Let's move on now and let's talk about the tax debt treadmill.
The tax debt treadmill is a phrase that I use to describe what happens when people get
themselves into a delinquent situation.
The IRS is responsible for this as much as anything in causing this problem.
What happens is very often if somebody's five or four or three years late on their taxes,
what they think they have to do is they think they have to pay all the back taxes first
before they can start paying their current taxes.
That's a mistake.
It's a serious mistake.
You don't ever want to be in a situation where you're using current tax revenue to pay back
tax debts.
This is what I call the tax debt treadmill.
The reason this never works is because on the back tax liabilities you've got penalties
and interest that accumulate every single day.
The penalty for failure to file the return is a maximum of 25% but even if the tax period
filed on time the penalty for failure to pay the tax is up to 25%.
Of course, the interest runs every single day compounded daily on the entire unpaid
balance of tax, penalties and previously assessed interest.
Every time you use current revenue to pay back taxes two things are going wrong.
Two things are going wrong.
Number one, you're not paying the current taxes, so you're making another problem.
Number two, you don't extinguish the prior liability because the penalties and interests
are such that you'd never seem to be able to get on top of it.
You've got to function using Pillars first rule of tax debt management.
This is critical.
It is absolutely essential to getting taxpayers off this treadmill and into a position where
you can negotiate a settlement.
Here's Pillars first rule of tax debt treadmill, and there're no exceptions to this rule, friends,
no exceptions.
If you have money to pay the current taxes or money to pay the back taxes but not both,
never pay the back taxes.
This sounds counter-intuitive, especially to laypeople people.
Probably makes sense to you now that I've explained it, but to laypeople people, it
makes no sense, because they think, "How am I ever going to get my back taxes paid if
I don't make some payments?"
The answer is, we don't care about the back taxes.
We care about the current taxes.
We have to get the client current with filing and current with payment for the current taxes
or we are never going to be able to solve the back tax problem.
If the client is current the IRS will play ball with you on the delinquencies.
We can get into an installment agreement based on disposable income after considering current
taxes.
We can get the client into C and C.
We can do an offer and compromise.
In most cases these days clients are going to qualify for an offer and compromise in
which case they're going to settle a back tax liability for something substantially
less than what they owe.
I don't care about the back taxes.
We got to make the client understand that the client doesn't care about the back taxes.
What we got to do is get current.
All resources have to be dedicated to getting current, all right?
Now, once we've got that done, now what do we do if there's filing delinquencies because
it's difficult to current if you've got a mountain of tax returns that are unfilled.
As I said already, I've got this client I talked to today that hasn't filed since 2008.
It's 2009 forward that these returns are missing.
Well, of course, the first thing that I told this guy to do is get 2017 filed, jump to
the head of the line, get 2017 filed.
That's number one is, always work backwards in curing the filing delinquencies.
File the most recent return first, particularly if you're trying to get rid of the wage levy.
That's going to show good faith to the IRS and it's going to show compliance.
Never mind the good faith part it gets you in the compliance.
That's the key.
Then work backwards.
We're going to file the most recent tax returns back to the oldest tax returns.
We're going to use the six-year rule unless the IRS says otherwise.
Now, what is the six-year rule?
The six-year rule says that the IRS will not go back more than six years to chase delinquent
tax returns, except in unusual circumstances.
Now, the six-year rule.
Let me tell you the good news and the bad news about the six-year rule.
The good news is it's an administrative policy and the IRS typically lives by it in chasing
delinquent returns.
The bad news is it's an administrative policy.
It's not a law.
All right.
From the standpoint of the statutory requirements, the IRS can go back 6 years, 8 years, 10 years.
They can chase a delinquent tax return past back 20 or 25 years.
Now, as a practical matter, they don't do that.
As a practical matter, they are looking for the returns we file within that six-year window,
unless there's unusual circumstances.
Now, what are the unusual circumstances?
The unusual circumstances generally fall into a couple of different categories.
First of all, if you're dealing with a high profile member of the community, the local
hotshot politician or the big time banker or a sports figure, those folks are going
to probably have to file every missing tax return to cure the entire string of delinquencies.
Number two, if we're talking about income from illegal sources.
If your client is a drug dealer or ran a prostitution ringer, something like that, illegal source
income they're going to require tax returns to be filed on illegal sourced income.
Number three, is if your client is a high profile tax protester.
In other words, one of these people that was out there encouraging other folks to not file
their tax returns, not pay their taxes.
Taxes are illegal, they're voluntary, they're unconstitutional, all of those types of arguments
are tax protestor arguments, or what the IRS calls, frivolous position, frivolous arguments.
Those types of cases the IRS is typically going to require their all the delinquent
reports to be filed.
The next category of unusual circumstances, very high amounts of taxable income.
I'm not talking about gross income, I'm talking about taxable income.
If you've got a client that's got taxable income six figures or more, the IRS is typically
going to want those returns to be filed even back behind six years.
The other situation is if we're dealing with all the offshore income.
Particularly if we're dealing with undisclosed offshore income the IRS is going to want those
return filed.
Now, most people do not fall into those categories.
Most people are going to live by the six-year rule.
Now there's another potential exception to the six-year rule, but I always take a wait
and see approach with that.
That is if I get my client into an offer and compromise situation.
Let's say this guy that I'm dealing with right now that owes 500 grand.
He's not going to be able to pay 500 grand, we're going to get him into an offer and compromise
situation.
In that situation, the IRS is typically going to want all delinquent returns filed, but
I always wait and see with that, because not every tax period is going to qualify for an
offer and compromise.
Even if they do, not every taxpayer is necessarily going to want to file an offer and compromise,
depends on the situation.
We want to take a wait and see attitude with that.
