Confused by IRS policies and procedures?
16 questions and answers can help set you straight
Now that tax filing season is over, it’s a good time to answer some questions you may have about IRS practices and procedures. Dealing with the federal tax agency and the complex Internal Revenue Code can make for some frustrating encounters.
Here are 16 questions and answers that explain some of the issues taxpayers may face.
1. I’m waiting for my tax refund. How long does it typically take? It depends on whether you filed electronically or mailed a paper tax return. Refunds from e-filing can be received in 10 to 21 days. If you filed a paper return, it can take longer.
You can check on the status of your refund by going to the “Where’s My Refund?” page on the IRS website. You’ll need to provide your Social Security number, filing status and exact refund amount.
2. What happens if a tax return is filed late? If you owe tax and don’t file on time, the total late filing penalty is usually 5% of the tax owed for each month, or part of a month, that your return is late, up to five months. If your return is more than 60 days late, the minimum penalty for late filing is the smaller of $135 or 100% of the tax owed. Even if you don’t have the money to pay your tax bill, you should still file so you aren’t hit with the late filing penalty.
3. How can a taxpayer prove a return, IRS form or other document was filed on time? It depends on whether you file electronically or through snail mail. With a paper return, timely mailing generally is timely filing. This means the return, petition or other document generally must be postmarked no later than the due date. (One exception to the postmark rule comes into play when filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, which must arrive at the IRS by the due date, rather than be postmarked on the date.)
Postmarked is the operative word here. In one case, a taxpayer used a private meter to put the postage on the envelope. The taxpayer sent the item by certified mail, but the envelope, certified mail sticker and receipt held by the sender didn’t have a valid U.S. Postal Service postmark. It wasn’t accepted as mailed on time.
Filed electronically? The IRS or state tax agency will provide confirmation that the return has been accepted, usually with a confirmation number, date and time. Make sure you save that just in case there’s a question in the future.
Keep in mind that there are still a number of forms, responses to IRS requests and other documents that can’t (or usually aren’t) filed electronically. To prove timely filing, go to the post office, get a receipt and save it with your tax files.
4. What happens if a tax return is filed with a balance due but payment isn’t made? In that case, the taxpayer would owe the late payment penalty (but not the late filing penalty). The late payment penalty is one-half of 1% of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or the 25% maximum penalty is reached.
The 0.5% rate increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. For individuals who file by the return due date, the 0.5% rate decreases to 0.25% for any month in which an installment agreement with the IRS is in effect.
5. Aren’t there ways to get out of paying the late filing and late payment penalties? The penalties for filing and paying late may be abated if you have reasonable cause and the failure wasn’t due to willful neglect. If you’re billed for penalty charges and feel you have reasonable cause, your explanation should be sent along with the bill to your IRS service center. Generally, interest charges aren’t abated. They continue to accrue until all assessed tax, penalties and interest are paid in full.
There are possible exceptions to the general deadlines for filing a return and paying tax. One possible exception is if you’re a member of the armed forces and are serving in a combat zone. Another is if you’re a citizen or resident alien working abroad.
6. What constitutes reasonable cause for filing a tax return late? It’s not easy to convince the IRS or a court that you’ve got a reasonable cause for filing your tax return late. Your idea of a reasonable cause may not be accepted.
For example, in one court case, a taxpayer argued that he was late filing for two years because his mother and daughter were ill and he often took them to doctor appointments. The court noted that during that period he was active in his business as an architect and that he should have been able to file the returns on time.
7. How long after I file a tax return can the IRS audit it? Generally, the IRS can include returns filed within the last three years in an audit. This is the statute of limitations, which limits the time allowed to assess additional tax and make refunds. The statute of limitations generally is three years after a return is due or was filed, whichever is later.
Additional years can be added if a substantial error or fraud is identified. Generally, if a substantial error is identified, the IRS won’t go back more than the last six years.
When a return is “officially” filed can be an important question. For one thing, it starts the statute of limitations running. If a return isn’t filed, there’s no time limit on how long the IRS can wait to audit the return. If you fail to sign the return, it’s not officially filed.
If the audit isn’t resolved and the statute of limitations date is nearing, you may be asked to extend the statute of limitations date. You don’t have to agree. Consult with a tax advisor so you understand all the implications.
8. What are some of the reasons the IRS audits tax returns? There are many red flags that might cause a tax return to be audited. For example, the IRS is on the lookout for taxpayers claiming large travel and entertainment deductions or home office deductions. The agency also searches for taxpayers who deduct losses while operating a business that auditors consider a hobby.
If you’re self employed or report a large income, you’re more likely to be audited. If the information on a tax return doesn’t “match” with what employers, banks, brokers, etc., report, the IRS will generate a notice about the discrepancy.
Selecting a return for audit doesn’t always suggest that an error has been made. Some returns are randomly selected or chosen based solely on a statistical formula. For example, IRS computers compare income and deductions on a return with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.
Returns can also be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were previously selected for audit.
9. If I’m audited by the IRS, do I need a tax professional to assist me or can I handle it alone? There’s no requirement that you have a tax pro, but receiving expert tax and legal advice up front could result in significant savings. If the audit involves a business, the auditor will probably ask a number of questions before looking at your records. To protect yourself, have your CPA or attorney present to assist.
