Representation & Tax Resolution FAQs
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What is an enrolled agent?
An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service during audits by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee. Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and consistently complete IRS-approved continuing education courses to remain current on tax law and regulations. Generally speaking, other tax practitioners can only represent taxpayers in matters directly relating to a return they themselves prepared, and the only standards that are applied to their level of knowledge are those they themselves choose to follow.
What is an IRS audit?
An IRS audit is a review (“an examination”) of an individual’s, business, or organization’s tax accounts and documentation used to create a tax filing to make sure information is being reported correctly and in accordance with tax law. Audits can result in no changes or changes. Any proposed changes to your return will be explained.
Do I need a lawyer if the IRS is auditing me?
Usually, no. If you are being audited, you should contact the tax preparer who did your tax return (if any) and seek help from that person. You would also be well served to secure the services of an Enrolled Agent to either represent you at the audit or to at least help you get prepared and give you advice ahead of time.
Why was I selected to be audited?
There are several reasons you may have been chosen for an IRS audit, and few have anything to do with what you did or didn’t do. Here are some of the most common reasons for why you are selected for an audit:
- Random Selection based on a statistical formula.
- Document Matching: Something on your return doesn’t match IRS records, such as an employer reporting wages paid to you that you did not report to the IRS.
- Related Examinations: Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.
Does filing an amended return increase my chance of being audited?
No. Filing an amended return does not affect the selection process of the original return. However, amended returns also go through a screening process and the amended return may be selected for audit. Still, you’re probably better off correcting an error on your tax return on your own rather than having the IRS find it and make you correct it.
What is the chance of being audited?
It depends on your income. During 2011, the most recent year for which figures are available, 51% of all audits were directed at taxpayers with annual income in excess of $5,000,000. Meanwhile, roughly 2.5% of all audits were directed at taxpayers who earned between $25,000 and $100,000.
5 % of all audits during 2011 were of taxpayers reporting less than $25,000 in annual taxable income. This is because many of these taxpayers claim the earned income tax credit and the IRS conducts many audits to ensure that the credit is not being claimed fraudulently.
For taxpayers making between $25,000 and $100,000, the chance of being audited was less than 1% on average, while it was roughly 4% on average for those reporting between $100,000 and $5,000,000. Above that, the chance of being audited during that year jumped to roughly 30%.
Since 2011, the IRS audit rates have dropped to lower levels, although presumably the focuses remain the same—on the high income earners where much potential exists for finding ways to collect more tax revenue, and on low income earners where much potential exists for recovering improperly clamed credits.
The IRS has also stated that returns with deductions that seem out of proportion with the income are often flagged for correspondence audits. The same is true for returns where income appears to be missing—such as Schedule C income amounts not matching that reported to the IRS by those who paid the non-employee compensation to the taxpayers—or the income from the sale of stock or other capital assets that does not match what other parties have reported to the IRS.
Basically, any inaccuracy on your tax return increases the possibility to being audited due to the IRS’s computers that match your tax filings against databases. On many levels, filing your tax return is an exercise in telling the IRS what they already know, which is why they audit those tax accounts that don’t’ seem to match up with the facts as they know them. However, if your return is done correctly and you have kept all your supporting documents, an audit is a hassle but not a disaster.
How do I know I’ve been selected for an audit?
If your tax account is selected for auditing, the IRS will contact you by telephone or by mail. If the initial contact is by telephone, the IRS will still send a letter confirming the audit. Please note that the IRS does not use email to notify taxpayers that they have been selected for audits. If you receive such an email, scammers have targeted you.
The IRS will inform you in writing about the specific reason you are being audited, and you will be provided with a list of documents they expect you to produce for the audit.
How does the IRS conduct audits?
An audit may be conducted by mail or through an in-person interview and review of the taxpayer’s records. The interview may be at an IRS office (office audit) or at the taxpayer’s home, place of business, or accountant’s office (field audit). The IRS will tell you what records are needed.
The nature of the audit, the identity of the auditor, and when or where it will take place will all be communicated to you in writing. The law requires you to retain records used to prepare your return. Those records generally should be kept for three years from the date the tax return was filed.
