Another blog post I have told you that the IRS Audit’s about 1% of returns. It varies by years and it is often influenced by the IRS resources and other demands upon their time. This percentage also varies based upon your income. On the average, only 6 tenths of a percent of Taxpayers with adjusted gross incomes between $25,000.00 and $75,000.00 were audited. Higher income earners are audited much more often than just 1%. This brings us to what IRS Taxpayer Advocate Nina Olson calls “unreal” audits. These are typically form letters alerting you to errors or omissions in your returns. Obviously, these are not full scale audits and not nearly as intrinsic, but they can still cost you money.

In 2010, more than 9 million individual taxpayers received these letters, or so-called “unreal” audits they would run and do an analysis by the Taxpayer Advocate Service. When you combine that, with full scale audits, this boost the percentage of individual taxpayers audited to 4.4%. Additionally, while the real audits tend to target wealthy people, the majority of individuals receiving these so-called unreal audits are low or middle income taxpayers.

Unreal audits generally fall into three categories:

1).        Zero Reported Income-this is when the IRS computers match up the income on your return, but it does not match the income reported to the IRS by third parties. For example: the W-2 sent by your employer to the IRS, shows an income amount different than what you reported on your income tax returns.

2).        Mathematical Errors- This is self explanatory. IRS has detected your math was incorrect and they have fixed it for you, usually to increase the tax you owe.

3).        Automated Substitute For Returns- If you do not file a tax return, the IRS generally files one for you and it is called a Substitute for Return. In my experience, it is always going to hit you with a greater tax bill than what you would actually have if you did file a return.

WHAT YOU SHOULD DO

  Follow these notices and include a bill for the amount of unpaid tax which you owe. Do not ignore it. This does not mean you should assume the IRS is right.

If you have not filed a return, you should definitely file your own return to correct what the IRS filed. However, if they are indicating that you made a mathematical error or under reported your income, you should verify who is in fact correct. It is possible, that your bank or some other financial institution provided incorrect information to the IRS.

TIPS TO AVOID PROBLEMS

1).       Be sure to provide correct social security numbers for you and your dependents. Provide an incorrect number or fail to provide one the IRS will disallow the exemption. In a typical year, nearly 300,000.00 tax returns contain incorrect identification numbers.

2).        If you received a tax form with incorrect information from a financial institution, or another third party, try to get it fixed before you file your tax return.

Len Stauffenger, devotes his practice to helping people who owe the IRS money. His practice is nationwide. He has been recognized by the Publishers of the Columbus Dispatch as being among the top 5% of Attorneys in the State of Ohio. He has been representing taxpayers across the country for years in resolving their IRS problems.

            For a free consultation call 1-877-349-8297.   

There is no one easy answer to this statement. However, they rely tremendously on computer technology to help spot potential abuses. Some returns are manually pulled and reviewed, but the IRS uses computers to look for “red flags.”

Much of this electronic screening uses something the IRS refers to as “tolerance levels.” The exact tolerance levels are dollar values or other measures which are programmed into the IRS computers as trigger points and these values and dollar amounts are closely guarded secrets. In fact, the IRS knows the scammers are constantly testing the tolerance levels with fraudulent tax returns.

Some of those tolerance levels are determined by empirical data, which the IRS studies and others are admittedly “picked by the seat of their pants” as stated by Mark Matthews the IRS Deputy Commissioner for services and enforcement from 2003 to 2006.

FRAUD

The IRS said it blocked more than $14 billion dollars in refunds on fraudulent tax returns during the 2011 tax return processing. Most of that was related to identity theft.

Russell George, who heads the Inspector General’s office, told a panel that congress should expand the IRS’s access to wage and withholding data from the department of health and human services social security records to make it easier for the IRS to spot fraudulent refund claims. This will allow them to check the taxpayers filings against the data.

The IRS actually has about 5000 less people working for them in this tax filing season than they did in 2011, 60% of those cuts were in the enforcement area. The total IRS workforce dropped from 94,346 in 2010 to 91,380 in the fall of 2011.

Unfortunately, identity theft fraud cases increased from 2010 to 2011 by 431%.

Not many of us have much sympathy for the IRS. However, it is good to know they have problems of their own. Because of these problems, i.e. hiring freeze, an increasingly complex tax code and a surge in tax refund identity theft, the IRS finds it harder to spend time detecting fraud and/or tax mistakes. In other words, the odds of getting audited have gone down some.

