Some Fundamental Considerations When Facing a Tax Problem

When a tax problem arises it is not uncommon to become overwhelmed and sometimes even paralyzed by the situation. No doubt much of the anxiety is due to the uncertainty of whether the problem can be solved and how to go about doing so. More and more self-professed tax experts advertise promising results with such individuals in mind. Many of these so-called experts, however, take a very narrow “one size fits all approach” when dealing with a tax problem. That is unfortunate; oftentimes there are many options that should be evaluated before a decision is made as to how best to proceed. My next few blogs will consider how, in my opinion, a tax professional should evaluate a tax problem. The discussion begins with an overview of how to approach a tax problem and then delves into some of the details regarding the different phases of a tax problem.

When I assist with a tax problem I always look at the situation as having two distinct phases. Phase I deals with how much is owed. Phase II deals with how to pay the amount owed. Most of the time you know whether you are in Phase I or Phase II of the process. For example, if you receive an IRS audit notice, you are clearly in the early stages of a Phase I situation. If you receive a collection notice after filing a tax return without full payment of what you agree is due, this is a Phase II issue. But what if you never filed a tax return reporting a balance due and now the IRS serves a wage garnishment on your employer? Where are you in the process? What are your options?

Faced with this scenario, a seasoned tax professional would rightfully want more information from both the taxpayer and the IRS before evaluating how best to proceed. The questions that come to my mind on hearing these basic facts include: Did you recently move and possibly not receive an audit notice? Is it possible the IRS prepared one or more returns for you (referred to as a substitute for return) based upon limited information reported to the IRS? Has there been an identity theft? Each of these inquiries relate to the Phase I question of whether a tax is owed in the first place, and if so, how much is really owed.

While sorting out these questions, additional consideration would need to be given to the impact of the wage garnishment that has now occurred. On that subject the questions that come to mind include: Was the wage garnishment issued from an IRS service center or out of a local office? Has there been any prior collection notice or action taken before the garnishment? Is a voluntary payment arrangement preferable? Is a bankruptcy filing something to be considered? All of these inquiries deal with Phase II aspects of the problem.

While there are often recurring themes and typical situations when tax problems arise, solutions are best when tailor-made for the specific taxpayer in question. Evaluating where the taxpayer is in the process helps determine what options are available. The “one size fits all” approach may result in a resolution, but it may not be the best solution under the circumstances.

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