CP2000 / Examination (Audit)
An examination is an inspection of an individual’s or an entity’s books and records. In addition, an examination involves the questioning of witnesses to determine the individual’s or entity’s correct tax liability. There are many reasons you could have received a CP2000 or an IRS Examination (Audit) letter:
- Did not file a tax return
- Filed your tax return but did not report all your Gross Income.
- IRS need to verify the Deductions, Exemption and/or Credits claimed
An Audit can be triggered from documents the IRS received through third parties (banks, brokerage accounts, employers, gambling winning, whistleblower program, neighbors, friends, etc.) that you did not report. If you do not respond to the Audit and provide the information requested in a timely manner, the IRS will assess the tax at the highest level without taking credits and expenses into account.
You do not have to go to this alone, you have a right to Representation. Ergedine Pericles CPA can represent you and make sure you pay the minimal tax legally allowed and set up payment plans, if needed. You will rarely have to communicate with the Auditor.
Unpaid Tax Bill
The IRS has set a Taxpayer Bill of Rights which is composed of ten (10) fundamental rights. Two of those 10 rights are:
- The Right to Pay No More Than the Correct Amount of Tax and
- The Right to a Fair and Just Tax System.
Legally, the IRS has ten (10) years after the assessment date to collect the tax from you (Collection Statute Expiration Date (CSED)). When you cannot pay the full balance at once or if the amount was applied incorrectly, the IRS has various options to help you resolve the issue. However, to qualify for those options, you must be current with monthly payments, timely file your tax returns, and make estimated tax payments, if needed.
Currently Not Collectible (CNC) / Hardship Status
If you cannot pay your tax debt and meet your basic living needs at the same time, you may qualify for Currently Not Collectible (CNC) / Hardship Status. The tax will still be due to the IRS; however, they will not collect it until they determine you no longer qualify for this status. Penalties and interest will continue to add up to this debt. Furthermore, they may keep any future refunds and apply them to the debt, there are exceptions. To determine when you are no longer eligible for that status, the IRS will reevaluate your case every two (2) years to see if there are any changes, such as additional income from employment or other sources. If there are no changes, they will continue the two-year reevaluation process until the Collection Statute Expiration Date has expired. To stay in compliance, you must continue to file all your returns on time even if you can’t pay. If there is a change in income and you can meet both the tax debt and pay your basic living needs, you will be required to look at other options to pay the tax due.
An Installment Agreement is a payment plan you make with the Internal Revenue Service (IRS) to pay your tax liabilities over an extended period of time when you cannot pay the full balance due. The payment plan must be set for up to 6 years (72 months) or paid within the Collection Statute Expiration Date (CSED) remaining, whichever is less. If the payment plan is accepted, you must remain current with tax filings and payments. However, if you are due a refund on any future taxes, the IRS will keep it until the tax balance has been paid in full; there are exceptions. The IRS can terminate this payment plan for failure to file, failure to pay or making late payments.
Offer In Compromise
An offer is an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed. If there is no way you will be able to pay the amount owe by the Collection Statute Expiration Date (CSED) with the money you make, or paying it would create financial hardship, you may be eligible for an Offer in Compromise. This is not easy to qualify for, because you will only pay a portion of the tax owed, and the remainder will be forgiven. However, if you qualify and IRS accepts to Offer, the tax amount agreed on must be paid within 5 to 24 months.
With this option, you must stay in compliance with the IRS for 5 years. You must file and pay all your tax returns on time. If you fail to meet this requirement, the Offer in Compromise agreed on will terminate and the amount they forgave will have to be paid back.
If you feel you don’t owe the tax, the amount is incorrect or a requested payment option is rejected, the Taxpayer bill of Right gives you the right to Appeal:
- The Right to Challenge the IRS’s Position and Be Heard
- The Right to Appeal an IRS Decision in an Independent Forum
Appeal is when you protest an IRS determination by submitting proper documentation to have your case heard. The Appeal division is an Independent Organization within the IRS whose mission is to resolve disputes fairly. The Appeal must be done within the time period set by the IRS. If you wait until the deadline has passed you may forfeit your right to be heard at the appropriate level.
If you would like to know more about these programs, call me today so I can analyze your situation to find the right payment plan for you or eliminate the debt altogether.
Trust Fund Recovery Penalty (Payroll Taxes Owed)
Trust fund taxes are income taxes, social security taxes and Medicare taxes you, the employer, withhold from the wages of an employee. The taxes are called trust fund taxes because they are held in trust until they are paid to the Treasury and your employees trust that you will pay the withholding to the Treasury by making Federal Tax Deposits (FTD). When you don’t pay these employment taxes, you are subject to the Trust Fund Recovery Penalty (TFRP).
The Trust Fund Recovery Penalty (TFRP) is a penalty provided by IRC 6672 against any person required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities. The penalty is equal to the total amount of tax evaded, not collected, or not accounted for and paid over. Trust Fund Recovery Penalty (TFRP) assessments are based on liabilities for the following tax forms:
- Form 941, Employer’s QUARTERLY Federal Tax Return
- Form 944, Employer’s ANNUAL Federal Tax Return
- Form 945, Annual Return of Withheld Federal Income Tax
- Form 720, Quarterly Federal Excise Tax
- Form CT-1, Employer’s Annual Railroad Retirement and Unemployment Return
- Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees
- Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
- Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests
- Form 8804, Annual Return for Partnership Withholding Tax (Section 1446)
Employee: If you are an employee (e.g., an accountant, bookkeeper, secretary, etc.) of a company that failed to pay their payroll tax and you received a Trust Fund Recovery Penalty (TFRP) letter from the Internal Revenue Service, do not just ignore the letter. When it comes to TFRP, the IRS will assess anyone it thinks should have been responsible for paying these taxes, including employees. If you had no authority as to which bills should or should not be paid by the company and/or did not make financial decisions for the company, call me now so you can be removed as one of the responsible parties.
