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What Are Some Tips to Effectively Solve a Tax Problem?
Most of the over 160 million taxpayers each year never have to deal with a tax problem like an audit, collection action, penalty, or IRS notice. But over 20 million individual taxpayers each year have an IRS problem. How should they approach the problem?
Here are 7 habits of effective tax problem solving:
Habit #1: Seek to understand the facts from the IRS perspective:
Before you do anything else, contact the IRS and request transcripts and information that help you understand your tax situation. Speak directly with an IRS representative about the specifics of your account. For example, if you are requesting penalty abatement, you should understand exactly what penalties are assessed. You should also review prior years to see if you qualify for first-time penalty abatement relief. Not understanding the IRS’s position is potentially costly and can add roadblocks to resolving your issues.
Habit #2: Begin with the end in mind:
Get the big picture with a complete tax history review and develop a plan to resolve all issues. You may have multiple issues that you need to resolve. For example, you could have a balance owed. But after reviewing your account, you see that the balance owed was as a result of an IRS adjustment to your account from a CP2000 notice, mail audit, or other math error notice. You could also find out that you had unfiled tax returns which would prevent you from penalty abatement or getting into a collection agreement like a payment plan. You could also review the past three years by getting tax return and wage and income transcripts. You may find additional deductions or errors made on your return that would warrant filing a Form 1040X (amended return) to lower your tax bill.
Habit #3: Think win-win and get in good standing with the IRS:
Confirm you are filing and payment compliant. A pre-requisite to tax problem solving is that you are in good standing on filing and payment. File any required back tax years (remember to review Policy Statement 5-133 before determining how many years should be filed) and adjust withholding or start making estimated tax payments. Past noncompliance may preclude you from entering into an agreement with the IRS and may get the IRS to start further investigations and enforcement activity to bring you back into compliance. For example, if you are facing an IRS audit and the auditor sees that you have not filed, they can begin a nonfiler investigation to bring you back into compliance. These investigations often involve penalties for failure to file and pay.
Habit #4: Plan your work, work your plan:
Successful and expeditious tax problem solving requires you to know and follow IRS procedures and use best practices to resolve issues. For example, if you are responding to a mail audit or CP2000, you may need to file a, complete, timely response to the IRS unit assigned to your case. Many taxpayers like to use an amended return for this response. There are two problems with this approach. The response should address the issues, but also address the penalties proposed and ask for an appeal if the IRS disagrees with your determination. The amended return also does not address proposed penalties which the IRS will proceed to automatically assess. In event of a disagreement, an amended return response to an audit or CP2000 does not allow you to request an appeal if the IRS disagrees. In the end, not following procedure and using best practices leads to poor results and a very long time dealing with the IRS.
Habit #5: In the end, always investigate penalty relief to reduce amounts owed:
If you owe the IRS or file late, you may qualify for first-time abatement on the failure to file and pay penalties. If you have a hardship reason or circumstances outside of your control, you may request reasonable cause penalty abatement. If you do not ask, the IRS will not offer to eliminate your penalties. You can save a lot by timely asking for abatement.
Habit #6: Sharpen the solution:
Confirm your problem is resolved and review all notices in the future. In dealing with the IRS, rarely does one phone call give you comfort that all is OK with the IRS. You likely need to confirm that your solutions are in place. For example, about 3 million taxpayers set up a payment plan each year with the IRS and many of those are done by direct debit out of a bank account. Taxpayers should always confirm that the IRS has set up the payment arrangement by direct debit as there may be a chance that the payments were not linked to the bank account. You should also keep an eye out for future notices that may indicate something is amiss. For example, if you filed back returns and the IRS is still sending notices about needing to file the return, you should contact the IRS or the Taxpayer Advocate to rectify the situation.
Habit #7: Use a Tax Pro for complex IRS problems or if you need an advocate:
Sometimes, the best habit is to know when to get help. When it comes to complex problems like office and field audits, penalty abatement, dealing with complicated collection agreements, or filing back tax returns, taxpayers may benefit from the assistance of a Tax Pro who is experienced in dealing with the IRS. Too many obstacles and rules apply that may be difficult for the average person to navigate. Follow this golden rule: if you don’t know where to start, a Tax Pro may be able to help.
As a bonus, the 8th habit would be to seek to be understood, and that may mean utilizing IRS appeals when available. IRS appeals can offer you a fresh look at your dispute and your argument. It also likely comes with a lower cost (as compared to petitioning the Courts) and likely quicker outcome. For the 8th habit, you may want to employ habit #7 (use a Tax Pro).
Do you have additional questions?
For assistance creating a strategy to address your tax issue, visit Jackson Hewitt’s Tax Resolution Hub to see the various ways we can help you.
About the Author
Jim Buttonow, CPA, CITP, is the Senior Vice President for Post-Filing Tax Services at Jackson Hewitt. He’s been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS, where he had worked for 19 years in various compliance-enforcement positions. Prior to his current role, Jim’s consulting practice focused on the areas of tax controversy and tax administration, which included leading product development on tax problem software for tax professionals, testifying before Congress, advocating for IRS transparency and efficiency, and proposing innovative large-scale solutions for taxpayers and tax professionals. Jim is also the author of Tax Problems and Solutions Handbook, a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients’ most common tax problems.
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