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Tax resolution is the process in which tax matters are straightened out with the proper authorities and plans are accordingly made and executed. Often confused with “tax relief”, the tax resolution definition is the actual practice of solving specific tax problems. For instance, life can get in the way and cause you to fall behind on your taxes.
Health issues, divorce, the death of a loved one, and surviving natural disasters can cause emotional and financial distress that causes people to put tax matters on the back burner, and not properly resolving them can cause problems down the line.
Tax relief, on the other hand, refers to actually eliminating your balance due by making an offer to settle your back taxes or having them reassessed and resulting in the reduction or elimination of your tax bill.
Tax resolution services sometimes encompass tax relief, depending on your situation. Ultimately though, tax resolution specialists assist you with tax matters that require deeper knowledge of tax law and IRS procedures that are separate from filing your current tax return.
Tax resolution services pertain to tax issues that have arisen due to incorrect preparation of tax forms, tax debt, IRS errors, major changes to your business and/or personal lives, or neglecting your tax matters. The following services commonly fall under the tax resolution umbrella. Some tax resolution experts offer all of these services while other companies or independent experts focus on one specific area, such as audit support or back tax settlements.
While being audited is not as common as our entertainment would have us believe, it can be an extremely stressful process that entails frequent contact with the IRS by mail and over the phone. Prior tax returns, records for open and past returns, and any substantiation necessary for pleading your case has to be readily available.
Since most people need to focus their time on their career and personal needs, in addition to not wanting to make mistakes with the IRS or state tax authorities, it is common to seek out a tax resolution specialist to provide representation if you are under audit.
The tax resolution specialist handles all correspondence with the IRS, argues your case for you to help you owe as little in taxes as you are legally obligated to, and if applicable, helps restore your tax account to good standing.
Going into currently not collectible status (CNC) is a common tax resolution option that helps taxpayers buy time to get their paperwork in order or prevent collection actions if they are experiencing financial distress.
You, or your tax resolution specialist if you are working with one, need to contact the IRS and explain why your account should go into currently not collectible status. Hardships like severe illness and short-term disability, job loss, and fleeing domestic violence are common reasons why people fall behind on tax matters or cannot pay their tax bills. CNC status is typically approved immediately in these circumstances, and you do not need to volunteer more information to the IRS than is necessary.
However, you retain the right to appeal their decision if CNC status is denied based on factors like your prior tax return reporting higher income, although the reason for denial is usually because your tax returns have not been filed.
If you are married, filing jointly is often the most beneficial status to use. However, it also means that you are jointly and severally liable for the tax bill that arises from your joint income– even after divorce, and even if the divorce decree states that your former spouse will take responsibility. But there are times when your spouse will make mistakes, or perhaps not be truthful about claiming credits and deductions to which they were not entitled. The IRS offers three types of relief for spouses who are affected by this.
Seeking innocent spouse relief can entail seeking out a tax resolution expert, particularly if you are not on good terms with your spouse pre-divorce and need an impartial professional to represent you, handle communications with your spouse, and the IRS, and determine which type of spousal relief best fits your situation.
Arranging an installment plan, or installment agreement is how you can resolve collection issues with the IRS in the event that you’re unable to pay your tax debt in full.
The IRS offers short-term installment agreements for free if you think you can pay down your balance in 120 days or less, while long-term plans have setup charges if you think you need more than 120 days to pay your tax bill.
Long-term payment plans have a $31 setup fee, and automated payments are directly debited from your bank account. If you are underbanked or do not like lacking control with automatic payments, the free is $149. If you meet the IRS’ low-income guidelines, you can get the $31 fee waived for automatic payments. If you want to do manual payments and are low-income, the fee is $43 but it frequently gets reimbursed.
The IRS actually has a statute of limitations on collections of 10 years. This timeframe is based on the IRS having 10 years from which your tax bill was assessed to collect the balance, and if they fail to contact you in that time, they can’t make further efforts to collect the taxes due.
Riding out the statute of limitations is incredibly rare, especially since the IRS uses several automated tools for addressing tax return discrepancies, missed payments, and unpaid balances. There are many different types of correspondence and actions that will reset the statute’s timeline, so you should not pursue this path without assistance from a tax resolution specialist.