The IRS does accept some electronic records. If records are kept electronically, the IRS may request those in lieu of or in addition to other types of records. Contact your auditor to determine what can be accepted to ensure a software program is compatible with the IRS’s.
It's almost time for my appointment, and I'm not ready. What do I do?
If you do not have all the information requested, contact your auditor at the number in the notification letter to discuss what information is currently available. It may be possible to begin the audit with the information available rather than postpone the appointment.
It a situation like this, you are well advised to seek professional help from an enrolled agent who specializes in dealing with audits.
How far back can the IRS go to audit my tax returns?
Generally, the IRS can include returns filed within the last three years in an audit. Additional years can be added if a substantial error is identified. Generally, the IRS will not go back more than the last six years.
How long will the audit take? How will I know when it’s over?
The length of each audit varies depending on the type of audit, the complexity of items being reviewed, the availability of information being requested, the availability of both parties for scheduling of meetings, and your agreement or disagreement with the findings.
At the end of the process, the auditor issues his findings (“determination”) and it is brought to a conclusion in one of three ways:
- No Change: An audit in which you have substantiated all of the items being reviewed and results in no changes.
- Agreed: If you agree with and understand the audit findings, you will be asked to sign the examination report or a similar form depending upon the type of audit conducted.
- Disagreed: An audit where the IRS has proposed changes that you understand but disagree with. In such a case, a conference with a manager may be requested for further review of the tax return and issues. You also have the option to request an appeal, or to enter a mediation program.
I received an email from the IRS telling me that I am being audited. They are demanding I send them information from my tax return, along with my social security number. How should I respond?
You shouldn’t. The IRS does not ask for information like that through email, via social media, or any other electronic media. You have been contacted by someone who is attempting to defraud you by stealing your identity. You should contact the IRS. For further guidance, you can visit this website: http://www.irs.gov/uac/Identity-Protection
You are also welcome to contact us at GPL if you have questions or concerns.
I took a position on my income tax return based on a U.S. income tax treaty. However, I received a letter indicating that my treaty-based position is invalid. What can I do?
You should discuss your filed return and the IRS notice with an enrolled agent or other income tax practitioner as soon as possible. You can also contact the IRS by calling the phone number on the notice.
I got a letter from the IRS stating that I owe more money from a prior year’s tax return. What can I do?
You should discuss the noticed and the return to which it relates with an enrolled agent or other qualified tax return practitioner as soon as possible. Most such IRS notices can be addressed with relative ease, so long as you respond quickly and with a full understanding of the issue the IRS is raising.
How does the IRS calculate interest and penalties on late-filed returns, or late tax payments?
Generally, interest is charged on any unpaid tax from the due date of the return (without extensions) until the date of payment. The IRS publishes updated interest rates on a quarterly basis. There are different types of penalties and ways that they are calculated.
What is a tax levy?
A levy is a legal seizure of your property to satisfy a tax debt. If you do not pay your taxes (or make arrangements to settle your debt), the IRS may seize and sell any type of real or personal property that you own or have an interest in, such as your house, your car, or your business. The IRS can also levy your wages, bank accounts, income earned form rentals and mostly any other source
Offshore Voluntary Disclosure Program (ODVP)
What does OVDI mean?
OVDI stands for the Offshore Voluntary Disclosure Initiative. It is a program of limited duration that offers significant benefits to taxpayers who may have engaged in conduct that could be viewed as criminal. Benefits include immunity from criminal prosecution and avoidance of the full brunt of civil penalties that otherwise could far exceed amounts concealed in offshore accounts. In 2014, the IRS made significant changes to the program.
What does OVDP mean?
OVDP stands for Offshore Voluntary Disclosure Program.
What is the Offshore Voluntary Disclosure Program (ODVP)?
IRS offshore voluntary disclosure programs are designed to encourage taxpayers with undisclosed offshore assets to become current with their tax liabilities. The programs have been part of a wider effort to stop offshore tax evasion, which includes enhanced enforcement, criminal prosecutions and implementation of third party reporting via the Foreign Account Tax Compliance Act (FATCA).