10. I lost all my tax records in a fire. What if I’m audited? All may not be lost. You may be able to deduct certain unsubstantiated expenses if you can show you did incur the expenses, the expenses would be deductible if substantiated and there was a basis for estimating them. It’s called the Cohan rule, after the late entertainer, George M. Cohan.
For example, let’s say you lose some of your rent bills for the year. You’ve got the bills for the first and last couple of months. The courts might allow the expenses for the missing months even without the bills because it’s clear you had the rent expense and the amount can be estimated. But consider this a last resort. And you can’t use it for travel and entertainment, auto and certain other expenses.
11. I got a summons from the IRS for records in my possession. What should I do? If the IRS issues a summons for documents in your possession, you generally have little recourse but to turn over the requested items. That’s true even if the confidentiality of customers or clients is involved.
In one case, the court rejected a taxpayer’s arguments that its clients’ privacy would be invaded if the requested information were turned over. The court noted that the U.S. Supreme Court has held that, when the IRS is legitimately investigating a taxpayer, any incidental effect on the privacy rights of unnamed taxpayers is justified by the IRS’s interest in enforcing the tax laws. The court also noted that when a person communicates information to a third party — even on the understanding that the communication is confidential — he or she cannot object if the third party conveys that information to law enforcement authorities.
12. If there is a question on a tax form and I just ignore it, will I be protected from getting into trouble over the issue? When preparing a personal return or a business (corporation, partnership, etc.) return, there are a number of boxes that you may have to check — or leave blank. Ignoring them could be costly. In some cases, checking a box may allow you to make an election that could save you taxes. In other cases, you’re making a statement.
For example, if you use a vehicle in your business or use a personal vehicle for business, you have to check some boxes to make statements about the usage and whether records were kept. Sometimes, checking a box that you shouldn’t have can subject you to negligence or even perjury penalties. This is true if, for example, you check the “No” box on Schedule B in response to the “ . . . did you have an interest in or signature or other authority over a financial account in a foreign country?” but you did have an interest in such an account.
13. If a person doesn’t pay taxes, what property can the IRS seize? The IRS has two powerful legal tools: liens and levies. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.
If a taxpayer doesn’t pay his or her taxes (or make arrangements to settle the debt), the IRS could:
• Seize and sell his or her property (such as a car, boat, or house), or
• Levy property that belongs to the taxpayer but is held by someone else (such as wages, retirement accounts, dividends, bank accounts, rental income, accounts receivable, the cash value of life insurance or commissions).
The IRS generally levies only when the following three conditions have occurred:
1. The IRS assessed the tax and sent the individual a “Notice and Demand for Payment.”
2. The individual neglected or refused to pay the tax.
3. The IRS sent the individual a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing” at least 30 days before the levy. This notice is usually sent to the last known address.
14. My business received an IRS notice about garnishing an employee’s wages. Can the employee take legal action against my company? It’s not unusual for an employer to receive an order from the IRS requiring it to garnish an employee’s wages and remit the amounts to the IRS. The employee might try to take action against the employer, often threatening to sue.
Fortunately, Section 6332 of the Internal Revenue Code clearly insulates an employer (or other private defendant) from suit for complying with an IRS tax levy.
15. What if a person claims he or she didn’t receive an IRS notice about taxes due? All the IRS has to show is proof of mailing and that the correspondence was mailed to the individual’s last known address. The IRS can show proof of mailing by producing its certified mail log or official record of mailing. In the absence of contrary evidence, the court will accept the IRS logs.
16. Suppose an individual doesn’t have the money to pay the bill. He or she files anyway and makes an effort to work with the IRS. Can the person be sent to jail? The unequivocal answer is, “no.”
What if the same person fails to file a tax return or ignores demands for taxes due? Can the federal government send the individual to prison? In these cases, the answer is, “yes,” but it’s still not likely.
Nevertheless, it has long been the practice of the IRS to make examples of high-profile figures who owe the federal government money, ignore the law and are unrepentant. The nation’s tax collectors hope that these public displays improve compliance for ordinary taxpayers. One example is actor Wesley Snipes, who was sent to jail in 2010. Throughout the proceedings with the IRS, Snipes used “tax protestor” arguments to defend his position, at one point claiming he was a “non-resident alien of the U.S.”
If a taxpayer can’t come up with the cash right now, he or she can request to use an installment agreement. The IRS generally will approve such an agreement if a person owes less than $50,000 and agrees to pay off the debt within six years. But he or she still must pay interest and runs the risk of late payment penalties if the tax obligations aren’t met in a timely fashion.
Alternatively, some delinquent taxpayers might convince the IRS to accept an “Offer in Compromise,” in which the tax agency agrees to settle a debt for less than the full amount owed. (Either way, a professional tax advisor can help with the paperwork.)
On its website, the IRS states that a “long-standing practice” is “not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation.”
The tax agency adds: “The IRS wants to get people back into the system, not prosecute ordinary people who made a mistake. However, flagrant cases involving criminal violations of tax laws will continue to be investigated.”
As you can see, dealing with the IRS can involve a labyrinth of rules, procedures and complicated tax laws. The above questions and answers deal with only some of the issues taxpayers face every day. If you have questions specific to your situation, please give us a call. We’d be happy to provide the answers.
To comply with the requirements of IRS Circular 230, we must inform you that the information discussed above is not intended or written to be used, and cannot be used by the recipient or any other taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or to promote, market or recommend to another party any transaction, entity, investment plan, arrangement or other matter.