What do I do if I have a problem with the IRS?
Nothing is certain in life but death and taxes said Benjamin Franklin. In the United States the Internal Revenue Service (IRS) is responsible for all federal taxes. Each state also has a department responsible for state taxes, and there are county, city and other local taxes.
There are few things to do to prevent any problems with your taxes. The most important is to be honest in your filing and paying. Tax-avoidance schemes rarely work.
Second, keep all tax-related papers at least three years, if not six years. The IRS can audit you up to six years from the date of filing if there is a 25% discrepancy between what you file and what they think you should have reported.
The types of papers to keep include W-2s, 1099s, 1040s, receipts for deductibles, and purchase and sale documents for real estate, stocks, or other investments.
What if I owe money on my taxes but can't pay right now? Go ahead and file. The penalty for failing to file is much more severe than filing and not paying. You can usually work out some kind of payment plan with the taxing agency.
There a few ways to deal with an inability to pay: Borrowing money from a bank, family, or friend; negotiating a payment plan; file for Chapter 13 or Chapter 7 bankruptcy; or file IRS Form 656 Offer in Compromise to offer less than the full amount owed.
If you made a mistake and now owe interest and penalties, you may be able to get the penalties waived. If you have "reasonable cause" such as being out of county, paperwork lost in a fire or flood, accountant error, or serious illness in the family, you can request the penalties canceled. For the IRS you can request it over the phone or in person, but filing an IRS Form 843 Claim for Refund and Request for Abatement may get your penalties canceled even if you have already paid them. The interest must still be paid.
What can the IRS take? The answer is "just about anything." If you fail to work out some kind of agreement the IRS can take your house, your pension plan, or garnish your wages. The good news is that they rarely take a home unless that is the only way to get the money owed and you aren't responding to their communications.
What about auditing? About 1% of all tax returns are audited. If you own a small business, your chances of an audit are much higher. The IRS estimates that about 80% of all tax returns are honest and the bulk of the 20% are self-employed small-business owners trying to minimize what they pay. If you are audited, be aware that only 15% of those audited don't owe more money. Don't think of trying to avoid paying anything, but rather, to minimize the amount you will owe.
The good news is you can challenge the results of an audit by sending a letter of protest within 30 days after receiving the final report. If your appeal fails, your next step is to go to Tax Court. Results for tax court run about 50% in lowering the final bill.
Disclaimer: This website is not equivalent to legal advice, and should not be relied upon as such. Any specific questions concerning your legal rights should be presented your attorney.