The latest series of voluntary programs began in 2009.
The IRS announced the 2009 Offshore Voluntary Disclosure Program (OVDP) in March 2009. It offered taxpayers an opportunity to avoid criminal prosecution and a settlement of a variety of civil and criminal penalties in the form of single miscellaneous offshore penalty. It was based on existing voluntary disclosure practices used by IRS Criminal Investigation.
Generally, the miscellaneous offshore penalty for the 2009 program was 20 percent of the highest aggregate value of the unreported offshore accounts from 2003 to 2008. Participants were also required to file amended or late returns and FBARs for those years.
The 2009 program resulted in many disclosures and furthered the investigation of many individuals and financial institutions that facilitated non-compliance with U.S. tax laws. As these investigations continued, the IRS responded to requests from tax practitioners that additional individuals sought to come forward and voluntarily disclose their offshore accounts.
In February 2011, the IRS announced the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which lasted until Sept. 9 of that year.
Generally, participants of this program paid a 25-percent miscellaneous offshore penalty on the highest aggregate value of unreported offshore accounts from 2003 to 2010. In addition, some participants were eligible for special 5-percent or 12.5-percent penalties, depending on the severity of their noncompliance.
In 2012, the IRS replaced the Offshore Voluntary Disclosure Initiative (ODVI), which expired at the end of 2011, with the Offshore Voluntary Disclosure Program (ODVP). Under the 2012 Offshore Voluntary Disclosure Program, participants pay a penalty of 27.5 percent of the highest aggregate balance or value of offshore assets during the prior eight years. The 5 or 12.5 percent penalties remained in effect for certain taxpayers.
In June 2012, the IRS added an option to the existing disclosure program that enabled some U.S. citizens and others residing abroad to catch up on their filing requirements and avoid large penalties if they owed little or no back taxes.
In June 2014, the IRS announced major changes in the 2012 offshore account compliance programs, providing new options to help taxpayers residing in the United States and overseas. The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations.
And with expansion of the streamlined procedures for non-willful taxpayers, the IRS will also adjusted the terms for taxpayers participating in the OVDP whose conduct may reflect willful non-compliance. The changes modify the OVDP program to make it suited for taxpayers seeking relief from potential criminal prosecution.
The IRS hopes that taxpayers with undisclosed income from offshore accounts will see it as an opportunity to get current with their tax returns. The program can be ended or modified at any time.
Who is in charge of the Offshore Voluntary Disclosure Program (OVDP)?
It is administered by the IRS’s Criminal Investigation unit.
Who is eligible for the Offshore Voluntary Disclosure Program (OVDP)?
Generally speaking, if you have undisclosed offshore accounts or assets you are eligible to apply for IRS Criminal Investigation’s Voluntary Disclosure Practice and the OVDP penalty regime.
Why should I make a voluntary disclosure of my income from offshore bank accounts?
Because it’s the law. By entering the OVDP, you can become compliant with your tax filings, avoid even more substantial civil penalties, and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.
If I enter the OVDP, I will probably have to pay penalties. Why not just leave well enough alone and not report my foreign holdings and bank accounts?
The IRS is gaining ever-increasing access to data from foreign banks through tax treaties and the Foreign Account Tax Compliance Act (FATCA), and they are actively engaged in discovering the identities of U.S. citizens and resident aliments with undisclosed foreign accounts. Taxpayers who don’t submit a voluntary disclosure, and whose accounts are discovered by the IRS run the risk imposition of harsh penalties and possible criminal prosecution.
Can my representative talk to the IRS without revealing my identity?
Yes, but this will not alleviate the risk of criminal prosecution if the IRS puts you under examination before you enter the OVDP program.
I am currently under an ISR audit. Can I apply for the OVDP?
No. If the IRS has initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities, you are not eligible for the OVDP. You should have the lawyer or enrolled agent representing you discuss the offshore accounts with the agent conducting the audit.
Taxpayers under criminal investigation by the IRS Criminal Investigation unit are also ineligible for the OVDP.
