Many taxpayers don’t waste time and file income tax returns before the deadline. While doing so, some complain that the filing process gets painful because the IRS is not responsive to their concerns, or they somehow missed the IRS notice and now face penalties. So, how does the IRS work and what should you do when dealing with them?
...the IRS and Congress are trying to be taxpayer-friendly, but it's very challenging because Congress has not been funding them.
PissedConsumer has already interviewed experts about tax season 2021. To further expand your knowledge of the IRS, US tax law, COVID tax relief, and tax benefits, we’ve invited a William S. Boyd Professor of Law, Francine J. Lipman.
Francine J. Lipman is an expert from the University of Nevada, Las Vegas (UNLV) and she has great experience in tax law and taxation. In this video interview, Professor Lipman explains in detail the peculiarities of the IRS tax system and tax filing in the US.
Watch this video or follow the transcript below to learn more about tax filing from the insider’s perspective.
Tax questions and practical tips covered in this expert interview:
- How to do free tax preparation and filing?
- How the pandemic may affect tax season?
- What has changed for the new tax season?
- How does the IRS work?
- What goes to the IRS court?
- How much does the IRS know about taxpayers?
- What is the IRS statute of limitations now?
- How does the IRS choose a taxpayer for an audit?
- How Covid relief checks can affect the US economy?
- Expert tax tips
How to Do Free Tax Preparation and Filing?
Francine J. Lipman: So here are some ways to get free tax preparation and filing. Go to the IRS.gov website and they have a button, a link that says file your tax returns for free. And they have partnered with a myriad of different for profit companies, all the ones that come to your mind, they have agreed to prepare tax returns. And I think it goes up to something like 70,000 of income.
So it's a significant amount of income for individuals. They often will do senior citizens and veterans as well. So go to this website, click on there. And then there are software packages that will prepare your tax return through a question and answer and electronically file it for free. If you're not comfortable with that, then still there's another resource.
How the Pandemic May Affect the Tax Season?
Francine J. Lipman: I'm going to even broaden the base because the federal US tax system, we are a don't ask, don't tell tax system. And so what we do regardless of your immigration status, regardless of your citizenship…
... if you are physically present in the United States for more than 183 days, guess what? You're subject to our income taxes unless you're on a special visa or through some treaty.
And so all folks who work in the States who reside here, who are physically present again, regardless of your immigration status, you're subject to US income taxes on your worldwide income.
Where Do Tax Benefits and COVID Tax Relief Come From?
Francine J. Lipman: Congress has been using the tax system, the federal tax system for almost everything these days. They deliver health care subsidies, and most critically since the global pandemic, Congress, since basically a year ago, March, last March, they've been delivering tax benefits as you know through the federal income tax system. And they pushed out at least two rounds of COVID tax relief, which is actually an advanced tax credit. Most of you have gotten it and hopefully, it wasn't too challenging.
The good news is while the first round of those $1,200 payments if you can remember back. Those payments were pushed out a little bit more slowly because the US treasury was just trying to figure this out and they were on lockdown as well.
But I would say the most recent round, the $600 for individuals plus dependents, that actually went out quite quickly. Now though, for those of who didn't get it for one reason or another. So let's say a new baby was born in 2020. So the IRS didn't know about that baby, didn't know she or he existed. Well now is your chance.
How Do You Claim Your Tax Benefits?
Francine J. Lipman: When you file your 2020 tax return right about now, you will claim that credit and you will have to reconcile what you've already received. So the good news though, Congress made it quite easy and taxpayer-friendly, in that, if you receive too much, perhaps because your income was lower in 2019, let's just suppose you were a nurse and you were not working as much in 2019. So you got the subsidies based upon that level of income.
But then in 2020, you were working double shifts and overtime to serve the pandemic. Your income may have gone up. Well, the good news is you don't have to pay those subsidies back. So, the IRS and Congress are trying to be taxpayer-friendly, but it's very challenging because Congress has not been funding them.
