Kevin Mark Klughart

PhD, PE, JD, MIP, LLM

Patent Attorney / Engineer

 

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Tax Law FAQ

 

What does it cost to litigate a tax matter with the IRS?

See the separate discussion on Tax Law Pricing.

How long does it take to litigate a matter with the IRS?

See the separate discussion on Tax Law Timeline.

Do I really need an attorney to deal with the IRS?

No, but generally your odds of winning are statistically better with attorney representation.  A recent report by the Consumer Tax Advocate revealed that overall success rates for taxpayers WITHOUT representation were approximately 10%, whereas with attorney representation the success rate rose to approximately 20%.  This success rate in part depended on the type of issue being litigated with the IRS, and doesn't include statistics for case settlements, but is instructive as to the impact of attorney representation on case outcome.  Of course, you should realize that your success rate with the IRS in litigation is always heavily dependent on the facts of the case.  Your results may vary accordingly.

How long does the IRS have to come after me for taxes?

It depends.  The normal statute of limitations for IRS recovery is three years from the date the tax return was filed.  However, if the taxes on the return in question are underreported by 25% or more, the statute of limitations is six years.  Finally, THERE IS NO STATUTE OF LIMITATIONS ON A RETURN THAT IS NOT FILED OR FOR A RETURN DEEMED FRAUDULENT.  Furthermore, the IRS may on your behalf file a tax return for you for any year in which you have not filed a return and assess the tax at that time.

The nugget of wisdom to gather from the above outline is that IT IS ALWAYS BEST TO FILE AN ACCURATE AND TIMELY TAX RETURN to start the statute of limitations as to the IRS's recovery period.

Can I file an amended return to correct a fraudulent return?

NO!  An corrected amended return does not undo the fraud in the initial tax return.

I haven't filed tax returns in years.  What do I do?

Your best approach is to contact an attorney who practices tax law and make efforts to file the last six years of tax returns and simultaneously make contact with the IRS to arrange a payment plan for any unpaid taxes.

How long do I have to file an amended return for refund?

A request for tax refund must be made within three years of the payment of the tax.  For normal tax returns filed on April 15, this would be April 15 of the tax year in question (as any withholding of tax or prepayment of tax is deemed paid on April 15 of the year following the tax year in question).  However, if the return was filed later than April 15th with payment, then the actual payment date is the starting date for the three year statute of limitations.

What is the downside of an amended return?

AMENDED TAX RETURNS ARE ALWAYS EXAMINED BY HAND, and as such run a higher risk of audit than tax returns in general.

What triggers a tax audit?

This is a pretty complex question, but there are a number of things that generally increase your chances of an audit, including but not limited to

Earned Income Tax Credit
Incorrect SSNs on return
Divorced/separated couples each claiming the same dependents on return
Failing to include W-2s or 1099s in the return
An amended return
Deductions which are large in size or number
Failure to calculate Alternative Minimum Tax (AMT) properly
Claiming the $8000 new homeowner tax credit

This list is not exhaustive, and you should consult an attorney practicing in the tax area if you have specific questions regarding tax audits.

What is a "deposit in the nature of a cash bond"?

This is a method of IRS suspending interest and penalties without actually paying tax that may be due the IRS.  This technique is especially useful in situations where actual payment of the disputed tax forces the taxpayer to sue the IRS for a refund to recover the tax, as a cash bond may be requested to be returned to the taxpayer at any time.  For details, see IRS Bulletin 2005-13.

Can I discharge my IRS debt by declaring bankruptcy?

Generally, NO.  IRS debts are one of a number of non-dischargeable debts in bankruptcy.

Can my forgiven debt result in an IRS tax bill?

YES!  This is one of the most significant minefields in the arena of consumer finance  Internal Revenue Code Section 61 provides that a taxpayer has income on the equivalent amount of "debt forgiveness".  For example, a consumer who has a credit card debt reduced from $75000 to $25000 has deemed "income" of $50000 and thus owes the IRS tax on $50000 as cancellation of debt (COD) income.

