Ever received a call from a potential client with a tax mess so overwhelming you do not even know where to begin? We handle cases like this all the time. The first step is simple: relax – you’ve got this! In this week’s episode, Eric Green dives into the art of tackling even the toughest tax case. Learn how to break down the chaos, create a plan, and resolve your client’s tax nightmare like a seasoned pro.
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Step-By-Step Guide To Resolving Any Tax Case Like A Pro
What To Do With A Train Wreck Tax Case
Thanks for joining me on this episode. No guests. What I want to talk about is what you do with that train wreck case. We get this a lot. One of our tax rep members, a CPA, an attorney, “Eric, I got this case. I don’t even know what to do with it,” I know but I did a Zoom call with one of our members. “What do you do with the train wreck case?” I have done this for many years at Green & Sklarz. Amanda, Lisa, and Jeff, we do this all day long.
There are cases that come in where we look at each other, we are like, “I don’t know what to do with this.” What I want to walk you through is our thought process. A client comes in. They have an entity, a corporation, a partnership, or whatever, that hasn’t filed in years. They haven’t filed payroll tax. Let’s say they haven’t filed payroll taxes in ten years. They don’t have great records.
Meanwhile, they haven’t filed their returns and, oh by the way, they are being levied by the state, and it’s this whole one of these, it’s a train wreck in a dumpster fire. What do you do? First of all, calm down, time out. Let’s back up. What do we do with any IRS or state, frankly? I haven’t studied all 50 states, but I can almost guarantee you they are all going to fall in line with this.
We start with compliance because if you don’t get the taxpayer into tax compliance. There is no deal, there is no compromise, there’s no payment plan. They are not in compliance, and this can get a little hairy because you’ve got the entity. You’ve got the individual. You might have payroll tax returns on the state. You could have withholding if there’s state income tax or sales tax. When taxpayers go off the rails, they tend to do it across the board, not always, but often. First and foremost, we are starting with compliance.
With the IRS, it’s Internal Revenue Manual part two. It’s policy statement 5-133, “The IRS wants compliance.” What is compliance? You have to have returns filed for the last six years. Now you can do more if you want to. Right now you are thinking, “As I can hurry up and get the 24 filed and we can start filing in a week. From when I’m doing this, let’s say 19 through 24. They are in compliance with the IRS.
Filing The Last Six Years Of Tax Returns
Now the client said, “I had these huge losses in 15.” You can go back and file more if you want to. The IRS will take them, but you don’t have to. 19 through 24, the last several years. The last several years get you into compliance. As far as the IRS is concerned, you have six years of returns on file, you are in compliance. Let’s focus on that for a moment. Then I’m going to move over to the States and then we are going to move on to stage two.
The last few years, great. I just got this. Do I mail them all in one envelope? I can e-file the last few years. Are they going to owe balances or not? I will give you an example. Let’s say, for in fact, you are going to file 19 through 24. Now you can electronically file 23 and 24. I don’t know if you can still e-file 21. I’m being honest, I’m not sure, but let’s assume that you can’t. 23 and 24, you could e-file. The rest have to be paper filed.
Are 23 and 24 refunds? If they are refunds, I would hurry up and get them e-filed. No big deal. Now you may not get the refund because of the missing returns, but at least the returns are in. If they have balances due, what do the other four years look like? If they have balances due, I would paper file all of them, and here’s why, if you e-file and there’s a balance due, the balance due notice will come out, and in a week or two, collections are going to get started.
Meanwhile, you might be waiting months and months for those other returns to be open and processed. Now what you end up with is a situation where you are being threatened in recent years and you can’t do anything because you are not in compliance. You are waiting for returns that are sitting in some service center for someone to open them and key them in. If there are going to be balances due on those older years and the newer ones, I’m paper-filing all of them.
Sending Tax Returns In Separate Envelopes
I hope that makes sense because this way the idea is if they get filed, and mailed about the same time, they will get opened about the same time, they will get processed about the same time, and the bills will start showing up about the same time. We can work on a resolution because you need all six years processed. “That makes sense. Do I put them in one envelope or do I send them in six?” Here’s what I’m going to tell you. You are going to send them in six separate envelopes certified because you have to track them.