So if you're frustrated with the IRS not answering the phone and by the way, talk about being a pissed consumer, I have sat on the phone literally for hours, I'm not exaggerating, to wait for the IRS to pick up. And then by the time they finally pick up, they will maybe just read you the notice you received in the mail.
So very frustrating. The issue is the IRS has very antiquated, you're not going to believe this audience. Their computers are from the 1960s, probably older than most of the audience members. And so how do they communicate with people?
How to Contact the IRS?
Francine J. Lipman: Through the US postal service. And as you know, that's another government organization that has been challenged. So please go to your mailboxes.
One of the things that I've discovered with the next generation of individuals from teaching my students, they don't go to their mailboxes every day. And when I talk about the mailbox, I mean the physical mailbox that's on the street. You have to open that up.
You have to get your mail because that's the way the IRS communicates with you… if you don't respond, if you don't respond to the IRS, you lose because the taxpayer has the burden of proof. And so it's really critical that you be responsive.
Now, the other challenging thing is how do you respond to the IRS? Guess what? You have you to respond in the same way they communicate with you. And that is through the mail. Not surprisingly, that is very slow. And so it can be very, very frustrating. And we have a lot, a lot of pissed consumers because of these issues.
What Has Changed for the New Tax Season?
Francine J. Lipman: One of the big issues I'm very concerned about for consumers is that many individuals because of downsizing and because of layoffs because of the COVID pandemic, were unemployed. And as a result, they got unemployment compensation.
The good news is you got your unemployment compensation. The bad news is it is taxable and many individuals when they received their unemployment compensation, they did not elect to have federal withholding because they were hurting, they needed to pay their rent or pay for food and other expenses.
Reporting Unemployment Benefits
Francine J. Lipman: Well now, as compared to your salary, you're going to have to report that unemployment compensation and there's no federal withholding. So I imagine more taxpayers are going to owe this year. And so when they're trying to figure out what to do…
...what you should do is you should absolutely file your tax return. You can elect to pay off your tax liability over an installment agreement...
And if the dollar amount is not too significant and the threshold is quite high, you can do that just with a form that you file with your tax return. And you can tell them how much you're able to pay.
Of course, it's going to be subject to interest and potential penalties, but that's much better than not paying it all. So you should file your return and then ask through a form that if you just ... I can't recall the number, but if you Google installment payment agreement, it'll come up and it is a form that will allow you to pay your tax liability over time.
We want you to file. We want you to be compliant. Why? Because we are expecting Congress to push out more COVID relief. And so you want to have a current tax filing there.
How Does the IRS Work?
Francine J. Lipman: The IRS and I say this very sincerely, having worked hand in glove with them for decades, they want to work with taxpayers. The worst thing you can do is ignore them. So do not ignore the letters, be responsive. They are sympathetic, especially during COVID.
What Are Low-Income Taxpayer Clinics?
Francine J. Lipman: They understand people are under terrible financial hardships, so you need to be responsive. And the good news is there are resources. So let me talk about the various resources that are across the country. There are low-income taxpayer clinics, pretty much in every state and in every major city that will help taxpayers navigate tax controversy matters. So not filing your tax return, but if the IRS is objecting to something in your tax return, or you receive some sort of notice, they will work with you.
All you have to do to find one is go onto the irs.gov website and search low-income taxpayer clinics. And then a map will come up. And that map, you just check the box on your state and it will give you the name, the address, and the telephone number. And usually, all of them have a 1-800 number for you to reach out to them.
They only work with taxpayers who are at 250% of the poverty threshold. That actually, because of the pandemic, might capture more people. If they aren't able to help you because your income level is too high, they might be able to refer you to someone.
How Does the IRS Process Tax Returns?
Francine J. Lipman: In addition, the IRS does have on its website, paid tax preparers. And so you can look at that as a resource as well, but the way that the tax system works, as I said, the taxpayer has the burden of proof. And so if the IRS objects to something on your tax return, you have to prove why you can claim that deduction or didn't report that income or get the credit.