Can my current spouse be levied for my ex-spouse's tax bill?

YES!  A common scenario that occurs in community property states such as Texas is where a person divorces a spouse that has a tax issue with the IRS which remains unresolved at the time of their divorce.  Since during the marriage the married couple typically filed joint tax returns, the burden of any tax owed to the IRS attaches to both husband and wife, and remains attached even after they divorce.  Assuming the tax-delinquent ex-spouse fails to correct the tax issue with the IRS, the IRS may come after the remaining spouse even after they have remarried.

Your question at this point is how can the new spouse, who never had a problem with the IRS and was not in the picture at the time of the initial tax problem be at risk for an IRS levy.  The answer to this is that absent documentation to the contrary, in a community property state one-half of the new spouse's income belongs to the divorced-and-now-remarried spouse from the first marriage.  This half of the income can be garnished by the IRS to satisfy the outstanding debt of the first marriage.  This presumption of community property can be overcome via appropriate contractual agreements between the currently married couple.  Seek advice from a competent attorney who practices in this area of taxation for further information.

Can I reduce my IRS tax bill to pennies-on-the-dollar?

Generally, NO!  Despite what you hear on television ads and on the radio, enforcement at the IRS is way up in the last five years, and there isn't much relief in sight.  The much acclaimed Offer In Compromise program which permitted taxpayers to proffer offers to the IRS to compromise and reduce tax obligations has for all intensive purposes been gutted in recent years to the point that it is not effective for most taxpayers.

Can an Offer In Compromise (OIC) help my tax bill?

Yes, but your chances of actually getting an OIC are very poor!  This program was once a very useful avenue for taxpayers to make things right with the IRS.  Recently it has fallen on hard times, and the burden on the taxpayer has been increased to the point that this is no longer a realistic option for many taxpayers.  See the IRS website for more information on Offers in Compromise.

Can I reduce my outstanding IRS employment tax debt?

NO!  Employment taxes are somewhat special in that the employer acts as a fiduciary for both the taxpayer-employee and the IRS in that it is the employers duty to safeguard the employment tax (both the employee component and the employer component) for remittance to the IRS.  Any failure of this fiduciary duty is a breach of the trustee relationship that the employer takes on in this transaction.  For this reason it is almost impossible to get these debts reduced by the IRS.

Can I reduce my employment taxes by treating my employees as independent contractors?

NO!  Recharacterizing employees as independent contractors will eventually result in an audit and significant penalties and interest for mischaracterizing the nature of the relationship between your company and the individual.  Whether an individual is an employee or independent contractor is a complex issue that should be discussed with a tax professional to avoid possible IRS and state tax liability issues.

Can I be personally liable for my IRS employment tax debt?

Yes!  If the IRS cannot obtain payment of the Employment taxes from the company or business entity, they are entitled to pursue owners/operators/directors/officers of the company to obtain payment of the tax.

What is the best business entity for a startup company?

It depends on your situation.  However, I get this question frequently from individuals who are in startup mode and have spoken to their CPAs who invariably suggest a Sole Proprietorship (SP), General Partnership (GP), Limited Partnership (LP), Limited Liability Partnership (LLP), or a Limited Liability Company (LLC).  However, in most of the circumstance I have encountered these are not the optimal business entity for a business startup, especially in states such as Texas.  I strongly suggest that if you are considering the creation of a business startup that you consult me or another attorney practicing in the tax area for advice before you commit to a business entity type.  This pre-formation decision could save you significant capital in the formation of your business.

 

Contact Information:

Kevin Mark Klughart

Registered Patent Attorney, USPTO

3825 Leisure Lane, Denton, TX 76210-5589

tel: 800-353-1211 / 940-320-0580  -  fax 940-320-0581

Kevin@Klughart.com   email  -  web    www.Klughart.com

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