What is 'quiet disclosure'?
This is how the IRS refers to what is done by taxpayers who report their previously unreported earnings from offshore accounts and holdings by filing amended returns, but not taking advantage of the voluntary disclosure programs.
I have already filed amended returns to declare and pay taxes on unreported offshore income, in other words made a ‘quiet disclosure.’ Should I still enter the OVDP?
You should consult with an enrolled agent or qualified attorney and have them review your amended returns. The IRS is stressing that taxpayers who have not entered the OVDP are still possible targets for criminal prosecution should they be audited. It is worth noting that if you do chose to perform a “silent disclosure,” it becomes very difficult to argue that your non-disclosure was unintentional, as the filing of an amended return shows that you did know you were supposed to disclose the offshore accounts.
What should I do if my spouse also wishes to make a voluntary disclosure under OVDP?
In situations where spouses both desire to participate in OVDP, they may do so jointly or separately. If spouses make a joint submission, they must include all required information and documents for each spouse and clearly indicate the intention to disclose jointly. If spouses make separate submissions, each spouse must complete and submit all required information and documents.
If the IRS has served a John Doe summons or made a treaty request seeking information that may identify a taxpayer as holding an undisclosed OVDP asset, does that make the taxpayer ineligible to make a voluntary disclosure under this program?
No, but it may subject you to a higher offshore penalty at the rate of 50 percent. However, if you haven’t already sought the assistance of an enrolled agent or tax attorney for advice and representation, you should do so.
You should be aware that the IRS may determine that certain taxpayer groups that have or had accounts held at a specific financial institution will be ineligible due to U.S. government actions in connection with the specific financial institution.
Will my voluntary disclosure be subject to an examination by an auditor?
Usually, no examination is conducted with respect to an offshore voluntary disclosure made under the ODVP. However, the IRS reserves the right to conduct an examination.
The normal process under the ODVP is to assign the voluntary disclosure to an examiner to certify the accuracy and completeness of the voluntary disclosure. The certification process is less formal than an examination and does not carry with it all the rights and legal consequences of an examination.
What should I do if I am having difficulty obtaining my records from overseas?
Carefully document your attempts to get records from the foreign institutions. For phone conversations, note the date, time, and duration of the call; note the complete name of the employee of the foreign financial institution with whom you speak. For correspondence, make a photocopy of all correspondence to and from the foreign financial institution. You should use a delivery or postal service that provides delivery confirmation or a return receipt for all correspondence sent to foreign financial institutions. This documentation will eventually be submitted to the examiner handling your OVDP case. If your case is not yet assigned, contact the IRS OVDP Hotline at (267) 941-0020.
When converting foreign currency to U.S. currency for purposes of filing a U.S. tax return, what foreign currency exchange rate should I use?
The Internal Revenue Service has no official exchange rate. Generally, it accepts any posted exchange rate that is used consistently.
Where can I find exchange rates?
The IRS provides annual average exchange rates on this page: http://www.irs.gov/Individuals/International-Taxpayers/Yearly-Average-Currency-Exchange-Rates
The U.S. Department of Treasury provides monthly average exchange rates on this page: http://fms.treas.gov/intn.html#rates
What exchange rate do I use if I received income such as interest or dividends in a single transaction in a foreign currency?
If you have a single transaction such as dividend income or the sale of property that occurred on a single day, use the exchange rate for that day.
What exchange rate do I use if I earned income or paid expenses in a foreign currency evenly throughout the year?
You can translate the foreign currency to U.S. dollars using the yearly average currency exchange rate for the tax year.
What is a Closing Agreement?
A Closing Agreement is a legally binding document between the IRS and a specific tax issue or tax liability. Closing agreements are generally reflected on Form 866 (Agreement As to Final Determination of Tax Liability) or Form 906, Closing Agreement on Final Determination Covering Specific Matters. They are governed sections of the tax code that are similar to contract law and a presumption that both the IRS and taxpayer are dealing in good faith. The IRS is not bound by the agreement if it later is revealed that the taxpayer had not been honest or was incomplete in disclosures made.