And you quite often can navigate it yourself by writing in plain English and demonstrating it with copies of documents, etc. And be patient because it's a slow, laborious process. Be patient, and the good news is the IRS has gotten a little bit better in that from a computer literacy side, in that you can go online right now and get your own tax transcripts.
And so that will show what tax returns they've received if you have a liability, what issues are being presented. And you can see it right on the main page of the IRS website. It's called tax transcripts. And there will be checks and balances, of course, to make sure it's you so other people can't access your personal data.
What Goes to the IRS Court?
Francine J. Lipman: So, you first try to respond to the IRS by writing them letters. And if for some reason they're not responsive, or you just cannot come to a meeting of the minds. By the way, there are lots of opportunities to elevate it even above the auditor to a higher level, like an administrative agency, kind of moving up the ladder.
And if in the end, you cannot come to a meeting of the minds, then the IRS will issue a notice of deficiency. And that is basically saying, we're going to assess a tax liability on you. The good news is that's not the end. You have 90 days to file a petition in tax court.
Tax court is a federal court, and that is the only trial court for tax matters, where you do not have to pay the deficiency.
So you just file a petition. And by the way, the US tax court has a website, and it's quite easy to file a tax court petition. Doesn't require much. They have information on their website, or maybe someone in these low-income taxpayer clinics can help you.
What Happens in the Tax Court?
Francine J. Lipman: But if you file a petition in a tax court, the tax court does have a small case division. And the small case division has a very relaxed level of evidence rules, et cetera. And the amount in controversy for the small case division is 50,000 or less. So it's a pretty high threshold.
The tax court actually travels. So they're based in Washington DC, but they come, the judges travel and come to every city, major city across the country. So in Nevada, my home state, they come to Las Vegas, typically two or three times a year. And then they go to Northern Nevada, Reno, once a year.
Now because of the pandemic, they're doing it remotely. So that's good news and bad news for folks maybe who are not geographically too close to a tax court. So it maybe makes it more efficient.
But as soon as your case, as soon as you file a tax court petition, and by the way, most taxpayers in tax court are represented by themselves. They represent themselves, which in some ways is tragic because there should be more access to tax justice, more resources, and folks like myself and others in the low-income taxpayer community, we represent individuals on a pro bono, meaning for a free basis.
And again, those low-income taxpayer clinics will do it for free. More good news. Even once your case goes to tax court, the IRS and the lawyers that represent the government in tax court, are the IRS chief counsel lawyers. By the way, in my opinion, wonderful lawyers, very nice, good people, generally speaking.
They want to settle your case. So they're going to reach out to you and they're going to try to settle it. They do not want to litigate cases and very, very, very few cases in tax court go to trial.
An example, Las Vegas, a big city. We usually have about 105 cases on our calendar call, 2 or 3 times a year. And even by the time we have trials, we maybe have 2 out of 105. All the other ones are deferred or settled or worked out. And the tax court judges also work really hard to push the IRS to try to work with taxpayers.
So one of the frustrating things for all of us, because the IRS communicates by mail and they might not have your most current address, especially if you've had a hardship and are moving around. The tax court really pushes them.
If you haven't been responsive, I've even seen tax court judges that will try to call the taxpayer. They really want you to have your fair share of a voice in court. Well, if you do lose in tax court, then you have a deficiency that you have to pay with interest in penalties, but that isn't necessarily the end of the story.
What If You Lose in Tax Court?
Francine J. Lipman: And tax court judges, it's really not under their jurisdiction to explain this to you, but I'm going to explain it to you.
So let's suppose you lose in tax court, an error, you didn't understand something. So you owe a significant tax liability with interest and penalties. And because of your current financial situation, you cannot pay that liability or you can pay some of it, but not all of it.
The good news is there's an opportunity to submit an offer in compromise.
