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Starting any business has risk, and most businesses take time to become profitable. Unfortunately, the IRS sees multiple years of losses from a business as a red-flag that usually results in further scrutiny. That scrutiny can result in disallowance of legitimate business losses and potential penalties for the underreporting. However, with the proper documentation and testimony, legitimate losses over multiple years can be taken and upheld. A recent Tax Court case on a miniature donkey businesses, Huff v. Comm’r, T.C. Memo 2021-140, outlines the factors needed to defend multiple years of losses in a business.

All kinds of penalties are being assessed by the Internal Revenue Service (IRS) against taxpayers, and more can be expected in the future.  In 1954 there were 13 penalties in the Internal Revenue Code, and now there are more than 150. Taxpayers should not overlook the opportunity to request the IRS to abate penalties.  The IRS abates many penalties for reasonable cause.

3D illustration of a rubber stamp with the word compromise printed on a brown paper with the text party one and twoOnce the IRS makes an assessment against a taxpayer, the taxpayer will receive several notices before the IRS takes enforced collection action.

Notice of Intent to Levy

This is the notice that is required before the IRS can levy and seize a taxpayer’s assets.

Some form of response should be sent with respect to these notices.  The response, along with a copy of the notice, should be sent by certified mail, return receipt requested, using the envelope provided by the IRS. The purpose in sending a response is so that it will show that the taxpayer is concerned about the taxes and is not ignoring them.

Wooden drawer is open.

There is a wealth of information available from the IRS that is not generally made available to the public.  Most of this information can be obtained by asking.  This information includes files the IRS assembles about a taxpayer, and various training manuals used by the IRS to train its employees.  In addition to training given to its employees, the IRS, like most professional organizations, conducts continuing education on an annual basis for its various divisions.  Most of the training manuals and annual training materials are available to the practitioner pursuant to the Freedom of Information Act (FOIA).

Give and Take Compromise text on paper with pencilMany people end up owing the IRS for many reasons and there are various options to resolve your tax debt.  Some of the options include an offer in compromise, installment agreement, or currently non-collectible status.

What is an Offer in Compromise?

An offer is when a taxpayer and the Internal Revenue Service settle a taxpayer’s tax liabilities for less than the full amount owed.

Envelope from the U.S. Internal Revenue Service with "Important Message" notice and Urgent in red. An assessment results when the liability of a taxpayer is recorded in the office of the Secretary of the Treasury.  The assessment establishes the right of the IRS to collect the tax.  No lien or levy can be made without an assessment.  Assessments are authorized by the Internal Code.

Tax forms, close up

Once a taxpayer overpays a tax, it is necessary to file a claim for refund before any action can be undertaken to seek a refund of such tax from the government. The purpose of the claim for refund is to place the IRS on notice of an alleged overpayment.  A taxpayer cannot require the IRS to make a credit or refund without filing the claim.  In addition, a claim for refund is a prerequisite for suing in the U.S. District Court or the U.S. Court of Federal Claims.  It also protects the overpayment of taxes if the statute of limitations expires.  Claims for refund take many forms, but most typically are Forms 1040X and 1120X, amended returns for individual and corporate income taxes.  Refund of other taxes requires regular forms which should be marked “amended” and show an overpayment.  The courts have recognized many forms of claims for refund, including informal letters from taxpayers to the IRS.  Form 843 should be used when filing claims for refunds for any taxes other than income taxes.

The preparing and filing of a claim for refund should be handled with care.  Only one taxable period and one type of tax should be set forth on any claim. The claim may cover several different issues for the same taxable period and type of tax.  The claim must be in writing under the penalties of perjury, and each and every ground upon which the taxpayer relies must be set forth in detail, plus sufficient facts to place the IRS on notice as to the taxpayer’s claim.  The claim should demand the dollar amount sought as a refund, plus any other amounts which are legally refundable – including interest.  In addition, the claim must be signed by the person who signed the return or, if a corporate return, by an officer of the corporation.  To file a claim for refund there must have been an overpayment of tax, which could include:

Safely mailing an application for ballot for 2020 election at a drive-up mailbox at the US Post OfficeDeadlines are important in legal matters, especially when it relates to tax issues.  There are estimated tax deadlines, tax return filing deadlines, and a host of deadlines if a return is audited and any adjustments are challenged. Once you get to court in a tax dispute – more deadlines. Anytime a taxpayer misses a deadline they usually lose some portion, if not all, of the rights associated with that deadline. Imagine, however, that a taxpayer attempts to meet the deadline by mailing a document that the IRS claims they never received.

silhouette of young designer team standing with a white blank screen laptop and notebook in hands while discussing/talking about them new project with the modern office as background.While dealing with the IRS generally involves submitting documents or legal authority to support a client’s position, in most cases the element of negotiating is present.  Negotiating becomes particularly important in dealing with the IRS where documentation may not exist, or the law is in the gray area.  Most practitioners will find that when dealing with the Examination Division, Appeals Office, and Collection Division, negotiating skills and techniques are helpful in resolving issues in favor of the client.

Almost everything is negotiable–even when dealing with the IRS.  Negotiating face to face with someone is generally more effective than negotiating over the telephone.  Accordingly, it is good policy to always arrange a meeting with the representative of the IRS.

In all levels of negotiations there is no substitute for preparation.  This includes knowing the facts of your case, the Internal Revenue Code, the Regulations, Internal Revenue Rulings and Procedures, the Internal Revenue Manual, Circular 230 and other ethical requirements.  Also, you should have a network of other professionals with whom you can discuss your case.

The following are general negotiating tips which, if followed, should give you a greater chance of success in dealing with the IRS:

USA patriotic American flag muscular arm flex adorned in red, white and blue stars and stripes, huge bicep, very cool symbol of fitness, pride, strength and motivation. Isolated vector illustration for easy editing.The battle outside ragin’

Will soon shake your windows

And rattle your walls

For the times they are a-changin’

-Bob Dylan

A change in presidential administrations brings with it the uncertainty of what the political, legal and tax landscape will look like in the future. Statements from the Commissioner of the Internal Revenue Service and the President of the United States are starting to provide clarity of what things will look like going forward.  Here’s what we know and what you, as a taxpayer, should be thinking about as you adjust your financial planning.