Will my same-sex spouse be considered a surviving spouse for purposes of the marital deduction for estate tax purposes?
Yes. For federal tax purposes, the terms “spouse,” “husband,” and “wife” includes individuals of the same sex who were lawfully married under the laws of a state whose laws authorize the marriage of two individuals of the same sex and who remain married. It doesn’t matter if the couple resides in a state that does not recognize the validity of same-sex marriages, so long as the same-sex marriage was created under the laws of a state that recognizes such unions.
The IRS also considers same-sex individuals to be lawfully married if their union was created under the law of foreign nations that recognize same-sex marriages.
However, the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term “marriage” does not include such formal relationships.
All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass “outright.” In some cases, certain life estates also qualify for the marital deduction.
What is included in the Estate for tax purposes if my spouse dies?
The Gross Estate of the decedent consists of an accounting of everything owned jointly or certain interests in at the date of death. The fair market value of these items is used, not necessarily what was paid for them or what their values were when acquired. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Keep in mind that the Gross Estate will likely include non-probate as well as probate property.
What is excluded from the Estate?
Generally, the Gross Estate does not include property owned solely by the decedent’s spouse or other individuals. Lifetime gifts that are complete (no powers or other control over the gifts are retained) are not included in the Gross Estate (but taxable gifts are used in the computation of the estate tax). Life estates given to the decedent by others in which the decedent has no further control or power at the date of death are not included.
What deductions are available to reduce the Estate Tax?
Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass “outright.” In some cases, certain life estates also qualify for the marital deduction.
Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
Mortgages and Debt.
Administration expenses of the estate.
Losses during estate administration.
Is there a limit to how long the IRS can continue to demand back taxes from me?
Yes. By statute, the IRS has ten years to collect any back taxes that are owed. Approved offers in compromise and installment agreements extend the limitation from the date they were put in place. For example, if you enter into an installment agreement for back taxes owed from 2010 in the year 2014 and then default on the agreement in 2017, the IRS can attempt to collect from you until 2024.
I owe taxes, but I can't pay them right now. What should I do?
The sooner you address the problem, the easier it will be for you to arrive at an arrangement with the IRS that you both can accept. Your options are:
- Request an installment agreement with the IRS under which you make monthly payments. Interest continues to accure on the remaining balance, so paying off the tax debt as soon as possible is in your best interest. However, installment agreements can be reached that allow for a five-year payoff period.
- Attempt to each an Offer-in-Compromise. If you can’t manage to pay off your tax debt in five years, you can try to reach an agreement with the IRS under which you pay a lump sum or a short-term installment agreement for an amount less than that which is owed. This approach is complicated, the IRS does not enter into them as often some advertisements on television and radio might lead you to believe, and it may end up being more costly for you in the long term. If you wish to persue this, you should first secure the advice and services of a qualified tax professional, such as an Enrolled Agent, who specializes in tax resolutions.
- Ask the IRS to declare your account “currently not collectible.” If you can prove to the IRS that you have no ability to pay your tax bill, they may suspend collection activities, including wage garnishments and levies, for up to one year. However, interest continues to acrrue on the outstanding balance. Once again, this is not something you should attempt to achieve without the advice of a tax professional who is experienced in tax resolution.
How do I get the IRS to agree that my back taxes are 'currently not collectible?'
This is a complicated process, and one that you should work with a tax resolutions expert (such as an Enrolled Agent) in achieving. For the IRS to mark your tax account as Currently Not Collectable, you must present the IRS with iron-clad evidence that you are unable to pay your tax bill at this time. You do this by submitting documentation on Form 443-F (or Form 443A if the taxes owed are an exceptionally large amount). The form should detail all your income, expenses, and asset information–all of it. Leaving anythig off will only cause more trouble for you.
The IRS determines whether a tax account is “currently not collectible” on a case-by-case basis. In addition to the information reported on the Forms 443-F or 443-A, they may also consider factors such as your age and health condition. Even if yo have some assets, the IRS may excerise “reasonable forebearance” and declare your tax account as “currently not collectible” of taking action against you would deprive you of essential means to survive.
