Resolving Tax Controversies
01/01/12 By M. Todd Smith
Assessment and Abatement
The IRS generally has three years from the date you file your return or the date your return was due, whichever is later, to assess taxes that it determines you owe. Once it determines that you owe tax, the Tax Code establishes an array of penalties to “encourage” you to comply in a timely manner. There are penalties for not prepaying enough estimated tax, not filing your tax return on time, not paying your tax on time, etc. In addition, if you pay your taxes late, even if you timely file an extension of time to file your return, you will be required to pay interest on the amount owed.
We may be able to help you to avoid penalties in circumstances where you can establish that there was reasonable cause for your late return or late payment. Situations that might, depending on the circumstances, establish reasonable cause include reliance on a tax advisor’s advice, death, serious illness, or unavoidable absence, erroneous advice from the IRS, fire, casualty, or other disturbance, service in a combat zone, etc.
Once a tax liability has been assessed, the IRS will begin what can be a very harsh collection process. The tax lien is a significant tool the IRS can use that could have a severe financial impact on you. It serves as a security device for the IRS to protect its position relative to your other creditors. If filed against your real property, you may not be able to sell the property, modify your mortgage, or otherwise obtain needed financing without removing the cloud on title.
For practical purposes, the tax lien does not put any money in the government’s pockets. In order to enforce collection, the IRS generally will seek to levy on your property. Generally, the IRS is required to give you written notice of its intent to levy at least 30 days before it levies. In the case of levied bank accounts, the bank must wait 21 days after service of levy before turning the funds over to the IRS. This freeze gives you a chance to resolve the matter before you suffer the potentially very harmful effects of a levy. In the case of levied real or personal property, the IRS can reduce it to cash by selling it. Before doing that it must, of course, provide you with notice of the levy and intent to sell. Also, the IRS could seek to garnish your wages, which is a form of administrative levy that does not require a court order. It may be possible under certain circumstances to diminish the amount of a levy to allow you to pay immediate expenses like rent or food.
The IRS is authorized by federal statute to compromise tax liabilities. We can assist you in submitting to the IRS what is called an “Offer-in-Compromise” by filing IRS Form 656 at any stage of the tax process, including during audit, administrative appeal, litigation, and collection. An Offer-in-Compromise may reduce your overall tax liability, but the application process can take six to nine months or longer.
The IRS is also authorized to enter into a written agreement with you allowing you to pay your tax liability in payments over time. It is important to note that interest on the unpaid tax liability will continue to accrue, sometimes at rates that are less favorable than can be obtained through other sources, like borrowing from family. We can help you determine if this is the best option for you by reviewing your particular circumstances.
Finally, most tax debts may not be discharged in bankruptcy. However, the IRS may agree under certain circumstances to accept payment of tax debts as part of the bankruptcy trustee’s payment plan. Bankruptcy is usually a last resort option due to its drastic consequences, so it is important that you get legal advice before making that decision.
There are multiple methods of appealing the decisions of the IRS, ranging from simply appealing to the auditor’s supervisor, to filing for an administrative appeal to the Appeals Office, to filing a petition to the Tax Court or a United States District Court. You have ninety days from the date the IRS mails you a notice of deficiency to file a petition with the Tax Court. In order to file the petition with the District Court, you must permit the IRS to assess the deficiency, make payment, and then sue for a refund of all or a portion of the tax paid.
For state tax assessments, where you file your appeal depends on the type of tax being assessed. To appeal income tax assessments, you will petition the Arizona Tax Court. For property tax assessments, you will petition the Arizona Board of Equalization. For most other types of tax assessments you will need to petition the Office of Administrative Hearings.