According to the IRS’s own information, the peak for audits was 2010 when they audited one taxpayer out of every 90.

IRS Deputy Commissioner, Steven Miller, was interviewed and said audit rates “may drop a little bit this year” because the agency has reassigned more workers to help deal with the increased number of cases of identity theft related tax refund fraud. If the overall audit rate drops below 1%, this will be the first time it has happened since 2001 through 2006. “The IRS is put between a rock and a hard place” stated Mark Luscombe, who is a Principle Tax Analysis for CCH.

Essentially, the IRS is being asked to do more with less resources and this has an impact on their ability to perform audits.

Here are some facts:

In 2011, the IRS processed more than 234 million tax returns, bringing in more than 2.4 trillion dollars to fund the government. Yet, the IRS estimates the gap between what taxpayers owe in a year and what is not paid on time, because of mistakes or fraud which totals $385 billion dollars.

IRS BUDGET

 The IRS budget for 2012 is 11.8 billion dollars. This is nearly a 2.1% cut from 2011. This is the second year in a row their budget has been reduced. Fortunately, those cuts leave the IRS “unable to adequately detect and address non-compliance, requiring honest taxpayers to shoulder, it gets proportionally large share of the tax burden” states Nina Olson, of the National Taxpayer Advocate, her 2012 annual report to Congress.

If you are self-employed you need to pay self-employment taxes. This is true even if you are part-time. These taxes are over and above your normal Federal, State, and City income taxes. If you are used to being an employee, you are used to seeing your check have a deduction for Social Security Tax or FICA and Medicare taxes. Now that you are self-employed, you have to pay these taxes on your own, based upon your annual net-taxable self-employment wages.

It is important that you understand that Uncle Sam does not want to wait until the end of the year to get these taxes from you. You are probably required to pay them on a quarterly base (some people pay them every month).

As you earn money, you can estimate the self-employment taxes that you will eventually owe.

When you file your Federal income taxes you need to submit schedule C or schedule C-EZ and schedule SE. You can get these forms from www.irs.gov/formspubs.

Using schedule C (or schedule C-EZ) you calculate your net taxable income from self-employment. Basically, you estimate the total gross income, which you will receive from your clients or customers for the year, and then deduct your business expenses to arrive at your net taxable self-employment income.

Remember, this is only an estimate of the actual taxes you will owe, but you can use this estimate to set aside enough money so that you will have it when the taxes are due.

If you are not comfortable determining your own estimated taxes then hire a qualified tax professional to help you.

In my experience of representing people all across the country with IRS problems, the majority of my clients are self-employed. When you were a kid in school, there were no classes explaining the pitfalls of having your own business.

Helpful hint: If you find it difficult to do your taxes quarterly, here’s a tip, do them each month. The only problems with doing them quarterly is that you come to a point where you look at that money in the bank and think it is yours, even though you have not paid taxes on it. Many of my clients find it easier to simply pay the tax each month. It is a little bit of additional paperwork, but the upside is, they never get behind.

If you need help with an IRS problem, contact us at 1-877-349-8297

  1).        Ja Rule. If you are like me, you may not know who Ja Rule is. He is a Rapper and an Actor and he pled guilty to tax evasion last year in New Jersey Federal Court. He admitted that he did not pay taxes in 2004, 2005, and 2006. He now owes the IRS over $1 million dollars in back taxes and penalties and was sentenced to two years in prison.

2).        Willy Nelson. Everybody knows Willy is a bit of a rebel. The IRS ceased his property claiming that he owes over $16 million dollars in back taxes. He actually reached a settlement with the government to pay $6 million dollars, but then he could not come up with the cash. When that happened, the government grabbed six of his houses and sent them to auction. He did hide his guitar from the IRS.

3).        Martin Scorsese. If you owed the IRS you are in good company. Most folks know he is an Academy Award Winning Director. What you may not know is that last year the IRS hit him with a $2.85 million dollar lien. It appears he has actually paid the tax bill now and there is some evident that the tax problem came about because he was the victim of a (poncey) scheme.

4).        Wesley Snipes. In December of 2010, Wesley Snipes literally reported to a Federal prison to serve three years for failure to file Federal taxes. Mr. Snipes was convicted in 2008 for owing the government over $17 million dollars in back taxes.