Employer: If you, the Employer, deducted Social Security, Medicare and Federal Withholding tax from your employee’s paycheck but did not deposit it in the IRS Electronic Federal Tax Payment System (EFTPS) account, not only will you be subject to the Trust Fund Recovery Penalty (TFRP), but can be charged with a felony. If convicted, in addition to the Trust Fund Recovery Penalty (TFRP), you could be fined up to $10,000 and/or sentenced to a 5-year prison term. Therefore, do not let this debt increase further, if you are falling behind on paying taxes that you collected from your employees, call now! Let me help you resolve your payroll tax issues so you can get back to running your business, without fear of the IRS shutting you down.
A Notice of Federal Tax Lien alerts creditors that the government has a legal right to your property. This lien will be attached to everything you currently own and anything you buy in the future. Unfortunately, a Lien may limit your ability to get credit. If you decide to get a loan to buy an automobile or a house, the lender may not approve the loan because the IRS will have priority rights to any and all your properties. If you already have a house, you will have a difficult time selling it with the Lien attached. For you to sell any of those properties, the IRS would have to release them. This Lien may also affect your ability to get a credit card or to lease. There are various steps you can take right now to remove the Lien. If you are serious about resolving your tax issues, call me!
Notice of Levy / Seizure and Sale of Assets
A levy is the legal seizure of your property to satisfy a tax debt. If you have funds held by someone else, the IRS will issue a Notice of Levy to that third party. The Notice of Levy gives the IRS the right to garnish wages and/or social security benefits, take money in your bank or other financial account. When the IRS takes your Social Security and/or Pension Income it is continuous until the debts are paid in full, leaving you nothing to live on. However, if the property is not with a third party but you, the taxpayer, are holding the property; Seizure and sale procedures are used to take and sell your Tangible Personal Property (e.g., car, boat, inventory, etc.), Real property (house) and other personal property through auctions.
This action is usually taken when the IRS has determined that you:
- Have the ability to remain current and/or resolve your delinquent taxes through an alternative collection method but will not do so.
- Cannot remain current and/or resolve your liability but have assets that can be used to pay the liability.
Therefore, if you are currently going through this, there are options available to you so the IRS can stop those Levies. If you want to keep your most treasured possessions intact, call me so I can assist you with the alternative collection and/or appeal methods.
Penalties and Interests
When you file your return late, make payment late you, and/or prepare inaccurate return, you are subject to penalties and interest. You are charged Interest on the tax owe and the penalties are assessed. Some penalties can be removed. However, by statutory law, interest cannot be removed unless it is improperly assessed. When the IRS removes a penalty that is called an Abatement. When it comes to removal of penalties, there are two types:
First Time Penalty Abatement
First Time Penalty Abatement only applies to:
- Failure to File Penalty: When you are required to file, whether it is a pass-through entity (S-Corporation / Partnership) return, where the Schedule K-1 income is reported on Form 1040 but chooses not to file or file late without being granted an Extension, a failure to file penalty will be assessed per month up to a certain limit.
- Failure to Pay Penalty: When you owe the IRS but do not pay the IRS or pay the IRS late, a failure to pay penalty you will be charged 0.5% per month up to 25% of tax owed. Even when an Extension is granted to file the tax return later, you are still responsible to pay the taxes on time. For example, if your return is due April 15th, and you file an Extension to file by October 15th, you are still required to make the payments for that return on April 15th. The Extension only applies to the Filing of the tax return and not the Payment of taxes.
- Failure to Deposit Penalty (Employment Tax Payments): When you do not deposit 1) Employee Federal Withholding, 2) Employee & Employer Social Security, and 3) Employee & Employer Medicare on time in IRS EFTPS you can be charged up to a 15% Failure to Deposit Penalty.
To be eligible for first time penalty abatement, you must meet these requirements:
- Tax year claiming abatement must have been filed and paid
- The previous 3 years’ return from the year you are claiming must have been filed, paid, and must not have penalty and interest.
Reasonable Cause Abatement
If you can prove to the IRS, you had a legitimate reason for not filing and/or paying your return on time, the penalties can be removed with a Reasonable Cause Abatement request.
You must meet some of these requirements to qualify for the Reasonable Cause Abatement:
- Ordinary Business Care and Prudence
- Death, Serious Illness, or Unavoidable Absence
- Fire, Casualty, Natural Disaster, or Other Disturbance-Reasonable Cause
- Unable to Obtain Records
- Mistake Was Made
- Erroneous Advice or Reliance
- Ignorance of the Law
Some of these penalties including the ones mentioned above and the following:
- Estimated Tax Penalty: If you are required to make quarterly estimated payments and you do not pay 100% of what you paid in the prior year tax or 90% of what you owe in the current year tax, you will be subject to this penalty. Estimated Tax Payment usually applies to 1040 Taxpayers with a Schedule C, high-income taxpayers, C-Corporations.
- Accuracy Related Penalty: 20% Accuracy related penalty is assessed during audits.
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