Understanding Tax Resolution: Noting The Importance & Value of Having Experienced Professionals On Your Side
By Robert Hazen
Equinox Director of Tax Resolution Services
As we begin the countdown to the end of the year and we start to look ahead to what tax professionals call “tax season,” we wanted to take some time to discuss Tax Resolution.
Throughout the year, we receive calls at Equinox from owner-operators and independent contractors asking us about issues with outstanding tax debts. The most common situations that drive these questions are taxpayers who still owe the Internal Revenue Service (IRS) from a previously filed return as well as people who have failed to file a tax return.
Both of these situations (along with some others) fall into the category of Tax Resolution. One way to define Tax Resolution is that it’s the process of addressing outstanding issues that will clear the slate and get people back into the good graces of the IRS.
In our experience, we have owner-operators and independent contractors coming to us with some sort of tax problem. It could have been from multiple years. It could be just from a couple of years. For example, they could have filed a tax return, had a balance due and not been able to have the funds to pay it.
When it comes to Tax Resolution issues, we've seen a variety of situations come across our desks, and we’ve seen a lot of crazy things happen with people over the years. One memorable situation that comes to my mind is a client who had actually been in hiding from the IRS for 10-plus years. He had spent some time up on a fishing boat. He had not filed his taxes for 20-plus years. Ultimately, he finally had enough of hiding. He called Equinox and we helped him through to get things resolved with the IRS.
While that is an extreme example of Tax Resolution at work, the past couple of years as we have dealt with the COVID-19 pandemic have created situations where people simply don’t have the funds. People are always going to put other expenses before their taxes, whether it means putting food on the table or putting their kids through school or paying the rent. A lot of times the taxes get put on the back burner.
The reality is that there are a number of different reasons why people run into situations that put them in a position of needing tax resolution. The harshest reality of these situations is that they won’t magically disappear. And, if you ignore them, they will only get worse over time. Even hiding out on a boat for a decade, as we noted here, doesn’t work.
Choosing A Tax Resolution Specialist
If you spend any time watching cable TV or listening to the radio, you have no doubt seen and heard ads that speak directly to people needing Tax Resolution. Many of these ads make it sound like your tax issues can magically disappear with one phone call. As with anything that sounds this good, you should be highly skeptical of this kind of ad pitch.
Before we move forward on this point, I will say there are some good companies and firms doing tax resolution work in the field today. However, in our experience, we have worked with a lot of people who have heard or seen this advertising and began working with some of these national firms. These places gave people with tax resolution issues a sense of hope only to get burned in the end.
Quite frankly, when we talk with people needing Tax Resolution, I'm blown away with the number of clients I speak with that have already gone to national tax firms who have been charged thousands of dollars, but they are no closer to a resolution than when they made that first call. Quite often, we have seen people come away from that expensive experience, not even knowing what their problem is and still holding a large tax liability that needs to be addressed.
One of the options for Tax Resolution that is often featured on Cable TV and the radio is the Fresh Start Initiative. Let’s take a moment here and examine this in detail.
The Fresh Start Initiative was rolled out in 2008. It was further revised in 2012. At the end of the day, Fresh Start is a simple way that the IRS would collect the tax. The IRS has existing programs such as an installment agreement, penalty and abatement as well as offer and compromise. The Fresh Start Initiative basically changed the terms of those different programs. People come to us all the time and say, “I want to participate in the Fresh Start Initiative.” Well, the Fresh Start Initiative isn't only an approach to specific tax solutions. We have to deal with something specific with the IRS.
Let's say we get finished filing the tax returns and we have a balance due. There are a number of different options. We can enter into a payment plan. That's called an installment agreement. We generally have anywhere between 72 to 84 months to pay the balance, and we could set up a partial pay installment agreement. That's when the IRS only has 10 years to collect the tax.
Sometimes, if the taxpayer is unable to pay, we would need to provide some financial statements that are based on their income and expenses, showing that they just aren't able to pay. In these situations, the IRS could put them on what's called a currently not collectible or hardship status. The nice thing about that is that they won't collect the tax for a period of time. The IRS usually reviews the financials every year, but they'll leave the taxpayer alone. That means that they're not going to collect. They're not going to levy the bank account. They're not going to garnish the wages. An installment agreement is a nice way to have peace of mind knowing that the IRS isn't coming after you.
A Look Inside Offer In Compromise
When it comes to the different options available for resolving tax debt situations, the Offer In Compromise is the golden darling within the tax industry. The Offer In Compromise allows you to settle for less than you owe.
What happens with the Offer In Compromise is that we go through and take a look at the financial situation. What are the assets? How much cash is there in retirement accounts? How much equity do we have in a home? Are there other things like collectibles that would go into the asset computation? The next thing is, how much money do you have available on a monthly basis?
