I. 30 Day Letter
The 30-day letter from the IRS generally states an audit has taken place and wants the owner to agree to the amount from the audit. However, the taxpayer can reject the IRS examiner’s findings and protest to the IRS Appeals Office.
II. 90 Day Letter
The 90-day letter from the IRS is a deficiency letter. The IRS sends the deficiency letter for including, but not limited, to 3 reasons: 1) when time to send the 30-day letter is about to run out, also called the statute of limitations; when the taxpayer fails to respond to the 30-day letter; or when there is an actual deficiency in payment of taxes. The business owner can rightly protest this letter in the Appeal Office, US Tax Court, or Federal District Court. The taxpayer should consider all appropriate defenses with an appeal
Every taxpayer has legal defenses to help with the appeal of the IRS deficiency letter. The defenses can reduce or eliminate the tax deficiency. Three popular defenses are the Offer in Compromise, Installment Agreement, and Innocent Spouse Defense.
I. Offer in Compromise
When business owners allegedly owe the IRS, one common defense from paying is the Offer in Compromise (OIC). This defense allows the business owner to pay only what it actually can pay to the IRS.
For example, the IRS states that a person owes $150,000 in taxes. However, due to severe inability to pay, he can only pay $75,000. The IRS can agree to an OIC and allow the owner to not pay the remaining $75,000.
One must understand the IRS, while very forceful, is not here to bankrupt the taxpayer. To deter this application, the IRS requires a 20% lump sum payment with the OIC application.
The OIC allows the taxpayers to pay the IRS and move on with life.
II. Installment Agreements
The Installment Agreement allows the business owner to pay the IRS in monthly installments rather than paying the entire amount at one time.
For example, the IRS states A owes $150,000 in taxes. However, A only owes $80,000 in taxes. This is a victory for A. But, the problem is A does not have $80,000 to pay the IRS.
A taxpayer can gain another victory by getting the IRS to agree to an Installment Agreement. This will allow the taxpayer to make small affordable monthly payments over months or even years.
III. Innocent Spouse Defense
The IRS often holds a spouse liable for the unpaid taxes of their separated or divorced spouse. This is particularly true if there was a previous joint income tax return filed. Many times one spouse is not involved and unaware of the business dealings of the other spouse. The separated spouse who does all of the tax paperwork could not be reporting tens of thousands of dollars. This would hold both parties jointly liable for the unpaid taxes. However, there is a powerful defense called the “innocent spouse defense”.
A divorce decree means nothing in the eyes of the IRS. It merely creates a right for the non-liable spouse to sue her spouse after she pays the unpaid taxes to the IRS. The innocent spouse defense allows the spouse to not have to pay the IRS at all. If he or she can show no knowledge of the understated taxes on the jointly filed tax return and it would be inequitable (basically a legal word for unfair) to require payment, then the IRS can allow the innocent spouse defense. The spouse must elect this defense within 2 years of IRS collection activities.
These are powerful strategies to help individuals on their tax returns. However, businesses have strategies to help defend against IRS payroll tax audits and protect against levies and liens.
Business owners are required to withhold payroll taxes (e.g. Medicare and Social Security) from employees’ checks. The IRS often attempts to hold businesses owners liable for any unpaid payroll taxes.
Running a business is understandably tough and falling behind on bills to creditors can happen. Business owners sometimes use withheld payroll taxes to pay company bills and loans instead of the IRS. However, owners have options and can appeal the notice of the IRS.
The owner can show he or she has not willfully failed to pay the collected payroll taxes. In addition, the owner can show another party is responsible for collecting the company’s payroll taxes. Companies often have hundreds of employees with everyone having a different role. In addition, companies often outsource payroll. Showing that another person is responsible for the unpaid payroll taxes can save money and headaches.
Tax Liens and Levies
Business owners often are hit with IRS liens and levies. Things happen, but owners have options and can appeal the lien or levy. An IRS lien is a legal claim against an owner’s property in order to guarantee payment of an alleged tax debt. A levy is where the IRS actually takes property or portions of wages from the owner to satisfy the alleged tax debt.
A business owner can pay the money or appeal the lien or levy. The owner should always explore all sound options.
The IRS is the world’s largest collection agency, but owners should not be afraid to pursue their rights through the various tax appeal venues.
When a business owner wants to appeal an IRS letter, there are options. The owner can appeal to the IRS Appeal Office, US Tax Court, or Federal District Court. They each have their separate pros and cons.
I. IRS Appeals Office
In the IRS Appeals Office, the Federal Rules of court Evidence (e.g. hearsay and other legal objections) are more relaxed. However, a major negative of the IRS Appeals Office is that another employee of the IRS will be reviewing your appeals. It will not be an independent and unbiased judge.
II. United States Tax Court
The US Tax Court applies the Federal Rules of Evidence. Hearsay and its exceptions (e.g. the business records exception) are important hurdles and create opportunities to win or lose the trial. In addition, there is no jury to hear the facts of the case. But, the benefit is there is an independent and unbiased judge.
III. Federal District Court
In Federal District Court, there is an unbiased judge and an available jury. However, the main negative of the Federal District Court is the owner must pay the alleged tax in full and then file a claim for refund to enter into this court.
Both the US Tax Court and the Federal District Court requires the taxpayer to understand who has the burden to speak and prove his case.
Burden of Proof
When a business owner appeals an IRS deficiency letter to a court, the taxpayer generally has to show he or she is not liable for the tax. This is a legal term called the "burden of proof". Outside of a few exceptions, the IRS is presumed correct and does not have to prove the taxpayer underpaid the taxes in court. Despite the possibility of human error, the IRS attorney generally never has to prove anything. The taxpayer must show he or she isn’t responsible for the taxes.
This is in contrast to other areas of the law, such as criminal law, where the government has the burden to show a person is guilty. The defendant in criminal law often never testifies. In tax law, the taxpayer proves he or she is not liable by testifying or bringing witnesses to testify. The taxpayer can also bring business documents to court to help the case.
It is important for a taxpayer to understand how to prove he or she is not liable for the taxes. Obtaining evidence through Freedom of Information Act (FOIA) requests can help a taxpayer prove the case.
Freedom of Information Act Tax Implications
The business owner has a very powerful tool to gather information and documents from the IRS when the owner appeals his IRS deficiency letter. This tool is called the Freedom of Information Act (FOIA). A taxpayer can send the FOIA request to the IRS to obtain the information the IRS has used against the taxpayer. The taxpayer must give the IRS a reasonable description of the records wanted in the FOIA request.
However, there are exceptions where the IRS will not give information on FOIA requests. A few of the exceptions include information relating to national defense or foreign policy, trade secrets, IRS employee personnel files, or enforcement techniques.
The taxpayer must be fully informed of the stance of the IRS in order to adequately prepare an appeal.
When a taxpayer comes to an agreement with the IRS, the taxpayers should request a closing agreement. A closing agreement is to protect the taxpayer against the government from reopening the case at a later date. The closing agreement is legally binding on both the taxpayer and the IRS, as to the matters that they each agreed to. Unintentional mistakes by either party will not reopen the closing agreement.
However, a closing agreement may be set aside if there is a material misrepresentation, fraud, or malfeasance. In addition, the tax court has the authority to review the reopening of a closing agreement. The IRS must show that the case is worthy of reopening.
A closing agreement is generally a good thing for the taxpayer. However, the closing agreement does prevent the taxpayer from later filing a claim or instituting a lawsuit for a refund of taxes paid.
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*This blog post is for educational purposes only and not be used as legal advice.