On the front end, my approach is to get the tax period current and then cure the most
recent six-years worth of filing delinquencies.
When we're talking about filing returns we're talking about 2017 to be the current year.
That means 16, 15 ,14, 13, 12, 11 would be your delinquent six years.
We're talking about seven tax returns getting filed.
Delinquent six years plus the current year's return gets the client current.
Now, we've got the client current with estimated payments for 2018, we've got the 2017 tax
return filed and we're working backward to get the most recent six years of returns filed.
That is the minimum compliance requirements that the IRS is going to look for and then
we can go from there.
Now, how do you get information?
Sometimes these tax periods don't have their information.
There's a couple of ways to figure out what tax returns are missing, what years have not
been filed, what the income situation is for tax periods.
This is particularly effective for wage owners.
You need to use IRS form 4506T, which is a request for transcript of a tax return.
It's actually a transcript of account or a tax return transcript.
There's actually three different types of transcripts here.
There's a master file transcript, which shows all assessments and collection action the
IRS has taken.
There's a wage and income transcript that shows a history of all information returns
filed on a tax period.
Not my tax period, but on a tax period.
Then we've got the tax return transcript, which shows the actual tax return itself.
If we're dealing with a non-filer, forget the tax return transcript.
That's not going to help you.
We already know there's no return.
In that situation we want the individual master file for that particular tax year and we want
a wage and income transcript.
The wage and income transcripts will show reported income.
The master file transcript will show what the IRS calls an account transcript, will
show collection action has been taken on that account for that particular tax year.
The first thing I do in every case is I get the master file transcript and I usually get
a window.
If the taxpayer says, "Well, I don't think I filed since maybe 2010 or 2011?
Well, I'll go back to 2006 or seven and then go forward with my power of attorney to 2019
let's say 2020 even.
You get this window and then I request transcripts for all those years.
I go through every single one of them, because very often the client doesn't remember what
they filed or didn't file and you'll find when you do this, that some returns have been
filed and some haven't.
Maybe there's an interrupted string, an uninterrupted string of filing and maybe it's sporadic but
you won't know that unless you get the transcripts.
The transcripts will also tell you whether tax liens have been filed, whether a final
notice of Intent to levy has been mailed out because that's important to know if your client
blew the 30 days or if you still have that option available, you need to know that.
It's going to tell you what penalties have been assessed, failure to file, failure to
pay all those things it's going to tell you if I think I said if tax liens have been filed.
It's also going to show you the assessment date.
This is critical as well, because the collections statute, the limitations, the IRS has 10 year
window to collect taxes from you runs from the date of the assessment.
It doesn't run from the date that the tax return is filed or mailed, doesn't run from
the date the return is received by the IRS.
It doesn't run from the date the IRS files a tax lien or mails a notice, it goes from
the assessment date.
I've got a chapter in my tax amnesty book, Chapter 10 that takes you step by step through
the calculation of this collection statute expiration date.
What you don't want to do is get yourself into a situation where you're risking extending
statutes that are about to expire.
You need to know what those are and that's why the master file transcript is so important.
Then as I said, the wage and income transcript allows you to know exactly what's been reported
to the IRS by third parties, such as employers or in the case of 1089 workers, 1089s.
Now, of course, if you're dealing with a purely self employed person, the wage and income
transcript might not be that helpful for you.
Because if they're pure, self employed people in a retail operation, for example, they're
not going to have a lot of 1089s if they have any at all.
You're going to have to use bank records in that situation to reconstruct the taxpayers
expense situation.
The other thing you need to understand is when you're filing these delinquent tax returns,
it is not a perfect situation.
In many cases, you're going to have to estimate income and expenses and I should say, estimate
income and reconstruct expenses to the fullest extent you possibly can.
I talk about that in the book as well.
It's not a perfect scenario but it doesn't have to be.
What you got to have is a full good faith effort to get the client current and then
be accurate going forward.
That's the key to making all of this work.
I do appreciate your attention and your attendance and I hope that this was effective and a good
learning experience for you.
Speaker 2: Alright, perfect.
Looking at this, we have the summary of what we have and I guess maybe the last question
will want to ask of you just before you go.
You mentioned your book on there and on this last final slide, we have some ways to get
ahold of you for folks that have maybe additional questions or want to look at additional coursework
or publications you have and I imagine you have help on your website.
I do know you also do a conference that addresses a lot of these things as well.
Do you want to talk just for a minute about those before we wrap up?
Dan: Yes.
Absolutely.
Let me talk about my website which is taxhelponline.com that's all one word, no spaces of any kind,
taxhelponline.com and that site has a description and ordering information for all of my books.
I mentioned how to get Tax amnesty, that's just one of about six or seven books we have
in print right now and you're going to want to check that out.
I do a two day seminar specifically on tax resolution issues and the kind of thing that
we went through here today, we do at a very intense, very high level, including role playing
scenarios to teach tax pros exactly how to deal with this kind of thing.
We do the seminar every single year.
It's always in the fall of the year, normally around the last week or so of October and
you can go on my website taxfreedominstitute.com and there's a link on there for the taxpayers
defense conference and that will give you the information you need about the conference.
Speaker 2: Perfect, that's great.
Additionally on the slide, we've got a link to the canopy community where you can connect
with other tax pros, ask some of these questions, get some answers as you've been doing.
Also, we've got other courses related to tax resolution, tax preparation, virtual currency,
all sorts of stuff.
We hope that you'll check those out again.
Appreciate, Dan being here and doing this with us today.
We'll look forward to hearing more from him in the future.
We also look forward to seeing more of you and if you have any questions, please let
any of us know.
We appreciate you being on today and we'll talk to you again soon.
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