Before you can even negotiate with the IRS, you need to make sure that your tax returns filings are accurate and up to date. The IRS will not negotiate with you until it has complete and accurate records regarding your financial condition and fiscal activity for the years in question
Before negotiating with the IRS you should request a copy of your tax transcripts for the years in question. This is necessary to ensure that what the IRS is demanding reflects your actual obligation. It is possible that when you filed your tax returns you made a mistake that inflated your taxable income or that there was a clerical error when the IRS entered your return. In either case, carefully reviewing the transcripts and comparing it with your records should eliminate any errors.
In some cases where the taxpayer does not file, the IRS will complete a return for that year based on the information it has. Since the IRS receives information regarding taxpayers’ annual wages and other major transactions, it can normally complete the income portion of a return with a fair amount of accuracy. However, the IRS cannot properly determine all of your deductions and credits because it is not aware of all the expenses that you incurred. As a result many IRS completed returns overstate taxable income. By reviewing the transcripts of an IRS completed return, you can ensure that the amounts entered reflect what you earned, and more importantly, what you could deduct.
If you determine that a mistake has been made for a tax year, you need to amend the return by filing a Form 1040X. The 1040X is composed of three columns. The first column shows the amounts that are currently on file with the IRS, the second shows the corrected amount that you are claiming, with the final column showing the difference. Each year in error requires its own 1040, and each amended return must be sent to the IRS in a separate envelope. These changes can take 8 to 12 weeks to process.
Next, you need to ensure that you file your current year’s tax returns. Just because you are dealing with the IRS on prior years’ returns does not mean you can ignore your current year obligations. By filing your current year tax returns, the IRS can be kept up to date about your current financial condition. This is especially important when you begin to negotiate, because the IRS will use the most recent return to determine whether you qualify for currently non-collectible status or to calculate your monthly payments in an installment plan.
When communicating with the IRS, you should consult with a licensed attorney to ensure that your rights are protected and your obligations met. You should also consult with a licensed certified public accountant when filing your current year returns or if you are planning on amending past years’ returns.
*This article does not provide legal advice; it is for educational purposes only. Use of this article does not create any attorney-client relationship between the reader and Levy & Associates.