And what that is, is you demonstrate based upon your financial situation, including all of your assets, all of your liabilities, your income, your expenses, how much you have left over. They will take that amount that you have left over, but if that's all you can pay, that's all you can pay. And they will work with you. Again, you can either do this yourself. I have had friends who have been able to navigate it themselves, but quite often, these were people who were relatively sophisticated.
But again, you can go to a low-income taxpayer clinic and they will help you navigate an offer and compromise. So that is an alternative. And I will also say many state taxing authorities, including the state of Nevada, where I'm a commissioner, we have a similar opportunity for offers in compromise, and we will work with taxpayers to manage their tax liability in a way that will not put them out on the streets.
How Much Does the IRS Know About Taxpayers?
Francine J. Lipman: Well, you're spot on. And that is that every employer, every contractor, including, by the way, Uber, Lyft, and all those companies, they issue 1099s. And they're actually motivated to issue those because if they don't, there's a $50 penalty for them for every 1099 not issued.
In addition, it supports their deduction. If they're paying you, they want to document that deduction. So the IRS has all of this information, your W2s, your 10-99s from being an independent contractor, interest, dividends, stock sales. So if you sell the stock, they have the gross proceeds.
They often don't have your basis, meaning the costs that you paid for the shares. But if you don't file a tax return, they will often do something called a substitute return. They will take that information if you're significantly delinquent and they will calculate your tax liability, but they will base it on the most conservative position.
So for example, they're not going to claim any dependents. They're not going to claim you as married, filing jointly. They're going to claim you as single, all of this income and no deductions because they don't have your deductions. They have income. And so I have seen taxpayers get this substitute for return, and it could be three times as much as what the real liability is.
Once again, as you said, the way you push back against this is to file timely and accurate returns. Even when they file this substitute return, you have an opportunity to represent the accurate information. At no time, does the IRS not give you an opportunity to respond. The only problem is that opportunity could be a short period of time. And if with mail delays and you not going to your mailbox, it could feel like too short of a time.
What Is the IRS Statute of Limitations Now?
Francine J. Lipman: So the statute of limitations is three years from the due date or the date of filing, whichever is later. So if you're only now filing your 2015 tax return, it's 3 years from the date of filing that they have to assess a deficiency. Now, if you never file, the statute of limitations hasn't even started to run. So you have to file to start it. Moreover, if you commit fraud, then the statute of limitations is open-ended as well.
How Does the IRS Choose a Taxpayer for an Audit?
Francine J. Lipman: So they absolutely do not need to have any sort of a reason. And in fact, there used to be when the IRS was better funded, something that was like a random audit, and they would ask you about every single line on your tax return. And I can remember representing clients who had that audit.
Those were random and no random selection, but because the IRS is so underfunded, they're responding to Congress and Congress because Congress has really focused, I think, inappropriately on low-income taxpayers and the earned income tax credit, they're over auditing the earned income tax credit.
So 43% of all audits in 2018, 43% included an earned income tax credit. That means necessarily that's a lower-income family with children. So that is a characteristic that often gets picked up for audit. In addition, many taxpayers will receive notices. And so back to what you were saying, the IRS has all this data. And so if they have information in their big computer in the sky or wherever it is, in the clouds, it matches all that information to your tax return.
And if there's some information they have that doesn't show up on your tax return, they will automatically send you a notice. Now that's not necessarily an audit, but some people feel like it is. It's kind of a correspondence request and the letter will be drafted in a way, and I work with law students, that it feels like that letter is conclusory.
It will say we do not believe you included this on your tax return therefore you owe us $1,000. If you don't agree with us, tell us why and respond by this date. Interest and penalties will accrue as appropriate. So you've got to respond to it.
They often send those for refundable credits. So a lot of my students, higher education students get these notices to prove that they are in school and have paid tuition. And again, that is easily demonstrated by the documentation that they have, transcripts of their grades from the university, loans because most students are paying for college with loans. They can document it, but if they don't respond, they lose. And so you have to respond.
