Learn about options for dealing with tax debt and what happens when you can’t pay your taxes. This episode focuses on individuals with tax problems. This week Steve is joined by his long-time colleague Chris Housh. Chris chairs the firm’s tax resolution and business entity compliance practice groups and is the Vice President of the Golden Gate Society of Enrolled Agents.
Listen to the full episode to learn more!
Episode Transcript
Intro:
You're listening to the Practical Tax podcast with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz LLP, a tax law firm.
Steve Moskowitz:
Hello everyone. Thank you for tuning into our podcast. We're really excited to talk to you about this. This is an area that affects so many people and a lot of people get embarrassed about it, or they don't want to talk about it, but it's a common problem and there's so much help. This is what happens when you can't pay your taxes. And we're going to do this in two parts. Part one in part two part one is going to be individuals. That's where we're going to start. I'd like to introduce my friend and colleague Chris Howes. Chris is an attorney. He's also an EA and Chris and I have worked together at the firm for over 20 years. Chris heads the department doing these cases, and he's done thousands and thousands of tens of thousands of these over the past couple of decades. Chris, tell us what happens when you can't pay your taxes. What do you do?
Chris Housh
Well, there's a variety of things that we can do, and that's one of the things I love doing for our clients is finding what's the right thing for them. I don't treat it as a cookie cutter situation. There's the ability to go and try and work with the government. Find the ways to go and figure out what is manageable, reasonable for your budget, and also look at different ways to try and relieve and reduce some of that liability as well. Using elements of timing, elements of what is the important expenses for you and what does the government allow you to do? I play with all that, figure out what the best thing for someone and try and get the best result for someone in those situations.
Steve Moskowitz:
Chris, there was a word in there that I think everybody want to jump on reduced. Tell us about how do we reduce our taxes?
Chris Housh
Well, first of all, we look and see is it actually the right real liability? Is it that the IRS created a false number for you when they didn't get your return? If that's a situation we get the tax return correctly in there reduce the amount that you owe. The other part is we look at whether or not financially, you have the ability to do an offer and compromise. We look at that, is there that financially, you're never going to be able to pay it in the time that the government it wants so therefore they should accept the lesser amount. Sometimes though, that dollar amount that the government wants to not offer and compromise is too high, but I can use something called statute limitations, how long the government is illegal allowed to collect might make it where making monthly payments over the time they are allowed to collect might make it where you be paid even less than you would've done in the offer and compromise.
Then also after you've either entered into the install pay agreement or have a base tax paid the original tax from return paid, we can also look at penalty abatement to go and say to the government, let's remove the penalties due to the events that were outside of your control in the year that the tax return was originally due. From that go and have them reduce out that penalty and also the interest related to penalty, but that part is if you have to go that route, that's the last piece in the puzzle because the government's not going to let me go and get rid of the penalty for not paying until you actually start paying. One of the things that a lot of the clients look at is going, oh, I don't want to start paying until I know the final dollar amount, but strategically we want to go and get the government to understand that you're cooperating, that you're making some payments now, and that makes them willing to go and help you out by going and getting things reduced on the other side.
Steve Moskowitz:
Chris, can you tell us about statute limitations? How long does the government have to collect these taxes?
Chris Housh
With the IRS is that they have 10 years from when they last increased the tax. That means either when the tax return processed, when they created that substitute for return, if your tax return wasn't actually processed, or if the audit, they get to restart the clock at the end of the audit, but 10 years from that time, now there's a couple different things that can accidentally move the clock forward a little bit, but 10 years is a good thumb to nail to use of going and saying, here's the amount of time that they're going to have. In that situation, I might do offering compromise in analysis and go, this person has a ton of equity in their retirement account or in their home, but only little bit of money every month available to pay towards their debt.
If it's at that small amount and they only have four years left, I can save them a lot of money going that route instead of going and trying to figure out how to go and have them access the equity in that house. We want to play with that. I end up having tens to hundreds of thousands of dollars in a couple years, even millions of dollars drop off for our clients through the using the statute limitations to that advantage.
Steve Moskowitz:
That's really terrific. I think our viewers and our listeners are really happy to know that sometimes the time itself you can cut a deal and the number just go away and speaking about going away, what happens when these taxes go away? Do they ever come back and haunt us?
Chris Housh
Once the statute limitations has expired, it is gone. The IRS can no longer click on that penalty or on that interest. I should make a quick caveat. Each state has its own statute limitations. California is 20 years double the amount of the IRS. Some states have crazy bizarre ones like New York actually has that if they remember to send you a letter, they restarted the clock. State taxes still have that option, but we have to do a different analysis.
Now, can the liability come back after it's been wiped out? Only if the government can prove that something was done fraudulently, they have to show that you intentionally misled them and did something. I've yet to run across it in my actual practice in over 20 years, but there is that little carve out that they have that you manage to hide $1 million from them. They might figure out how to go and then restart the collection for that $1 million that you hid.
Steve Moskowitz:
Chris, has it been your experience that sometimes you have to remind the government that the statute limitations has run or otherwise they might keep collecting?
Chris Housh
Yes. In fact, actually during the pandemic, that actually has been the biggest amount of time that I've had to do it. In the past, it would be maybe occasional that the computer was off by a couple months and I would be going in, or there was a split assessment where the IRS forgot to go and tie the wife's account to the husbands and therefore they had different times listed. But during the pandemic, the com IRS computer has actually been off frequently where I'm having to call in because they've gotten two or three months of additional payments. Once I can to them that the statute limitations was expired, but the computer still collected money. Those additional payments get refunded back to the taxpayer with interest for the amount of time the government held onto it.
Steve Moskowitz:
Chris, can you tell us the grounds for getting an offering cover? It sounds great because it, essentially, what you're telling us is that you only pay part and the government forgive your arrears. What are the grounds to get the offer?
Chris Housh
So there are three kinds of offering compromise that exist with the IRS; doubt as to collectibility doubt as to liability, and then effective tax administration. I'll start with the one in the middle, doubt as to liability. That's where you go and say to the IRS 'You have the number wrong.' What you want to do is then show them, you have to put all the documentation together and say, 'Here's what the correct amount is and that I've actually calculated your tax and interest and penalty for you government. Here's what it should be.' The thing is that the IRS wants you to first try and do that through the audit reconsideration unit, before you go to the offering compromise unit. It's an option, but they prefer that you go the other route of challenging the tax through the regular routes before you go to the offering compromise unit.
Steve Moskowitz:
So that's a benefit to the client going to somebody experienced like you to know then not to fall into those pitfalls? But if we do have to go ahead and do this, could multi billionaire go ahead and use this.
Chris Housh
If it's that you absolutely had where the tax is incorrectly computed, yes. It doesn't matter how much money you have for a doubt to liability to go and do that. In fact, it's actually easier for that multi-millionaire because one of the conditions you're doing is saying that if the IRS agrees with me, I'm immediately paying the money that is what I've calculated is what's being owed. The multi-millionaire can afford to go and pay the correct tax with the penalty and interest at the end of that route.
Steve Moskowitz:
What if the tax is correct and you're not a multimillionaire, then what do we do?
Chris Housh
That's when we want to go and do the other two; doubt as to collectibility or effective tax administration.