What happens is that the IRS takes a look at the total income and then they have local and national standards that are applied to that particular taxpayer based on the size of the home along with what county they live in. From there, the IRS looks at how much is available, combining those two. That's how the Offer In Compromise is determined. You should know that there is no set rate of, say, 10 percent or 10 cents on the dollar. It's an actual computation based on that particular taxpayer’s situation. So that's why we don't know until we actually do the financial analysis.
People in these situations need to understand that they may not be able to get all or even some portion of their tax liability forgiven by the IRS through Offer In Compromise. At the same time, there are different tax resolution options available in addition to Offer In Compromise, including Penalty Abatement, Currently Not Collectable and a Partial Pay Installment Agreement. The reality is that, while we may not be able to use Offer In Compromise, we may be able to accomplish the same thing by reducing the taxes. As always, every person’s tax and financial situation is unique to them. Our approach is to put everything on the table and develop a plan that will work best for that individual’s given situation.
Developing An Effective Tax Resolution Strategy
At Equinox, we like to break our tax resolution engagements into three different stages. The first one being discovery, the second one being the filing of the tax returns and the third one being the resolution.
When we look at the discovery, obviously, it focuses on our starting point, which will help us in determining what tax resolution approach to pursue. One of the things that we do with every client is we obtain a Limited Authorization. Through limited authorization, Equinox can contact the IRS and our taxpayer's behalf, and, to find out what the problem is, we do what's called a compliance check.
When we call the IRS, we're going to find out a number of things. Number one, are there any balances due? Number two, are there any unfiled tax returns? Number three, if there are any unfiled tax returns, we will order the wage and income information, which is the W2's 1099s. This is the information needed for us to file the tax returns. For number four on our list, we'll find out how much longer does the IRS have to collect?
These are all tools for us to help to figure out the resolution side of things. Once we have the compliance side of the picture, we now know which tax returns need to be filed. I would say a majority of our tax resolution clients have unfiled tax returns. This is an issue because the IRS won't talk to us until we have all tax returns filed. After we've spoken with the IRS and we have completed our compliance check, we can then put together a plan of how we're going to get this case resolved.
In some cases, people with tax resolution needs will come to Equinox without their 1099s, W2s or other paperwork that would go into the preparation of a tax return. As part of our compliance check with the IRS, If there was income that was reported to a taxpayer’s social security number, we would be able to pull the W2s and 1099s. If the taxpayer was using an EIN or a business name, and we have that information available to us, we can request the 1099s that were issued to that business name as well.
In some extreme cases, we may need to rebuild the records and we can do that from bank statements. We can also use industry standards and IRS transcripts. We work with our tax resolution clients to come up with the information that's needed legally and ethically based on experience that will help the taxpayer prepare that tax return.
What most people may not know is that not everything is sent to the IRS. You have your information from the motor carrier, such as income that is sent to the IRS. And that's what shows up on a W2 or 1099 in the event that you're an employee company driver or owner-operator/independent contractor who is leased with a carrier. Generally speaking, if you are a company driver, you're going to have a W2 that obviously is going to have tax withholdings. But for owner-operators, information such as your fuel expense and truck payments and interest and all of these operational expenses, the collection of records for those items falls back on the owner-operator or independent contractor. At the end of the day, it’s up to the taxpayer to provide and justify that information when it comes to the tax return.
One of the benefits of working with Equinox, a firm that specializes in the trucking industry, is we know what should be on a trucker’s tax return. For instance, we know what the fuel should be based on a percentage of revenue. I've yet to speak with a driver who didn't know how much his weekly lease payment was. We know every driver out there has a heavy use tax. The fact is that, with a lot of expenses found in the trucking industry, we can go back and look just based on historical data. For example, we can review the fuel prices during this particular time period that we are trying to reconstruct.
Addressing Tax Liabilities Discovered In Preparation Process
In some cases, Tax Resolution can come into play during the preparation process. At Equinox, we have seen situations, particularly with first-time clients, where they may be sitting on an existing tax liability. We’ve had other situations where we have discovered through the process of preparing a return that the client now owes a large tax liability and is unable to pay it all at the time of filing their taxes.
When these situations arise, the first step is to make sure that the taxes are filed with the IRS. Most people know that the IRS has penalties for filing your taxes late, or not filing them at all. When it comes to the late-filing penalties, it’s five percent for every late month after the deadline, with the maximum penalty capping off at 25 percent above your existing tax liability. Our first step in addressing tax resolution with clients in these situations is to make sure that the client gets the returned filed on time with the IRS. From there, we will begin to take a look at the resolution. In moving forward, we’re going to focus on the best way to keep the IRS out of the client’s bank account. We work to help our clients to be able to go down the road and continue to run their business without looking over their shoulder at the IRS.
