Taxing situations

When it comes to your taxes, the IRS may just be human after all

By Keith Johnson

As business owners and individuals, you’ve all had that sinking feeling at one time or another when your tax return is prepared and you get hit with the shocking news. Because of improper planning, unforeseen circumstances, or some other emergency, you find you owe Uncle Sam more than you can afford to pay right then.

This scenario is most likely to occur because of two reasons. First, the IRS requires businesses that have a payroll to file and pay payroll taxes on a Form 941. It is easy for a small business owner to find themselves overwhelmed by the amount of federal payroll taxes they held from their employees as well as the required company match for Social Security and Medicare. The Form 941 is due every quarter and can make any small business owner lose sleep figuring out how to stay current, especially in these hard economic times.

Second, and related to the first, a sole proprietor who may not even have employees may find themselves owing a significant amount of self-employment tax. Self-employment tax is actually the government’s way of ensuring that sole-proprietors pay their fair share of Social Security and Medicare. The tax runs around 15% of net profit, is counted toward your Social Security benefits, and is in addition to the income tax generated by the net profit reported on Schedule C and line 12 of the 1040. Again, this tax adds up quickly and has left many small business owners in despair.

Wishful thinking

If something like that happens to you, you will feel like ignoring it and hope it goes away, or when an IRS letter comes, you’ll want to leave it in the mailbox and hope the mailman takes it back; however, the IRS is similar to a spoiled child in the fact it doesn’t like it when it’s ignored. But instead of pouting or throwing a temper tantrum, the IRS can resort to filing liens and levies, as well as take you to court.

But remember, the IRS actually is staffed by human beings just like you. The IRS will not only work with you to resolve your tax issues, but bend over backward as long as you work with them in good faith. It is a little known fact that the goal of the IRS is taxpayer compliance, not criminal prosecution.

Make no mistake, if you owe the tax, you owe the tax and the IRS can’t help that. But they can make payments much easier if you let them.

What to do if…

You just got a letter from the IRS stating you owe $5,000 in taxes and have $500 in penalties and interest on top of that. The first thing you need to do is not panic. Call your tax advisor immediately and tell him or her what is going on.

Perhaps a mistake was made by either your payroll preparer or you, but only a thorough review of your payroll or financial records will confirm that. Many business owners will get such a letter to find there was a timing or processing error, such as a payment not posted to the account correctly.

•It may be legitimate. If a review of your business records by your tax advisor reveals that the tax may be legit, what’s next? Your advisor should prepare a Form 2848, IRS Power of Attorney for you to sign. It allows the advisor to represent you to the IRS on your behalf.

It allows the advisor to discuss your tax situation over the phone, collect records for your account, and be present at any meetings with IRS agents. It doesn’t allow the advisor to access bank accounts or make business decisions for you. Go ahead and sign as your advisor will not be able to do much without it.

Your tax advisor can then contact the IRS and get in touch with the agents who can best explain your situation and review your options. Before the IRS can help you, you must be up-to-date with your tax filings. The IRS will advise if there are any missing returns. Get them filed immediately. Payment arrangements can be figured out later.

Once your tax advisor has all of the information they need to catch you up-to-date, you may find that you don’t owe anything. This happens more than you may think. There may be penalties and interest for late filing, and if that’s the case, request your advisor to write a letter to the IRS requesting abatement of penalties. If this is your first offense, the IRS will usually grant it. Interest is harder to remove unless it is the result of an IRS error.

•It is valid. Let’s say the tax you owe is legitimate, and you’re in over your head. The IRS will allow you to enter into an installment agreement. You need to file a Form 9465 for this. If the amount is less than $10,000 and you have not had another installment agreement in the last five years, the IRS cannot refuse your request.

Basically, your setting up a loan payment arrangement similar to a car or mortgage. The IRS will ask you for a monthly payment amount which can pay off your tax in four or five years, but it does cost $105 to set up.

Also, if the tax is expected to be paid within 120 days, do not use this option. The IRS collection process is such that taxes owed will not go into active collection status for 120 days. This also appears on the Form 9465. Use this like a same-as-cash alternative.

•It is a financial hardship. Suppose you’re really in trouble. There are other alternatives to asserting financial hardship such as Offer-in-Compromise, which is rarely granted but worth looking at. There is also a Currently Not Collectible (CNC) status, which puts collection activity on hold for up to 10 years.

At this point, you need to organize your financial records as the IRS will require you to complete a 433-A or 433-B collection statement. This lengthy form requires supporting documentation for your assets, liabilities, income, and expenses. This is a pain to put together, but will help the IRS in determining a reasonable payment.

If you can show the IRS that repayment will cause severe financial hardship, they are more likely to work with you. You can also request the services of a Taxpayer Advocate by filing an aptly named Form 911. An advocate will help grease the wheels to resolve your tax problems.

Know your options

Getting in trouble with the IRS is easy to do and happens to many more than you may think. Don’t feel you’re a failure or a bad business owner. Lots of things can happen to put you in hot water. There are also many options the IRS has given you to resolve any problems. Get the help you need immediately. Don’t wait for it to go away.

Keith E. Johnson CPA, is owner of Keith E. Johnson CPA PA in Jacksonville, Fla., a full-service CPA firm providing accounting, auditing, consulting, and tax services to individuals, businesses, and non-profits. He can be contacted at 904-727-0077 or

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