Jassen Bowman EA
Jassen Bowman EA

Unfiled Tax Returns

Do you have past due tax returns? If so, you’re not alone. While the IRS does not publish statistics on this, nor are they really able to track this number, but my own research and statistical analysis (because I’m a numbers geek and do stuff like that), estimates that there are between 5 and 8 million outstanding personal income tax returns in the United States for the past three years alone.

If you owe a tax debt to the government and are seeking to get that situation resolved, you will first need to file any missing returns. The IRS will NOT negotiate a payment plan or a reduced settlement if you have past due tax returns. The reason for this is pretty simple: If you don’t file the returns, they don’t know how much you really owe.

While any tax preparer, CPA, or Enrolled Agent can probably assist you with filing your past due tax returns, it is important to note that many of these tax preparers focus their practices solely on current year tax return filings. Since the tax laws change literally every year, it’s a daunting task just to keep up with the tax code for the current year, so many tax preparers don’t bother trying to keep up with prior year tax matters.

A firm that specializes in taxpayer representation, on the other hand, often does exactly the opposite. Many of these firms don’t even offer current year tax return preparation. Since the tax code as applicable to prior years is fixed and no longer changes, they can maintain their skills and knowledge on prior years quite readily since they focus almost exclusively on preparing older tax returns. This lack of change in the past tax code and their experience preparing these returns also lets them complete them fairly quickly, since they don’t have to spend time researching the old laws, and therefore you don’t have to pay for that research time, keeping their fees reasonable for this sort of service.

Search our directory of taxpayer representation firms to find a tax professional in your area that specializes in preparing back tax returns.… Continue reading

IRS Penalty Abatement Reasonable Cause Criteria

One of the most common questions we are asked has to do with the reduction of interest and penalties on IRS accounts. Any reader of this blog knows that I am adamant about correcting the myths, lies, and half-truths perpetuated by tax resolution salespeople, and the IRS penalty abatement is one of the things least understood and grossly oversold by unlicensed salespeople at large, national tax resolution companies.

First of all, let’s get this out of the way: There is no reasonable cause interest abatement application process within the IRS. It simply doesn’t exist, period. If somebody is telling you they can get your interest reduced, you’re straight up being lied to, and you should seek assistance elsewhere.

There are two, and precisely two, instances in which interest is reduced:

  1. Any IRS employee gives you false information, which you acted on and resulted in the interest. This is one reason why all IRS correspondence should be conducted and follow up in writing.
  2. Since interest is calculated based on the tax liability, if an amended return is filed and the tax itself is lowered, then the interest is also reduced.

Now, on to penalties. The IRS charges dozens of different types of penalties, but the three that we most commonly talk about are the late filing penalty, the late payment penalty, and the penalty for not making Federal Tax Deposits. These three penalties combined can add a whopping 65% to your total IRS bill. If your tax debt is more than two years old, you’ve maxed out all these penalties, and therefore over half your total debt is penalties.

The IRS does actually have a compassionate side, and it’s generally found in the penalty abatement process. Penalty abatement applications can also be appealed if initially denied, so you can always get a second set of eyeballs on the issue. The thing to keep in mind is that the IRS has very strict guidelines for granting penalty abatements, and these guidelines are referred to as “reasonable cause criteria”.

It should be noted up front that “we didn’t have the money” is NOT a reasonable cause criteria. A drop in revenue, by itself, is insufficient argument for obtaining penalty relief. Any request for penalty abatement simply citing the economic recession will be immediately denied.

Why is this? Here is the IRS’ logic: You made the money, and should have paid the taxes at the time on that money. … Continue reading

Can Tax Debtors Actually Afford Your Tax Services?

This is probably the most common question I get from CPA’s in particular. The key is collecting your retainer up front. If I know that a situation is going to take, say, $3,000 to resolve, then I tell the client that up front. I’ll let them pay on a retainer basis like a lawyer does in installments, but I insist on an up-front minimum of either 1/3 of what I expect the total to be, or $1,000, whichever is greater.

The next question that usually follows is this: These people and businesses owe back taxes, which implies they’re broke, so how do they pay you?

This comes down to selecting those businesses and individuals with a high cash flow, so they CAN pay you. There’s a little trick for selecting the best leads to start with, actually.

Here’s the secret: The average 1040 tax debtor owes for 3 or 4 years worth, and the average business lien will cover a median of 4 quarters worth of 941 taxes. Knowing that, and knowing the tax rates, you can work backwards from the tax debt amount, make an assumption regarding the ratio of penalties/interest to tax, and arrive at roughly how much their AGI or quarterly payroll is.

Based on what you’re comfortable with, you can then set a criteria for whom to work with. If you are comfortable bringing on clients with a $40,000 per year income, then you can find the tax liens to mail to and call that have that income level, based on their tax debt amount. If you’d rather work with clients that have a minimum six figure income,
and therefore are more likely to be able to afford your services, then you select the appropriate tax debt minimum. A lot of $100k to $150k earners with insufficient withholding or estimated tax payments will accrue roughly $10k to $15k per year, plus maxing out penalties, then multiply by 3 years, gives you a minimum lien amount of about $40,000 if you want six figure earners.

Do note, however, that these tend to be more sophisticated consumers, and therefore require better marketing systems to get them to come on board clients.

The same applies to payroll tax debtors. The higher their payroll, obviously the greater the business cash flow. I have found 8 to 10 percent to be a good number to use as a rough average for withholding across employees, plus of … Continue reading