In these situations, you’ll see some of the tax resolution options come into play. It could be an installment agreement. It could be currently not collectible. It could be penalty abatement. It could be the offer in compromise. Those are all different options that we can utilize once we determine that a client has tax balances due.
No News Isn’t Necessarily Good News
When it comes to outstanding tax liabilities with the IRS, the last couple of years may have given people who have accrued large tax debts a false sense of security, including a belief that possibly their tax problems have magically disappeared. Collection enforcement by the IRS has dropped off over the past couple of years, but we need to look at the facts here.
First of all, the IRS, due to budget cuts by Congress, has not had the resources for collection enforcement that they have had in previous years. The arrival of COVID-19 and the global pandemic also created another challenge for collection enforcement. But, for anyone thinking that their tax liability issue is solved because they haven’t heard from the IRS, you need to understand that’s just not the case.
Collection enforcement is starting to ramp back up. We’re starting to see letters going out from the IRS, and people are reaching out to Equinox. The IRS is coming, and, whether it may be unfiled returns, outstanding balances or whatever the case might be, these issues cannot be ignored. If you are in a situation where you have an outstanding tax liability, now is the time to be proactive and address it before IRS enforcement comes knocking on your door.
Tax Resolution Services & Pricing
How much do your services cost? This is one the most important questions people who have tax resolution issues will ask us. Recognizing that you must address any outstanding tax issues is a vital first step toward saving yourself time, trouble and money. As we have noted, the IRS, in most cases, does find those people who have issues that have created tax debts and penalties. Putting your head in the sand won’t make it go away and it will simply become more expensive and more painful over time.
When it comes to what we charge at Equinox for our tax resolution services, we have a process in place that is very up front with our clients. As we noted, we go through a discovery process. Once we have pulled transcripts and looked over the available information, we’ll know what it will take to resolve a given case. We’ll have a plan of action that will allow us to provide the client with a quote. From there, we generate a letter of engagement. Once the letter of engagement is signed, we go to work on behalf of our client to represent them through the tax resolution process. By taking this approach, both our clients and Equinox know exactly what will be charged and what it will cost to address those particular tax resolution needs. When it comes to what we charge at Equinox, there are no surprises or hidden fees.
As we mentioned earlier, one of the sad realities of the marketing done in the area of tax resolution is that we’ve seen many cases where someone saw an ad on cable TV or heard a pitch on the radio promising what would essentially be a magic wand only to be taken for a ride. It’s tragic when you talk to someone who spent thousands of dollars on one of those too-good-to-be-true offers, ultimately to see no movement on resolving their outstanding tax liability with the IRS. If someone is pitching that they can make your tax resolution issues simply disappear when you sign up with them, you are very likely headed down a bumpy and bad road that will eventually become a dead end.
As we always say here at Equinox, everyone’s tax situation is different. The services that you’ll need for tax resolution will be unique to you. With that noted, we are very familiar with the pricing structure in this market and very rarely have we been beaten on our fees, which, as noted, are highly competitive. In fact, the rate structure for what we charge for tax resolution work and the service our team at Equinox provides delivers lasting value and long-term savings for our clients.
Equinox Is Ready To Help!
Our team at Equinox understands all the considerations that come into play with tax resolution. We have extensive experience in helping owner-operators and independent contractors who come to us with outstanding tax liabilities and tax resolution needs.
We understand the individuals who become our clients need to have a representative speak to the IRS on their behalf in these matters. There's only a few different designations within the tax profession who can do that. Just to be clear, it can't be a tax preparer only. It can't be an office assistant. It can't be a sales rep per the IRS rules. It has to be a CPA, an enrolled agent or an enrolled actuary. The qualifications necessary for professionals involved in tax resolution are governed by IRS rules, and we have the professionals on our team at Equinox who meet all the requirements for handling tax resolution.
While we’ve put a strong case forward on why you should strongly consider utilizing Equinox for your Tax Resolution needs, here’s the reality of these situations. Tax Resolution requires professional expertise. Pros who understand how to navigate a wide range of situations and consideration. With the offers that you see on cable TV or hear on the radio, unfortunately, many of these individuals who are answering the phones are just paid sales commission people. They are focused on signing you up and getting you into their program. Truth is that, while they have a title of a tax consultant, most of them are not authorized per IRS rules to represent a client before the IRS.
At Equinox, we always tell our clients who will be working on their case. We cover all of the bases and serve as a single point of contact. When it’s time to dive into your tax resolution needs, you are going to be speaking with a licensed CPA, a licensed enrolled agent and the members of our team who are qualified and experienced to get your specific tax problem resolved. You can take the first step today by contacting us at the following email address, firstname.lastname@example.org.