Here’s why. In my experience, if you put all six in one envelope, here’s what’s going to happen. You are going to eventually get bills. You’ll get bills on 19, 20, 21, and 24. Where’s 23? Now you call the IRS. We don’t have 23, but I sent it to you. Prove it. You have one certified mail slip for all of them. I’m sending them in six separate envelopes. Why? If one vanishes, I can prove that the year was filed. On the green slips, we will put 1040-19, 1040-20, 1040-21, 1040-22, 1040-23, 1040-24. This way if I can track them all I can say, “Twenty-two is the one that’s missing, and I can get it refiled.
The other thing I want to warn you about, this is a postal service thing that we are now dealing with in 2025. We have sent things certified from downstairs. We drop it in the box and it vanishes. We go to track it. Three days later it’s not there, and you can call and scream and yell at the post office. It doesn’t matter, they don’t have it. What they did with it is beyond me, but they don’t have it. If it’s important to do this, I have been sending a staff person to the post office and come back with six receipts.
Here’s what happens. Now you call the IRS, you have a green slip, they go to track it from that number, and it’s not there. They are like, “You didn’t mail it.” I promise I put it in the box. “We don’t care. It’s not in the system. You didn’t mail it. You can’t prove you mailed it. You didn’t mail it.” I am going to send someone to the post office. What I would suggest is, that since none of us have that much time, you are going to mail all six separate envelopes, tracking them. I will let you know, if I mail it on Monday, or Friday to track it you go to track it, and one of them is missing. Wait until Monday. If it’s still missing, resend it. It’s all you can do, but that’s what I would do with the IRS.
Now let’s talk about the state. Most states do not have this six-year rule. What you’ll find is most states want every return all the way back to the dawn of time. That’s the way they are. They are going to want all of them. Let’s say I haven’t filed in twelve years. “We want twelve years of returns.” I’m in Connecticut. In Connecticut, we would file that we owe the tax. The interest is 1% a month statutory interest like a credit card. We have taxpayers who’ll owe $60,000 in tax and $75,000 in interest and penalties. The interest here is brutal.
If you are filing missing returns and it involves nothing criminal, do not come into voluntary disclosure. Share on XWhat do you do with the state? Almost every state has a voluntary disclosure program. The IRS has a voluntary disclosure program, and if you read it, it is purely for people who have criminal exposure. If you are filing missing returns and there’s nothing criminal, don’t come into voluntary disclosure. They don’t want you there. They are going to charge the fraud penalty. It’s part of the program. You agree to it. Why? You are supposed to have criminal exposure. If you don’t have criminal exposure, don’t come into the program.
The states are not designed that way. In every state that I have looked at, the voluntary disclosure program is meant for out-of-state businesses that are doing business. Like here in Connecticut, we have New York, Massachusetts, and Rhode Island that border us. There are a lot of contractors that come over into Connecticut, do work roofing, carpentry, whatever and they go back over state lines. They are not registered in Connecticut. They are not paying. It’s designed for those people.
Most state voluntary disclosure programs I have seen are very welcoming. They want you to come in, and so they make them very favorable. In Connecticut, they want the last three past-due years. You have to fully pay tax and interest, with no penalty. With Connecticut, where they normally want every year back to the dawn of time, in this case, they would simply take 2021 through 2023 through voluntary disclosure.
Full pay means no payment plan. Cut a check for tax and interest. You’ve limited it now to three years. You don’t have to go back to doing the other nine. There’s no penalty on top of it. It’s very favorable. There aren’t too many positive things I can say about the Connecticut Department of Revenue Service policy. That happens to be a good one. New Jersey is the last four past-due years. New York is 3 to 6 years. California is six. Massachusetts is three years or seven years if you are a resident or non-resident. Non-resident, 3 years, resident, 7.
It depends. You have to look at the state program, but they are usually pretty simple. Like Connecticut, you send them an email name, Social Security number, and address and you tell them, “We’d like to come in.” Non-filer. I always tell them that he has very bad records. “We’d like to file the last three past-due years and full pay,” Connecticut asks for an estimate. What do you rough out the amount to be? We have already usually drafted the return. I can say it’s going to be between $20,000 and $30,000, which is what we are estimating. They don’t give payment plans in Connecticut, but honestly, I have called them and said, “Can we get a little more time?” They will foot-drag it for 2 or 3 months.
They can’t drag it out much longer, but they can foot-drag it a little over 2 or 3 months to give your client a little more time. With the states, you have to look at the voluntary disclosure program. Rule number, Remember the train wreck. Timeout. Let’s deal with this. Let’s say it’s a corporation. We haven’t filed the S-corp returns. We are going to do the last six years. We got that under control for the IRS. We are going to prepare them. Let’s prepare the state versions. We are going to do voluntary disclosure on the state and Connecticut to be the last three past-due years, and we are going to have to do 2024 anyway. It’s the last few years. Now we have to do the individual. Do we have payroll tax issues? The same deal. Last few years. Sales tax, you are it’s state you are going to do voluntary disclosure.