What happens when the IRS declares my back taxes 'currently not collectible?'
If the IRS declares an account “currently not collectible,” your tax account receives a Status Code 530. The decision is documented on Form 53 (Report of Currently Not Collectible Taxes).
Be aware, however, that the “currently not collectible” agreement with the IRS is not finalized until Status Code 530 has been entered into your tax transcript. You may still find yourself subject to garnishments in the meantime. Once Code 530 is in place, all collection activities are temporarily suspended.
Having your tax account declared “currently not collectible” does not remove the tax liability, nor does it stop the accrual of interest on the outstanding balance. The IRS will repeatedly follow up with you and require that you recertify that your account is still non-collectible. If the account is If the account is still deemed not collectible at the statutory expiration, the IRS cannot further pursue tax debt payment.
The IRS has sent me a CP-504. They are threatening to levy my assets for back taxes! Why?
If you have received a CP-504, it means that the IRS has sent you several notices that have gone unanswered. You still have time to avoid an IRS levy or lein–the IRS must send you a Notice of Intent to Levy before they can take the steps threatened in the CP-540 notice–but it’s important that you take appropriate action, quickly. You must seek the help of a qualified tax professional, such as an Enrolled Agent, to provide you with advice and proper guidance in such a case.
The IRS may send you a separate CP-504 for any year for which you owe back taxes. If you receive one, you need to take action before the Notice of Intent to Levy is issued, as it will almost be too late to alleviate your situation at that point.
How does the IRS calculate penalties? What are they?
There are three major types of penalties that the IRS assesses. They are:
- Failure to File: The IRS assesses 5 percent of the net tax amount due for the first month, and for each month, or fraction of a month that you do not file. The penalty cannot 25 percent of the net amount due. If the return is not filed within 60 days of its due date, the minimum you will be charged is $100, or 100 percent of the net amount due, whichever is less. The FTF does not start accruing if you have filed for a valid extension, but if you fail to file by the extension deadline, penalties begin accruing immediately.
- Failure to Pay: The IRS assesses .5 percent per month or fraction of a month, up to 25 percent of the net tax amount due. This penalty begins accruing immediately, even if you have a valid extension. In addition to the penalties, the IRS charges interest on all unpaid back taxes. Also note that 10 days after the IRS sends out its Notice of Intent to Levy, it will increase the FTP penalty to 1 percent per month.
- Fraudulent Failure to File: If the IRS determines that you didn’t file in an attempt to evade taxes, the penalty is is 15 percent of the net tax amount due per month, plus a 75 percent fraud penalty. There is no upper limit on the amount of penalties.
I am declaring bankruptcy. Can my back taxes be included in the debts I want forgiven?
If you are intending to include your federal taxes in a bankruptcy filing, you need to make sure your attorney is an expert in tax resolution issues, or has secured the services of someone who is. Federal taxes, and interest and penalties owed, can be included in in Chapter 7 and Chapter 13 bankruptcy filings under specific circumstances, and you want to make sure that you can meet these circumstances. They are:
- You must file tax returns for all the years you wish to have taxes discharged under a bankruptcy filing. It is not sufficient for the IRS to calculated taxes from a “substitute for return” based on your W-2 and 1099 information.
- You cannot have willfully tried to avoid paying taxes.
- Your tax return(s) cannot have been deemed fraudulent.
- The tax filing due date must be at least three years, including extensions, prior to the bankruptcy filing.
- The tax return, even if filed late, must have been on file for at least two years before the bankruptcy filing.
- The IRS tax assessment, no matter what the circumstances under which it was made, must have been completed more than 240 days before the bankruptcy filing.
- The tax return cannot have been deemed fraudulent.
Are conversations and communications with my accountant considered privileged and confidential?
Generally no. Accountants are obligated to keep your personal and business information private. However, the federal government does not recognize client-accountant confidentiality rights, and records must be surrendered if they are demanded under the authority of a proper supine.
