When you fail to pay the IRS back taxes you will be fined penalties and charged compound interest (as much as 47% per annum).  Often the amount of penalties and interest charged is significantly higher than the taxes owed.  Reducing or getting exemption from tax fines is commonly known as tax abatement.  It is possible to negotiate for an abatement of penalties and interest, but it is at the discretion of the IRS agent you are working with.  The IRS allows you to avoid IRS tax penalties if you have a good reason, known as reasonable cause.

Decisions are made by the IRS on an individual, case-by-case basis.  Reasonable cause can be anything like divorce, death of a loved one, a medical emergency, loss of job, failed business, being cheated etc.  In fact, IRS guidelines generously suggest that a penalty abatement should be “generally granted when the taxpayer exercises ordinary business care and prudence” in trying to pay their taxes.

So tax abatement can be granted by the IRS based on a number of reasons.  Experts say that the IRS may choose to abate your penalties if your tax debt resulted from one of the following:

- Death or serious illness of someone in your immediate family

- Unavoidable absence

- Unforeseen disaster (like a fire) to your business

- Inability to determine the tax because of reasons beyond your control

- Civil disturbances

- Lack of funds, despite your exercise of adequate business prudence

- Other reasons that show you exercised ordinary business care but could not pay your full taxes by the deadline

In order to obtain a tax penalty abatement, you need to make a IRS Penalty Abatement petition to tell the IRS what happened to you that prevented you from fulfilling your tax obligations.

If your reasonable cause is not deemed good enough, generally you won’t be given an abatement unless the IRS made an error or somehow delayed your tax case, causing the interest to pile up.  But it is very difficult to get the IRS to admit to an error.  However, if you believe this is the case, then make sure you have some documentation or a detailed contact log to prove your case.

If you submit an IRS Penalty Abatement petition and it is denied, you cannot make a request on the same grounds again.

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If you run afoul of the IRS, you can bet they will use the full extent of the law to prosecute you. The IRS has a department called the Criminal Investigation Department (CID) that investigates all tax cases of a criminal sort. The CID investigating officer will typically begin his investigation by obtaining background information about the taxpayer, examining the taxpayer’s accounts to check up on his or her tax returns in prior years and conducting interviews with the taxpayer. The investigation may even go to the extent of looking at the taxpayer’s education and employment history, and locating the taxpayer’s bank accounts.

CID investigating officers’ most important limitation in their duties is that they are required to inform taxpayers of their Fifth Amendment rights against self-incrimination (including the right to remain silent) where they suspect a Taxpayer of a Tax Crime. The investigations center around violations of the criminal statutes of the Internal Revenue Code, together with other crimes against the internal revenue laws such as conspiracy to defraud, false claims, false statements, presenting false documents at an audit, perjury, and failure to report currency transactions.

The CID will determine which case needs investigation by weighing the probability of winning the case in court. Once the CID identifies such a case, it will make a recommendation to the District Counsel of the IRS who will then review it. If the District Counsel agrees with the CID’s recommendation, then the case is referred to the Tax Division of the Department of Justice (DOJ). If the DOJ reviews and decides to prosecute, it will send the case to the US Attorney’s office.

This whole process may be curtailed if there exist factors such as poor health that may create sympathy for the taxpayer making it unlikely case can be won in court. Barring that, a federal grand jury must vote to move forward with an indictment for a taxpayer to be charged with a tax felony. After a grand jury investigation, the US Attorney makes a written recommendation either for or against prosecution of a grand jury target. This recommendation is then reviewed by the Regional Counsel for the IRS for final approval.

 

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As a taxpayer, it is your responsibility to file your tax returns annually whether or not you think you have made enough money to be taxed. The problem that gets some taxpayers into trouble is they do not file their tax returns because they feel they are not taxable due to their low incomes. If that describes you, you should remember that earning below the taxable income does not absolve you from submitting a tax return. If you fail to submit a tax return, the IRS’ Automated Substitute for Return Program will kick in.

The Automated Substitute for Return program is affects taxpayers who have not filed individual income tax returns, but owe a significant income tax liability. Under this program, the IRS will file a substitute tax return on your behalf without any deductions or tax breaks that you may be entitled to. This program determines and assesses the amount of taxes you owe using information the agency receives from Form W-2, Wage and Tax Statement, and the Form 1099 series, plus other internal data.