Let’s get you into compliance. Step number one is compliance. Without compliance, there’s no deal, there’s no resolution. When everyone else is in panic and meltdown, you need to be calm and say, “Eric Green, he blabbed about this. Compliance. Get him into compliance.” Number two is to work out a resolution. Get the financials. In most states, the IRS has Form 433. Different versions of it. If you are dealing with the older campuses, those are the collection information statements. The states all have their version of it.
The IRS has very strict allowable expense rules. If you are a Tax Rep member, we have tons of training on that. If you are not a Tax Rep member well, you should be, first of all, but we do workshops from time to time. We are doing a couple in June. If you want to learn this. I get the books that are out there. There are places you can go to get that knowledge, but you have to apply those standards to calculate what’s called RCP Reasonable Collection Potential.
That’s what’s going to determine if they can make an offer and what that offer amount is. That’s going to determine if they are in a payment plan, what they are paying, are they uncollectible. We are going to move on to the resolution next, and that’s the critical issue. When you start to get comfortable with this, now you are going to move over into being a tax resolution master.
When I say that, this is what I mean. As we are working through the compliance, let’s say it’s a married couple. Are we going to file for married filing jointly or married filing separately? As we are working on the returns, I’m going to work on the collection aspect. Why? In Connecticut and 41 states, we are separate property states. There are nine community property states. I’m going to get to the community property next.
If you do not have your accounts, expenses, and possessions in order, do not file a joint return with your spouse and drag them into your mess. Share on XIf you are in a separate property state like Connecticut, I will use myself as an example. I am a self-employed attorney. I’m supposed to make estimated tax payments and quarterly payments like every other self-employed person. My wife is a W-2 employee at a major university. She has taxes withheld. In 25 years, I have never had a malpractice claim, but accidents happen. I don’t own my home to my wife’s name. My wife has her retirement account, all that stuff. Why would I want it? If I’m going to owe a lot, let’s say I haven’t made my estimated payments. We are going to owe a lot of money. Why would I want to file a joint return and drag her into this?
I’m going to look at the collection aspect and frankly, I might be better off married filing separately. I don’t own my home, and so a lot of the collectability, those assets that could be used to pay this, I don’t have, and so we are better off married filing separately. Even if the liability is higher on me, I might be a better offer candidate because of it. There’s a strategy to marry, file separate, marry, and file joint. When you are in a community property state, now things get, I’d say interesting, I don’t want to say complicated, but things now we got to pull out our pencils for those of a pencil is. Sharpen our pencils and get the work here.
First of all, a community property, state income tax, and even unpaid sales tax and withholding payroll tax, the trust fund taxes are what they are called. Those are considered community debts because your business was trying to generate income for the family. That’s a community debt, which means community assets can be used to pay for it. Even if you married, filing separately it’s a trust fund recovery penalty against me because we didn’t pay our payroll taxes. God forbid. My wife is in a community property state like Texas, or California, and my wife’s assets, if they were community assets would be available. The house that we bought during marriage, even if it’s in her name, that’s available. The retirement accounts that she saved for during the marriage are available.
Determining Community Vs. Separate Property
The next step is, if it’s a community property state and we are going to have a community, we are going to have property that’s there. Is it a community property or a separate property? For instance, let’s assume my wife inherited from her parents. She didn’t, but let’s say she did. That’s a separate property. Even if she inherited it during the marriage, that is not community property. That is hers. That wouldn’t be subject to the community property laws or collection on my debt if she owned real estate like rental real estate or something beforehand. Let’s say she bought a place in her name during the marriage that’s in a separate property state. She loved Cape Cod. She bought a home out on Cape Cod, Massachusetts is a separate property state. Even though she bought it during the marriage. That would not be a community property and not be included.
When it comes to the community property collection aspects, what you are going to find is you are going to need to start looking at each asset. When did you acquire it? How did you acquire it? It gets a little complicated in that case, if you think the client qualifies for innocent spouse relief, they may want to seek innocent spouse relief because innocent spouse relief will shield those assets. Even in a community property state. If I’m using her, he or she is granted innocent spouse relief, by the IRS or the state if they have it.