5).        Richard Hatch. This is another one of those “celebrities” I have never heard of. Apparently, he was on the show Survivor. He won first place, which was a million dollars. This is one of those stories you could not even make up. This guy did not report the $1 million dollars in income. Even though, he won it on a television show watched by over 50 million people. So it was a pretty good guess the IRS knew he won it too. He was sentenced to jail and home confinement for more than three years. Believe it or not, that conviction was in January of 2006, he was then again busted in 2010 for failing to file his taxes.

Both of them owe the IRS millions. Nicholas Cage is an Academy Award Winning Actor.  He has made tons of money. He made over $40 million dollars in 2009. Unfortunately, he has trouble keeping it. Initially, the IRS reported he owed more than $6 million dollars and that number later jumped to $13 million. I guess no matter how much you make you can always spend it. He has 15 houses, 4 yachts, and a golf stream jet. The IRS has auctioned off a few of his houses.

Leona Helmsley-who was famous for being a Billionaire Hotel Airiest. In 1986, she was charged with income tax evasion. She was turned in by contractors that she did not pay. She is sort of famous for her quote where she told her house keeper “we don’t pay taxes, only the little people pay taxes.” She was convicted and fined $7 million dollars and sentenced to 4 years in Federal prison.

If you owe the IRS money, one possible solution is an Installment Agreement. Up until recently, if you owed less than $25,000.00 you could do something known as a Streamline Installment Agreement. The advantage of a Streamline Installment Agreement is that it is simple to get  and enter into.

The IRS recently changed their procedures, and now, a form of the Streamline Installment Agreement is available to anyone who owes between $25,000.00 and $50,000.00 (nothing has changed for those who owe less than $25,000.00).

Generally, a taxpayer can have up to 72 months to pay. However, in certain circumstances, taxpayers can have longer to pay, or the Installment Agreement can be approved for the amount that is less than the amount of tax they actually owe.

You can enter into one of these Installment Agreements if your tax liability is based upon the following:

1).        Income tax owed on a form 1040.

2).        Trust Fund Recovery Penalty signed against a responsible party (in other words, payroll taxes).

3).        Self Employment or Unemployment tax.

4).        An Owner, who is personally responsible for taxes in the name of Limited Liability Company where the Limited Liability Company is no longer operating.

If you enter into one of these Installments Agreements and you owe more than $25,000.00 but less than $50,000.00, the IRS will require you to enter into a direct debit Installment Agreement.

Keep in mind that every solution to an IRS problem has pluses and minuses. You should check with a professional who deals in this area of the law on a regular bases, to find out which solution is best for you.

Virtually all forgiven debt is considered as income by the IRS, which creates a nasty surprise for many taxpayers. I have had many clients come to me because they were surprised to learn they had an IRS debt, even though they had always filed their tax returns and paid the taxes that were due. This nasty surprise came about because someone had forgiven a debt and reported that forgiveness to the IRS on a form 1099. Unknown to the taxpayer, this is treated as income. The IRS then computes the tax due on that income, which of course, was never paid.

There are exceptions to this rule:

1).        If you can prove the debt was discharged in bankruptcy or you were in solvent when the debt was forgiven, then it should not be treated as income to you and not taxable by the IRS. Another exception to this rule is, when a mortgage on your primary residence is cancelled, that forgiven debt should not be treated as income. Likewise, it should not be taxable.

2).        If you are concerned that a forgiven debt might be treated as income, the first signal for you to consider is the form 1099-C. This is a key form which relates specifically to cancellation of debt. It would be issued by the creditor to you, with a copy to the IRS. If you have not received such a form, it maybe that this particular creditor did not (intentionally or unintentionally) decide to notify the IRS of the forgiveness of your debt.

3).        To put this in perspective, the IRS anticipates that creditors will send taxpayers well over 6 million 1099-Cs’. This is more than double the amount that were issued in 2010.

One reason for the increase number of 1099-Cs’ is obvious because of the bad economy. However, another reason is the fact that at the end of 2012, the provisions of tax exemption for cancellation of mortgage debt on primary residences expires under the Mortgage Forgiveness Debt Release Act. The law basically allowed taxpayers to refinance their home and modify their mortgages without being subjected to the tax for debt forgiveness. However, the provisions of the Act, which allow for this exception expires the end of 2012.

If you have questions about any of these provisions call our office at

1-877-349-8297.