There are a few tax and accounting practitioners, however, with whom your communications are protected by privilege. Under the federally authorized Tax Practitioner Privilege law contained in the Internal Revenue Code conversations between a taxpayer an Enrolled Agent (EA) are privileged as long as they would be considered privileged if they took place between a taxpayer and his or her attorney. This exception is limited to federal tax proceedings only.
If you desire privileged communications regarding your tax issues, your safest route is to use a qualified attorney to gain the protection of the well-recognized attorney-client privilege. If your attorney then contacts an tax practitioner or accountant to help understand your financial situation, the communications between them will be privileged as well, so long as they are not disclosed to a third party, which will break the privilege. Be aware, however, that accounting advice given by your attorney, or the simple preparation of a tax return by your attorney, will not be privileged.
Should I hire someone to represent me and prepare and file the estate return? How do I pick the right person?
There are several factors to consider:
- How complex is the estate? By the time most estates reach $1,000,000, there is usually some complexity involved.
- How large is the estate?
- In what condition are the decedent’s records?
- How many beneficiaries are there and are they cooperative?
- Do I need an estate tax professional?
With these questions in mind, it is a good idea to discuss the matter with several estate tax professionals. Ask about how much experience they have had and ask for referrals. This process should be similar to locating a good physician. Locate other individuals that have had similar experiences and ask for recommendations. Finally, after the individual(s) are employed and begin to work on estate matters, make sure the lines of communication remain open so that there are no surprises during administration or if the estate tax return is examined.
Finally, most estates engage the services of both attorneys and CPAs or Enrolled Agents (EA). The attorney usually handles probate matters and reviews the impact of documents on the estate tax return. The CPA or EA often handles the actual return preparation and some representation of the estate in matters with the IRS. However, some attorneys handle all of the work. CPAs and EAs may also handle most of the work, but cannot take care of probate matters and other situations where a law license is required. In addition, other professionals (such as appraisers, surveyors, financial advisors and others) may need to be engaged during this time.
What is the CP-series?
CP is an IRS designation for notices they send to taxpayers for literally hundreds of reasons. The most common notice is the CP2000, which is a purely computer generated letter than alerts the recipient to a discrepancy between what was reported on the tax return and what the IRS records indicate it should properly be.
What is a CP2000?
This is a purely computer-generated notice that informs you the income and/or payment information you reported on your tax filing doesn’t match the information the IRS has on file. This could affect your tax return; it may cause an increase or decrease in your tax, or may not change it at all. If you are unclear on the issues raised in the notice, you should take it to a qualified tax professional, along with the tax return to which it relates.
What is a CP01?
This IRS notice relates to an identity theft claim you have made. It states that the IRS has verified your claim of identity theft and has placed an indicator on your account.
What is a CP01A?
This notice tells you about the Identity Protection Personal Identification Number (IP PIN) we sent you.
What is a CP01H?
The IRS is informing you that it has locked your tax account because the Social Security number (SSN) of the primary or secondary taxpayer on the return belongs to someone who was deceased prior to the current tax year (before January 1, 2014 for a 2014 tax return).
What is a CP01S?
This notice is an acknowledgement from the IRS that they have received your claim of identity theft. There will be additional notices sent to you when they finish processing your case, or if they need additional information.
What is a CP21A (or CP22A)?
The IRS sends this notice in response to either Form 1040X, or to a letter you sent in response to a prior notice. It acknowledges they’ve made the changes requested, and that you owe money on your taxes as a result of the change(s).
What is a CP21B?
The IRS sends this notice in response to either Form 1040X, or to a letter you sent in response to a prior notice. It acknowledges they’ve made the changes requested, and that you’ll get your refund within 2-3 weeks of your notice. They send CP21C if the change(s) didn’t result in a refund or an additional amount due. Your account balance for this tax form and tax year is zero.
What is a CP21E (or CP22E)?
This notice follows a closed audit. The IRS is letting you know that they made changes to your tax return for the tax year specified on the notice and that you owe money on your taxes as a result.
What is a CP59?
The IRS is informing you they have no record that you filed your personal tax return or returns in prior years. You probably need to file previous years before the IRS will issue the current refund, or show why you haven’t filed. If you did file, you should seek the assistance of a qualified tax professional.