To summarize, when you have the train wreck of a case, first of all, calm down. The first thing we have to do is we have to get these people into compliance. This taxpayer, this business, or whatever it is. That’s the first thing you are going to sort out. The next step is, once we are in compliance, what does the end game look like? As you get better at this, you’ll learn very quickly the end game will drive some of the decisions you make about compliance.
For instance, like I said, married filing joint, married filing separately. If your state allows payment plans, are you better off doing voluntary disclosure, submitting the state returns, getting that payment plan set up, and then mailing it to the IRS? Why would that matter? If I’m in a payment plan to the state and the state assessed before the IRS did, they are in the priority position. Their debt is older and we have a payment plan before the IRS even assessed. It takes them months to open those returns and process them. I have used the state potentially as leverage for my offer to wipe out future income and get an offer with the IRS, which is usually the bigger tax step.
Do not panic when a client comes in with what seems like a disastrous tax case. What you need to do is step back, get them into compliance, and work on a resolution. Share on XThere’s a lot of strategy around this. If you are interested in this, I would urge you to join Tax Rep, do some of our programs, and roll up your sleeves. I find this area of practice fascinating. I do. Every day is different. Every case has its wrinkles. It’s an interesting area of practice. It’s a specialized practice. Nobody barks at my fees because they need us. If you are a CPA, EA, or even an attorney, it’s a great addition to what you are already providing, but don’t panic when the client comes in with what seems like this disaster. Step back, get them into compliance, and work on a resolution.
There might be some other issues that come up. For instance, remember that corporation they hadn’t filed in twelve years, the payroll tax and sales tax. Is this worth saving? First of all, let’s back up. Your client for some bizarre reason. Not just your client, my client, all clients. They set up this entity, it becomes like their child. They become weirdly attached to it. We need to be the voice of reason.
Is It Worth Saving The Company?
One of the first things when we start sorting this out, we see the disaster. Is this company worth saving? I have had fights with taxpayers. It’s a good company. It makes $100,000 a year. That’s because you are not paying your sales tax, and you are not paying your payroll tax. Let’s say, without the penalty and interest, because you would have paid it on time. You paid your $50,000 to payroll, and you paid the $12,000 of sales tax. Your $100,000 is now $38,000.
I don’t know what McDonald’s is paying managers right now, but it’s more than $38,000, and you’ll see their jaws drop. Let’s look at the economic reality. Is this company worth saving? If it had a blip and we have to fix it, and now it’s back on the straight and narrow and it’s a profitable company, by all means, let’s work out a deal, and payment plan and we’ll get you sorted out and on your way.
Sometimes people come in, and this company is not making money. If they do everything properly, they are not making money. This is a loser. When I first started doing this, I did what the client asked. “You got to get me into a payment plan, you got to save the company right away,” and I would go jumping in, and I would do this, and they are back in 6 or 9 months because they defaulted. This company isn’t profitable. This company is not worth saving.
I would have done them a bigger favor by saying, “Let’s walk through this. Let’s do everything properly, and usually, they will come to their conclusion, which is, this company doesn’t make money, does it?” No, you are destroying your other assets from this asset because not only is this asset becoming worthless, but you are personally liable for unpaid sales tax and unpaid payroll tax. Now you are going to use your other assets to pay for this asset. That’s not a good deal. Why don’t we put this to bed and either go get a job, start a new venture, or something?
Importance Of Being The Voice Of Reason
We need to be the voice of reason in terms of this company. Is this worth saving, or should we be trying to wind down, and clean up the loose ends here, so my client can move on with their life? When you have that train wreck, do not panic. We are going to deal with compliance, and in terms of resolution, remember, the outcome of the resolution may drive what you do for compliance. It’s important to look at the complete picture, not knee-jerk, hurry up, get the IRS done, and submit those.
There might be a better plan to get the state done first and work something out with the state. It is about the strategy and what is the end game and, in a way, engineering backward. I hope you find this stuff helpful. If you can, like and subscribe. We love the stuff you are doing here for the show or the YouTube channel. If you have ideas, topics you want to hear about, or guests you want to come on, go ahead and Email us and we’ll try to do what we can to accommodate.
Thanks very much. Keep following us. Hit like and subscribe. Follow the show, the YouTube channel, or both whichever you enjoy and keep the questions coming in. Let’s start repping. Let’s start helping all these taxpayers who need help. There are a lot of them, and they will pay for good help. Take it easy, and I will see you next time in the next episode. Bye-bye.