Once your tax liability is assessed, the IRS will issue a proposed assessment (Letter 2566) informing you that you must file a valid return, consent to the proposed assessment, or appeal it within 30 days. Taxpayers who do not respond receive a statutory notice of deficiency.

In the decade from 2002 to 2011, the number of tax returns the IRS has filed under the Automated Substitute for Return has risen significantly by eight times. But last year, the number of returns under the program fell by half, and the amount of tax assessed decreased by 54%. Nina Olson, the National Taxpayer Advocate said it was due to workload issues and a new practice of limiting the number of returns assessed at one time on the same taxpayer. The IRS no longer makes an Automated Substitute for Return assessment on a taxpayer who has a balance due for another tax year, she said.

To improve the system of the Automated Substitute for Return program, Olson put forth some suggestions to Congress including contacting taxpayers before making assessments and not making them where the IRS has no confirmed address for a taxpayer. But to-date, these proposed suggestions have not been taken up by the IRS.

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When you go into business for yourself (whether part time or full time), you are subject to another type of tax called the Self Employment (SE) tax. SE tax is a Social Security and Medicare tax primarily for people who work for themselves. This is in addition to the income tax you already know about. The IRS states that you must file an annual return and pay estimated tax quarterly, similar to the withholding tax deductions that wage earners are subject to every month.

To determine how much SE tax you have to pay (if any), you need to determine your net profit or loss. To do so, subtract your business expenses from your business income. If you the difference is a positive value, you have a net profit and you must declare it as part of your income on page 1 of Form 1040. If the difference is a negative value, you’ve got a net loss and you usually can deduct this amount from your gross income on page 1 of Form 1040. But under certain circumstances, you cannot deduct your entire net loss.

If your net earnings from your part time business is $400 or more, you have to file an income tax return. If your net earnings are less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions.

As a business owner, you need to pay an estimated amount of your tax liability once a quarter. This is for Social security Medicare and income tax. To find out if you are required to pay this estimated quarterly amount, refer to the worksheet in Form 1040-ES Estimated tax for individuals. You will also need your annual tax return for the previous year.

If you are in your first year of business, you have to estimate the amount of income you expect to earn for the year. If your estimation is too high, you have to complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, just complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.

You can use the blank vouchers in Form 1040-ES when you mail your estimated tax payments. Alternatively, you may make your payments using the Electronic Federal Tax Payment System (EFTPS).

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If you’re reading this, chances are you owe the IRS some tax money and find it hard to pay it off. And you’re wondering how long you will have to be in debt to Uncle Sam. Well, the short answer is 10 years. 10 years is calculated from the date your tax is assessed and is known as the statute of limitations. It means that the IRS has 10 years to collect the debt from you. But bear in mind this 10 years may be extended under certain circumstances (see below). Needless to say, if your Collection Statute Expiry Date (CSED) i.e. the end of your 10 years is drawing near, you can be sure the IRS will increase their collection efforts.

You may be thinking, “What if I do not file my tax return and make myself scarce for 10 years?” That would be futile because once the IRS does not receive your tax return, they will file one on your behalf (called a substitute return) minus any deductions and then issue a deficiency assessment. This starts the 10 year collection period. Another scenario may be where you file your return but pay less than what you owe. Under such circumstances, the IRS will issue you a written notice of the amount you owe and the date this notice bears is the start of your 10 year statute of limitations.

As I mentioned the 10 year time frame is not fixed as it can be extended. The extension comes when statute of limitations is suspended temporarily and then re-instated. Here are some of the circumstances that may cause this to happen:

• When you apply for certain means to resolve your tax debt

This may include things like an installment agreement, offer in compromise (where you offer to pay less than what you owe as full payment), innocent spouse relief etc.

• When you file a bankruptcy petition

If your bankruptcy petition is confirmed, the court will issue an automatic stay that prohibits the IRS (and all other creditors) from making any collection efforts on you. So long as the automatic stay is in place (which is equivalent to the period of your bankruptcy case), your 10 year time limit is suspended.

• When the IRS sues you

If the IRS initiates a lawsuit against you then the 10 year time limit is also suspended.

• When you agree to extend it

Now you may be asking why you would want to do that. If your limitations period is coming to an end and you still owe the IRS, their officers may offer you an installment agreement with attractive terms in order to get you to agree to extend the collection deadline.

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