How Covid Relief Checks Can Affect the US Economy?
Francine J. Lipman: It is going to help. And I would say that the first round of COVID relief checks, that kept people sustained. Pushing out that money, even though it's 1,000 doesn't seem like a lot. When you multiply that times 170 million, that's a big hunk a chunk of change. And that kept the economy from going into a terrible downhill spiral.
Now we need relief for state and local governments. So hopefully Congress will push that out and also continue to push out individual relief because people spend it and that has an exponential benefit.
So get your refunds, spend them on things you need, and spend them on consumer activities that are not going to piss you off, but that are going to give you joy.
Tax Expert Tips
Francine J. Lipman: I want to make sure that everyone out there seriously considers filing your tax returns electronically. I also want you to seriously consider, and I feel that it's very trustworthy, a lot of your information is out there and use reliable websites and I'm going to tell you how to access those.
So file electronically and include your bank data because that way your deposit can be automatically deposited. And that will expedite your refunds significantly. Moreover, the IRS cannot put money into your bank account without your authorization. We are expecting Congress to push out more COVID relief so you want them to have your current bank account.
It is a nightmare if they have an old bank account, it will likely bounce, but then you'll get a paper check. And that just takes a longer and longer amount of time. So here are some ways to get free tax preparation and filing.
Go to the irs.gov website, and they have a button, a link that says file your tax returns for free. And they have partnered with a myriad of different for profit companies. All the ones that come to your mind, they have agreed to prepare tax returns, and I think it goes up to something like 70,000 of income. So it's a significant amount of income for individuals. They often will do senior citizens and veterans as well. So go to this website, click on there, and then there are software packages that will prepare your tax return through question and answer and electronically file it for free.
If you're not comfortable with that, then still there's another resource and that is volunteer income tax assistance. Pretty much every major town major city across the US has VITA programs. And they will prepare your tax returns for free. And many of them are doing what we're calling virtual VITA.
So they're accommodating online preparation. How do you find out the closest VITA site? Again, the IRS website, just search free tax services or VITA, and it'll come up with a map and all you have to do is put in your zip code and it'll come up with sites and their hours of operation, et cetera. This tax season, it is important to file.
And if you haven't already received your COVID relief, my goodness, file as soon as you can to get that COVID relief, but make sure you have all of your data. It is better to file a complete and accurate return a little bit later than to file early and have to amend.
The good news is the IRS has now said that they will accept amended tax returns electronically.
Those used to have to be filed by mail. In addition, we are starting to hear from members of Congress, some serious push back on the IRS to consider extending this tax filing deadline. So that very well might happen. But I have students who perhaps didn't file an 18 or 19, so they didn't get any COVID relief. They're going to file their tax returns right away to get that COVID relief and make sure they're in the system for the new COVID relief, which we hope will be forthcoming in March or so.
So, use the IRS website for free resources and do not hesitate to go to another resource. It's called the Taxpayer Advocate Service, TAS, Taxpayer Advocate Service. And they are to help taxpayers who are in real hardship.
Maybe you're feeling like you're going to be evicted if you don't get your tax refund. They can go to the mat for you and get your refund. They can even get tax liability, offsets removed if you owe back taxes. Every major city or state has a local taxpayer advocate, you can call them and they're there to help you.
So the most important thing for tax situations is, do not ignore it, communicate with people in an honest, candid manner, and they will work with you, and that means federal and state. My experience with most state taxing authorities honestly is they're easier to get in touch with, their lines are not as busy and they do, especially now during COVID, they want to help.
Filing taxes with the IRS might seem complicated unless you do your diligent research and properly fill out the forms. In all your correspondence with the IRS on your taxes, make sure to check your mailbox and always respond. As Professor Lipman says, “if you don't respond to the IRS, you lose because the taxpayer has the burden of proof.”
We thank Francine J. Lipman for sharing her insights on tax law, IRS procedures, tax court, and the COVID relief. You are welcome to share her invaluable tips and comment below.
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