What is a CP60?
This notice indicates that the IRS removed a payment erroneously applied to your account.
What is a CP62?
This notifies you that the IRS applied a payment to your account. Unless you think the number is incorrect, you usually don’t have to take any further action.
What is a CP63?
This notice lets you know that the IRS is holding your tax refund because you have not filed one or more tax returns, and they believe you will owe back taxes once those are filed. If you fail to respond to this notice, the IRS will eventually create and file returns on your behalf, based on the information they have available.
What is a CP71 (or CP161, CP163, CP164?, CP171)?
You received this notice to remind you of the amount you owe in tax, penalty and interest. If you don’t pay the mount due, it is followed up with CP71A – CP71D. These restate the balance due along with any penalty and interest.
What is a CP72?
You may have claimed a frivolous position on your tax return. A frivolous return is identified when some information on the return has no basis in the law. You should seek professional advice from a qualified tax practitioner with help in responding.
What is a CP080?
The IRS is letting you know that they did not receive a tax return for a given tax period. They have credited a payment made for the form and tax period shown on the notice, but they still need the tax filing.
What is a CP81 (or CP081)?
The IRS is informing you they haven’t received your tax return for a specific tax year. The statute of limitations to claim a refund of your credit or payment for that tax year is about to expire. You should contact them immediately if you believe you filed for that year, and possibly even seek the assistance of a qualified tax professional.
What is a CP88?
The IRS is telling you they are holding your refund because you have not filed one or more tax returns, and they believe you will owe tax.
What is a CP90C?
The IRS levied you for unpaid taxes. You have the right to a Collection Due Process hearing. You should seek the services of an enrolled agent or tax attorney.
What is a CP108?
You made a payment to the IRS, but you may not have submitted the correct voucher with the check. They are letting you know that they can’t determine what tax form or tax year to apply the payment to.
What is a CP120?
The IRS needs documentation of your tax-exempt status. The notice should state what additional information they need. If you feel it is unclear, you need to contact the IRS immediately or seek the assistance of a qualified tax professional or enrolled agent.
What is a CP120A?
This notice is sent when your organization’s tax-exempt status has been revoked for failure to file a Form 990 series return for three consecutive years. In addition, you are no longer eligible to sponsor a tax-sheltered annuity plan (Internal Revenue Code section 403(b) retirement plan).
What is a CP123 (or CP124)?
The IRS is telling you they made changes to your excise tax return because they believed there was a miscalculation. The result was As a result was a balance due of less than $1. If you are unclear as to what the perceived miscalculation was, you may want to have a tax professional review the documents that were filed. The small dollar amount may be a symptom of other possible issues that the IRS hasn’t caught—yet.
What is a CP130?
This notice indicates that your tax return filing requirements may have changed. You may no longer need to pay the Alternative Minimum Tax. It is often mailed in response to an amended return.
What is a CP138?
This notice tells you that all or part of the overpayment on a return you filed was applied to other federal taxes you owe.
What is a CP2566R?
This notice informs you that the IRS has filed one or more tax returns on your behalf, because you didn’t respond to previous notices (specifically a CP63). They based their calculations on information from employers, financial institutions and others.
What is a CP3219A?
The IRS is notifying you that they have received information that is different from what you reported on your tax return. This may result in an increase or decrease in your tax. The notice also explains how the amount was calculated and how you can challenge it in U.S. Tax Court.
What is a CP3219N?
The IRS is informing you they didn’t receive your tax return. They have calculated your tax, penalty and interest based on wages and other income reported to by employers, financial institutions and others. You may be able to have better tax treatment if you seek the help of an enrolled agent or other qualified tax professional.
What is an Accuracy-related penalty?
If the IRS believes you have willfully understated income, overstated deductions, or been frivolous in the way you prepared and filed your tax return, they may assess Accuracy-related penalties. Accuracy-related penalties are 20 percent of the tax underpayment in the case of “substantial” misstatement, and 40 percent of “gross” misstatement.
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