I have written and talked at length about how to settle your IRS debt for less than what you actually owe. This is known as an Offer in Compromise. I have written another blog post about the formula that the IRS uses. That formula is still very much used by the IRS. This goes to the very heart of whether they will settle with you and for how much. Settling with the IRS is based on your “ability to pay.” Today I want to give you some real life examples. Over the last 10 days, I have settled three different cases with the IRS. I believe my discussion will give you a “feel” of how their process works. The names have been changed but the facts are accurate.

MARK THE ATTORNEY

An Attorney lives and practices in a Suburb of a larger Metropolitan area. He is 45 years old. He is divorced with four children. He owed the IRS over $220,000.00. We were able to settle his claim with the IRS for $91,000.00. Mark owns two pieces of real-estate, his home and a rental property. He has little to no equity. Mark makes a fairly good income; it varies from year to year. The IRS primarily focused on his income for the three months, just before we submitted the offer. Mark also has some substantial expenses. Some of them fall within the “allowable” guidelines and others do not. Mark also has a substantial child support bill because he is divorced. This tax is to support his allowable item under the IRS guidelines regardless of the amount.

Mark’s initial offer of the IRS was $60,000.00. The IRS countered at $113,000.00. After several weeks of negotiation, a settlement was ultimately struck at $91,000.00. This was a cash offer, meaning that Mark had to submit 20% of his offer upfront. Once the deal was struck, he was given five months to pay the balance of the offer.

SCHOOL TEACHER  

An unemployed school teacher with experience, but lost her job. She is 38 years old. She is single with no children. She is living with her parents because of her unemployment. She has no assets in her name and no income other than unemployment income. She owes the IRS $17, 000.00. We were able to settle with them for $1,000.00.

JEFF THE HANDY MAN

Jeff has some college, but did not graduate. He has mostly worked in blue collar jobs. He is currently 54 years old. He works for one of the big box retailers for $15.00 an hour. His tax problems came about because for awhile he was self employed and he did not understand how to pay estimated taxes and fell behind. He had no assets that had equity, nor things that the IRS can force him to borrow or sell. Upon all his monthly income expenses, he would $75.00 left after paying all of his bills. He owes the IRS a little over $43,000.00 and we were able to settle his claim for $6,000.00.

The commercials you hear on Television by those big companies make it sound as though it is easy and automatic. It is not. The good news is, it is real and it can be done. I have given you these stories so that you will get a feel for how it works. But remember, you cannot determine what you can settle for based upon what someone else settled for. There is a standard settlement or standard percentage. This is based on your “ability to pay.”

FEW CHANGES IN TAX LAWS THIS YEAR

Next to the political gridlock in Washington, there are very few changes to this year’s tax laws. Of course, the tax code is still pretty complex.

“Although, congress keeps talking about simplicity, they have really done very little to simplify the tax systems” says Mark Luscombe, a Federal Tax Analysis at CCH.

“So every year, it gets a little more complex.”

Here is one simple way of looking at it, every year CCH puts out a standard Federal Tax Publication. In 1913 it was 400 pages long. Today it is 73, 608 pages.

Here are some of the changes for this year:

FILING DEADLINE

 Everybody knows tax day is April 15, 2012, but this year it falls on a Sunday, and April 16, 2012, is a holiday in the District of Columbia. The deadline is actually April 17, 2012. Also, April 17, 2012, is also the deadline for making contributions to your 2011 Individual Retirement Account. Keep in mind you can take an extension for filing a tax return up until Monday, October 15, 2012, by filing form 4868. The form is on the IRS website, which is at www.irs.gov. Keep in mind the extension is merely an extension to file the return. It does not give you additional time to pay what you owe.

DEDUCTIONS

Taxpayers can take the standard deductions or they can itemize deductions on schedule A. For 2011, the basic standard deduction amount is $11,600.00 for married couples filing jointly. For most singles or for a married person filing separately, it is $5,800.00.

Teachers, Counselors, Principals, or School Aides who work at least 900.00 hours, during a school year, in a school that provides elementary or secondary education can deduct up to $250.00 of school supplies that they have purchased out of their own pocket. They are eligible for this deduction, even if they take the standard deduction.

MILEAGE

            Taxpayers, who take deductions for business use of a vehicle, can deduct actual cost or use the IRS standard mileage rate. For 2011, there are two different IRS rates. It is 51 cents a mile for the first 6 months and 55.5 cents per mile for the second 6 months. Why the difference? The IRS changed the rate to reflect the higher cost of gasoline.

You can also deduct your mileage from moving expenses. It was 19 cents a mile for the first half of the year, and 23.5 cents a mile for the 2^nd half.