Document in detail how you meet the tests, the way you normally would when preparing an affidavit. Get signed affidavits from as many witnesses as you can who will say that they witnessed your actions as a contract labor person, not an employee, according to the rules. Do this within the 30 day time period.
Look up the current ‘safe harbor’ rules to avoid the IRS charging you for several years, if you had a ‘reasonable basis’ for treating them as contract, and filed all the applicable 1099′s on time, etc.
Remember: Even if you lose and are charged the self employment tax, interest, and penalties, none of it is trust fund (since you never took it out of the paycheck in the first place). Therefore, if you have a corporation or LLC, you will have time to set yourself up to liquidate the company if the taxes are too big for you to handle. A corporate liquidation will get you out of all of these. You can call or email us to see if you qualify. If you don’t qualify, we can look at ways you can qualify in the near future.
Wage levies – Bank levies
Reasons the IRS may remove levies are:
- Statute Of Limitations on collections has expired.
- Releasing the levy makes their collection easier.
- You have convinced the IRS that the levy creates a severe economic hardship for you.
However, the best thing to do is accelerate the collection process. Money can go toward the 1st payment that you negotiate 45 days from now, so the next payment isn’t due till 2 1/2 months! The IRS will give back money from a bank levy, by allowing the bank to cash certain checks written to employees that are not part of your immediate family. You should also argue that the money frozen in the bank was your federal tax deposit money, so it should be coded first to that before the payment of any back taxes. If you can negotiate the removal of these levies with the agreement that the money go toward the first installment payment 45 days from now, this will give you 2 1/2 months till you have to write a check toward the back taxes. See chapter 8 on doing payment plans for advice.
Signed Affidavits switch the burden of proof back to the IRS. Sometimes that doesn’t matter, but many times it does. So when in doubt about its effectiveness, I would use one anyway. Here is a general outline…
Affidavits need to be exact as to facts and conclusions so make sure you include the following:
- Reference to the letter from the IRS that you received with the title and name of the letter. Include the date on the top of the letter.
- State specifically what the letter is doing that you take objection too. Then state your objection. For example, if the letter imposes a tax, don’t state the reasons why you can’t pay the tax. State the reasons why you object to the tax being applied to you. For example, you filed your return. You paid the tax already. The code doesn’t allow the penalty to be applied because of a certain reason, etc. Short, sweet, and to the point.
- State all facts. Leave out emotions. Include what was happening that led up to the actions you took. State why you took them, and how your actions were the only prudent choice. Show that there was reasonable cause not willful neglect. Show your actions were in good faith, any failure to pay was a result of prudence when providing for payment, and that you still were unable to pay without suffering a hardship, etc.
- In many cases there is a set of reasons you have to prove in order to use an affidavit. Google “IRS penalty handbook” and look up “relief from penalties”. You will find the definitions needed to get out of penalties. I have included some other cases in this manual. Once you read through you will have a good feel for what it takes.
- When asking that penalties be removed, make sure that you ask separately for any interest to be removed. Sometimes the IRS removes penalties and forgets to remove the interest that has accrued on those penalties.
- Put your declaration at the bottom of the letter. Use words such as “I swear under penalties of perjury that to the best of my knowledge, the above facts contained in this letter are true and complete”. Sign and date the letter.
The IRS Is Missing A Return You Filed
Sometimes the IRS is missing a return you would swear was filed. If you want credit for filing it on the date you filed, prepare a letter (affidavit), stating the exact situation. For example, “on March 4, 2007 I personally went to the mailbox at the post office at 2348 Main St., Buffalo, N.Y. and dropped in an envelope containing my 2006 form 1040 personal income tax return, sealed and addressed to the IRS at 1200 Government Plaza, Albany, N.Y.” Include with your mailing, any proof of mailing that you may have. Have your letter notarized and give it or mail it to the collection officer. If no one is assigned your case, mail it directly to the IRS address designated in the letter you received informing you of the missing return. If you found out by pulling your own record of account, then call ACS to find out the status of your case and who to mail it to. I hope you are not asking for the phone number. By now you should know to Google “IRS ACS PHONE NUMBER”, or something like that. The numbers they give are 1-800-829-1040 and 1-800-829-4933. You can always call phone numbers on other IRS letters you have and they can direct you. Always send any mailing to the IRS certified, return receipt. I have a client that does his IRS mailings just “certified” and without the receipt. This does prove you mailed it, and it’s cheaper that way. Personally, I like to have the actual receipt copy in my hand. I’m old school, and sometimes don’t like to trust any government office with records of transactions I may need to prove later!
To make sure you win when it comes up in the future, send all correspondence to the IRS certified, return receipt, after making a copy for yourself of every document send. Staple it all together so you have an exact duplicate of the order of each paper sent. Mail each tax return copy. You keep the originals, including signature pages, in a separate envelope. A photo copy of a signature is as good as an original in most cases. If sending in 1040′s for more than 3 years, mail each one 3 days apart. That should keep it from going to the fraud division to determine if they should question why so many returns are delinquent.
IRS Letter Charging Unreported Income.
Just get a copy of the 3rd party payer information. Call the IRS to get it (see above). Usually the notice will list the income sources and amounts, so you may be able to verify it right away. Good news- since this is a correction notice, contest it, stating that each source individually is not your income, (or only part of it is), and swear that you didn’t omit income on your return. Then request that under code section 6213(b) they must abate the liability, or in the case where they elect not to abate it to send you a notice of deficiency so that you can file an appeal. Then state under penalties of perjury that you declare that the facts stated in this letter are true, correct and complete. Of course, I do not advise you to do this if the facts are not true. Follow the procedures outlined above for preparing an affidavit. You should also include form 843 Claim for refund and request for abatement. This will formalize your abatement request. You have to change the form a bit. Above the words ‘Claim for refund….’ put “Abatement request under code section 6213(b)”. At worst, if they don’t accept this and issue the 90 day notice of deficiency, or even just tell you “where to go”, you can continue to make sure they only add the correct amount to your liability. Try to get the IRS to remove any negligence or substantial understatement penalties. And if you remember, after you pay it off, you can file a claim for refund of taxes paid (same form). Explain how you didn’t realize that you had this income in the first place, and that you will endeavor to keep better records in the future, etc.