Wednesday, February 09, 2011

Questions for the Tax Lady: February 7th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, I had a local CPA prepare my tax return a few years ago, and I just got a notice from the IRS that I owe more money from that year. What should I do?

Answer: Isn’t that one of the most heart stopping letters you’ll ever receive? Upon receiving an IRS notice, the first thing you should do is read the entire thing. Double check Social Security numbers, verify that the issues the IRS is reviewing are accurate; mistakes do happen so your first order of business is to make sure the IRS has the right person, and the right information. Take special care to notice due dates, write them on your calendar, circle them in red; do whatever you need to do to commit these deadlines to memory.

Second, call the CPA who helped you prepare your return that year. Ask them to review the letter, and the tax return for the year in question. Remember, tax laws are subjective, so even if the CPA did everything correctly, the IRS can still see things differently. Many tax professionals will stand by their work and help you put together an answer for the IRS. Whenever the IRS sends a letter adjusting a tax return, you have two options, agree to their adjustment and pay the difference via check or a resolution method, or you can disagree with the adjustment and write a letter showing why the adjustment is incorrect. Which option you take is up to you and your tax professional.

Third, call the IRS. You do not have to agree to the amounts owed, or settle on a debt resolution method at this point. You simply want to get on the same page, let the IRS know that you received the notice, and that you are being proactive in dealing with it. Use this time to verify the amounts shown on the notice, let them know that you are working with your tax professional and will be working toward a solution promptly.

Fourth, you must follow through. Whatever you choose to do, dispute the adjustment, set up an alternate resolution method like an installment agreement, or just write a check, do so within the IRS deadlines. If you fail to respond, the IRS will simply begin enforced collections; unpleasant, to say the least.

Question: What is the difference between an IRS Installment Agreement, and a Streamlined Installment Agreement?

Answer: A Streamlined Installment Agreement is actually a type of IRS Installment Agreement. Both involve paying off your tax debt in monthly chunks, including penalties and interest. There are some differences, however.

If a person owes less than $25,000 and the debt was assessed within the last five years, he or she may be eligible for a Streamlined Installment Agreement. Why is this a good thing? This method of tax debt resolution does not require you to disclose all your personal financial information to the IRS. The monthly payment amounts are based on how much you owe, and the process is generally much faster. You will pay the entire tax liability, including interest and penalties within 5 years. So, on the plus side, you get your debt paid entirely off within five years, and you don’t have to spend months arguing with the IRS about your income and expenses. However, this might mean some large monthly payments to the IRS.

On the other hand, general Installment Agreements do not have a cap for how much you owe, but you will have to disclose your income and expenses to the IRS. The reason: your payments will be based on how much you can pay each month. The IRS will review your monthly income, and your allowable expenses (including housing, groceries, and medical costs but not credit card payments) and whatever is left over from those IRS recognized expenses will be how much you must pay each month. Yes, those payments can be very high. However, since tax debts have an expiration date – generally 10 years after they are first assessed – you may not have to pay off the entire balance; just keep making those monthly payments until the debts expire.

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