If you have unpaid tax bills, the IRS may put a levy on your assets like your bank accounts, retirement assets, and even your home. It begins with filing a federal tax lien, then the levy process is when the government states their intent to seize your assets then actually does it if no further action is taken.
Removing liens and releasing levies is an area that many tax resolution specialists focus on. Halting the levy process ensures you get to keep your assets and removing liens can prevent other problems, like being unable to sell your home or borrow against your 401(k).
An offer in compromise (OIC) is filed when you want to make an offer with the IRS to settle your back taxes for less than the originally assessed amount.
The offer in compromise process can be daunting since you still need to make an effort to pay your tax bill while applying and awaiting the verdict, such as continuing to make payments on any installment plans you have open. Your account must be in good standing with all open tax returns filed.
Doubt of liability OICs are filed if you don’t think your tax bill was correctly assessed, this is less common. Doubt of collectibility OICs are filed if you don’t think you will ever be able to pay off your tax debt, such as being assessed when you were high-income but you become disabled and unable to earn at the same capacity.
There is a $205 fee to apply unless you are low-income or claiming doubt of liability. There are tax resolution specialists who focus exclusively on offer in compromise cases and negotiating with the IRS on these settlements.
There are two sides to taking care of unfiled tax returns: filing the backdated returns themselves, and determining if you were legally obligated to file one in the years that you did not file.
If you have several years of backdated tax returns that need to be filed, this is a matter that needs to be resolved before you attempt to go uncollectible or settle your back taxes. Most tax preparation firms will handle unfiled taxes before going to a tax resolution expert, but depending on the firm, this can be difficult during peak tax season (January-April).
In addition to taxes themselves, taxpayers can be charged penalties for a variety of infractions. Failing to file a tax return carries a 5% penalty of the unpaid balance per month. Filing late carries a penalty, then there are more complex penalties based on accuracy, highly specific areas like foreign asset disclosures and compliance, and extreme cases called “frivolous tax positions“.
Seeking penalty relief for penalties and interest can be a simple or arduous process depending on what type of penalty it is. Penalties can be partially abated or waived entirely depending on the circumstances. Failure-to-file penalties can be waived with self-service tools, but most people seek a tax resolution professional for help with more complex penalties like accuracy-related penalties to reduce their tax liability.
If you have a business and employ people, you can be charged with a trust fund recovery penalty if you remit payroll taxes late just because of cash flow issues. This penalty makes you liable for 100% of the unpaid payroll tax, cannot be discharged, and often requires professional assistance to get the charges dropped.
Tax resolution companies employ licensed professionals who focus on tax resolution areas like audit support and OICs. However, you need to carefully research the outfit since most settlements are impossible to guarantee given that the IRS rejects most OICs. A tax resolution service that focuses on a variety of areas and helps you establish payment plans and other types of resolution is more apt to be legitimate than a tax settlement company that claims they can erase your tax bill by submitting an offer in compromise.
Yes. You have the right to represent yourself to the IRS in an audit or when submitting an offer to settle your back taxes.
After all, IRS audits are relatively rare: only 0.60% of tax returns, or six million of them, were examined between 2010-2018. Of these six million returns, less than one million entailed any type of audit at all. Of the 771,095 tax returns that were under audit, a vast majority were done by “correspondence examination” (also known as a “desk audit”), only 202,223 field audits were actually done in person with an IRS agent, which is commonly portrayed in the media. The IRS must adhere to the Taxpayer Bill of Rights by providing you due care in conducting your audit, in addition to adhering to the correspondence and field audit guidelines in the Internal Revenue Manual.
However, most individuals opt to work with a tax professional since audit correspondence and navigating various areas of tax law and administrative procedures are incredibly time-consuming and can be fraught with mistakes. 58% of tax returns that were filed in 2019 were done with a tax professional, and many taxpayers go on to retain the same tax professional for assistance with other tax matters. Professionals like attorneys, CPAs, and Enrolled Agents can represent you in all tax matters, not just tax returns they prepared.
We are here to help you navigate the tax resolution waters.