The Right and Wrong Ways to Resolve Tax Issues

Having Uncle Sam breathing down your neck over a tax issue can make anyone seek out a quick fix, but before seeking help from a company, experts advice doing your due diligence.

While there are reputable firms with accredited certified public accountants, enrolled agents and tax attorneys to assist in settling tax issues, there are also unscrupulous companies pledging to resolve tax problems for pennies on the dollar—and that isn’t a reality, claim experts.

Advertisements on TV and radio from companies claiming “we can save you 90 cents on the dollar if you retain us to negotiate the resolution of your tax liabilities” are likely too good to be true, says David Moise, principal-in-charge, Tax Procedure and Controversy Practice at accounting, tax and advisory services firm, WeiserMazars.

“That may be true under certain limited circumstances, but that advertisement seems to indicate that when you go to the IRS, you negotiate a resolution of the tax liability irrespective of your financial ability to pay and that’s not true.”

And it’s not just advertisements, dishonest companies are also reaching out directly to consumers offering their help for a retainer upfront with the promise to settle outstanding obligations.

“If a company says to you, ‘we’re going to charge you some money upfront’ and they go as far as to say ‘we can guarantee that we can cut your obligations by 60, 70, 80%,’ that immediately is a red flag,” says Michael Eisenberg, of Eisenberg Financial Advisors. “There is no way anybody can guarantee that they can cut the tax obligations by any amount until they’ve discussed something with the IRS.”

Rather than entering a potentially risky situation and end up paying more in fees and interest without a resolution, here are three steps the experts recommend taking when faced with tax issues.

Step 1: Contact the IRS

After receiving notice of any outstanding tax obligations or penalties, it’s essential to contact the IRS and address the issue immediately, says Moise.

“If you speak to a revenue officer, he is going to be willing to work with you depending on your circumstances. The revenue officer is going to say you need to submit certain financial information to show me what your ability to pay is and then we can discuss/negotiate a collection alternative.”

If back taxes are owed, Eisenberg recommends doing everything possible to bring the current year up to date before reaching out.

“The IRS is much more likely to work with you if there’s only one year and you’re current on the subsequent years because they realize things do happen, financial issues come about…but if you’ve been good before and you’re good after, there’s a much better likelihood of the IRS trying to help you try to reach an arrangement,” he says. “By doing that, there is nobody you need to pay any additional fees to because you’re able to do it yourself.”

Step 2: Know Your Payment Program Options

Consumers unable to pay off taxes, penalties and fees in full should inquire about their eligibility to participate in the IRS’ offer in compromise program-but be prepared to back up claims of financial hardships with documents and bank statements, says Matthew McGeever, CPA at R&G Brenner Income Tax.

“If I have a $10,000 bill and I can demonstrate to them that I don’t have the wherewithal to pay that but I would be willing to compromise on that for a lesser amount, the IRS is flexible and they will consider it,” he says. “They may require more documentation to prove that you don’t have the wherewithal and they may even say that you do have the wherewithal because we looked at your bank account.”

Depending on their circumstances, taxpayers may also be eligible for the installment payment program.

“Let’s say you owe $6,000 and based on your financial information, you can pay $300 a month until the obligation is paid off,” says Eisenberg. “[But] understand on the installment payment program that interest continues to run on the outstanding balance and you will still owe additional interest until your debt gets paid off.”

Step 3: When in Doubt, Hire an Accredited Professional

Some tax matters get so complicated that it’s best to work with an accredited professional, says Bill Smith, managing director of accounting and professional services company, CBIZ MHM.

“Unless it’s a very small amount and you know that you can pay it off over a relatively short period of time...the best thing to do is get to a reputable accountant, tax attorney, specialist, enrolled agent with experience who will explain to you the process and not promise the moon, then you have the facts you can deal with,” he says.

It’s in taxpayers’ best interest to be honest and upfront about their situation and provide the professional handling their case with as many documents as possible to increase their chances of reaching an agreement with the IRS, recommends Eisenberg.

“You could say ‘I took some deductions that I thought were legitimate and honest,’ and the IRS can have a debate with you about that or the amounts of the deductions and you back them up with your paperwork or a third party’s mortgage interest, property taxes, charitable donations--if those things are there, then the IRS is going to allow them,” he says. “Make sure your paperwork is in order, you bring all of the documents to the professional and have a dialogue upfront.”