This guide gives you an overview of the different stages of IRS controversy and what you can do in each stage to maximize your likelihood of success with your case.
The Audit is the initial stage where an IRS Revenue Agent contacts you to discuss your financials. Audits can be triggered by many factors, including information that your employer gave the IRS not matching what you sent to the IRS, having a reporting type with a higher chance of audit, such as Schedule C filers, or simple random luck of the draw. These factors all relate to what's called a "DIF" score. The higher the DIF score, the more likely you will be audited.
During the Audit process, there can be three types: A phone audit, an audit in the office of the IRS, or an audit in your own place of business. Generally the phone audit takes the least amount of time, and the place of business audit take the longest, sometimes up to several months. During these audits, the IRS Revenue Officer will ask you for all of your receipts for your tax return. Normally, if you do not have the receipts, the Auditor will disallow the expenses. Therefore, the best preparation for the audit is to find as many receipts as possible before the Audit actually occurs.
IRS Appeals is the second level after the audit, and an easier place to negotiate with the IRS regarding your tax liability than the Audit level. All taxpayers have the right to request IRS Appeals, but few do who are not represented by an attorney. Often you will only have a limited amount of time after the Audit to request an IRS Appeals conference, so you must be very careful to watch the deadlines.
US Tax Court
If you do not go to IRS Appeals or do not request IRS Appeals, the IRS Auditor will issue what is called a "Statutory Notice of Deficiency" or "90 Day letter." This is the letter that allows you to petition to US Tax Court. Anyone can go to US Tax Court, and you do not need an attorney. However, most taxpayers who go to US tax court without an attorney (90% of all US Tax Court cases) often lose because the rules are complex and the arguments to succeed are legal by nature. However, if you hire an attorney, oral testimony can often take the place of receipts to help you win your case.
If you do not go to IRS Appeals or US Tax Court, or if you go and lose in US tax court, your case will go into collections. The type of collections will often differ depending on what type of collections officer you have but the two most common types of collections are lien and levy.
A lien is a right by the IRS to the proceeds of your property if you were to sell the property. A lien placed on your property does not give the IRS the immediate right to collect payment on the taxes. Rather, the IRS has to wait until you actually sell the property in order to collect. There are ways to get rid of liens by making them subordinated, or selling the property and paying off the lien, but usually they involve substituting property or paying off the lien amount.
A levy is most often a garnishment of your wages. The IRS can give a notice to your employer telling the employer to withhold a certain percentage of you salary and pay it over to the IRS. The levy normally cannot be changed unless you will suffer immediate financial hardship or enter into another agreement.
There are a number of ways to avoid liens and levies, but they often involve acting quickly. Normally, within 30 days of receiving a notice of lien or levy, you can file either a Collections Due Process hearing or a Collections Appeals Process hearing. Filing both of these will stop the lien or levy from being put on your property. In addition, you can enter into an Installment Agreement with the IRS to pay off your debts over time. All of these will allow you to pay off the IRS under terms that are negotiable, compared with the lien and levy where you have no negotiating power as to how much the IRS will take.
Offer in Compromise
An Offer in Compromise is settling your debt for less than you actually owe. While the offer in compromise is available at any stage, usually it is entered into during the collections phase, due to the availability of other means to reduce your tax debt prior to the collections phase. This is the process where you hear TV and radio commercials telling you if you have a lot of IRS tax debt, call them and they will help you reduce your tax debt. While this can be done, more often than not it is easier to resolve your tax debt in the IRS Appeals and US Tax Court phase than during the collections phase.
While it is possible to reduce your tax debt for an offer in compromise, more often than not the people who are successful have no likely potential of making large money in the future. Disabled and the unemployed therefore are the most likely to succeed, then people facing financial hardship. If neither of these situations is you, then your offer in compromise will likely not be accepted.
There are also other remedies, such as Audit Reconsideration and Doubt as to Liability Offer in Compromises as well as other techniques to help resolve your tax debt. Every tax situation is different, and you should sit down with a qualified tax attorney to discuss your case before deciding how to proceed. Also, cookie cutter approaches such as the advertisements on TV often do not fit every single taxpayer. Therefore, it is a better idea to have a lawyer review your case and give you an unbiased view of the facts of your case before you hire anyone to help you. Once you do this, you will get a better understanding of how to proceed with your case.