What Information Will Your Accountant Need To Help With Your Tax Problem?
You have a serious IRS tax problem, and you probably don’t even really know how much you owe because you don’t want to know. I get it. You vaguely remember you owed a number that wasn’t in you bank account when you picked the completed return up at the accountants office. And again the next year. And the year after that. You didn’t even file the year after that.
Now you’re sitting in my office.
Dealing with IRS tax problems is stressful and unfortunately overly complex. Complaining about the complexity does no good, and if you think about it, it’s really pretty simple.
If you owe less than $50,000 you qualify for a Fresh Start option. The documentation requirements for a Fresh Start are pretty mild. We’ll talk about that later.
If you owe more than $50,000 tings are a lot harder, depending on how much you owe. Needless to say, you will be providing a lot more info to the IRS if you owe more than $50,000.
What will make the biggest difference is the response strategy we choose. If you want to set up a repayment plan, where you make a monthly payment for a period up to 72 months.
If your financial situation is so bad you can’t pay anything now, or for the near future. In this case you will be asked to provide a lot more. This is called Currently Not Collectible status (CNC).
The strategy requiring the most documentation is an Offer in Compromise, where you ask the IRS to forgive a big part of your debt. I warn clients that this strategy usually has a “redo” portion about 6 months after submitting the initial application. The IRS will come back and ask for the same documentation, only current. They want to make sure nothing has changed.
Regardless of how much or which strategy you use to address your problem, you will need to collect and submit documents to the IRS. Let’s take a look at what to expect.
Tax Documents and Returns
You’ll need copies of the tax returns in question and all documents used to prepare the return. Typical documents are W2’s, 1099 Summary reports from your broker, financial statements if a business is involved, 1098 Mortgage Interest Statement…You know the drill. Whatever you used, or took to your accountant, to have the return prepared.
If your tax preparer is also handling your tax problem, they should have this info in digital format. I usually ask for tax returns of the previous 2-3 years prior to the tax issue first becoming a problem, i.e. you tax issues began with the 2015 tax year so I would also like to see the 2012 – 14 returns.
If you are a shareholder of a closely held corporation, or a member/partner of a partnership/LLC, you may be asked to provide the info used on those returns as well.
Regardless of the strategy you choose to deal with your tax problem, this info will be needed.
Communication with Tax Agencies (Federal and State)
When you have an IRS tax problem, the IRS is good at letting you know.
Bring all the nastygrams you’ve received from the various taxing agencies. Bring them all, even if it’s embarrassing. We don’t judge.
We need all the letter so we can understand the breadth of the problems. It also tells us how far up the IRS ladder your case has risen. Auto generated letters are less urgent. But if you receive a letter froma specific IRS office, you may have been assigned a Revenue Officer. This would be the person we would need to speak with.
Financial Statements
If you have a business you will need to have a balance sheet and profit and loss statement. You don’t need CPA prepared financials, but they need to be accurate. If you’re unsure, have your accountants office prepare them for you.
Bank, Credit Card and Investment Statements
If you still receive these statements via snail mail, you should have them. Otherwise, you can get them online. You may need to set up an account to be able to download the statements. This task takes time, but is pretty straight forward.
One caveat, don’t think you can hide money in your kids accounts. The IRS can request your kids accounts. Also, don’t try and “forget” an account. They already know about all the accounts in your household.
Asset and Liability Information
This information will be required if you owe a lot, or are trying to get the IRS to forgive a lot. A large part of the IRS review of your tax problem will be in this area.
If you own a home, you may need to get an appraisal. I’ve had Revenue Officers accept realtor analysis of value instead, but no guarantee it will work for you. The same goes for rental property.
This is really aimed at real estate. Liquid assets will be revealed on the bank and investment statements. Other assets would be vehicles, boats, airplanes…you get the idea.
Liabilities would be mortgages on your physical assets and any unsecured notes. You will be asked to show proof of payment as well. I’ve had success showing the payments made on bank statements (usually via billpay), but some Revenue Officers want to see the actual cancelled checks.
This information goes a long way in determining what strategy would be best for you.
Employment and Income Information
If you work for someone, bring your paystubs. Your employer is required by law to issue a paystub showing the gross, net and deductions made every payday. Many employers have gone to online portals where your payroll information is stored.
If you are self employed, the previously mentioned financial statements, along with the bank statements will suffice.
If there are any other sources of funds, such as distributions from a trust or periodic payments made from a lawsuit, these all need to be declared and have documentation to prove it.
Business Information (if applicable)
If you are self employed, or a partner/shareholder in a partnership/LLC or corporation, you will be asked to provide info as it relates to the business. Financial statements, bank and credit card statements, loan documents…You get the idea. If you have a business, expect the documentation requirements to at least double.
And while the document disclosures are greater with the self employed, you also have more options. Business assets are exempt since they are tools used in your livelihood. Business debt is also given priority when calculating your discretionary income (the amount left after all qualified expenses have been paid).
Having IRS tax problems and having a business will increase the work needed to be done.
Payment Records
If you’ve made any payments towards your tax debt we need to have proof. The IRS is just like the rest of us so we want to make sure you have been given credit for any and all payments or credits applied to your account.
Power of Attorney
You would need to sign IRS form 2848 which would allow the tax professional to speak directly to the IRS on your behalf. If you have a state ax problem as well, you’ll need to sign a Power of Attorney for the state taxing agency as well. No ne will talk to us without this.
Future Tax Planning
While not tax planning in the typical sense, we will need to do some tax planning to maintain compliance with IRS requirements. Once a strategy is implemented, you as the taxpayer will have the responsibility to file and pay your taxes on a timely basis. If you don’t, the IRS can rescind any agreement they made with you and demand full payment at that time.
Legal Documentation
If you are involved in a lawsuit and that is a big part of your problems, get info regarding the lawsuit to the accountant. Due to the uncertainty of legal actions, I might suggest applying for Currently not Collectible status to buy time.
Conclusion
You’ll need to work closely with the tax resolution specialist handling your IRS tax problems. Be honest and transparent and you’ll get a result you can be satisfied with.