Help! Huge IRS Tax Bill - 2012

[camera_jen]

I just went to the post office and received a bill from the IRS for $11,173.  One of the great things about my apartment is the letter carrier decided I moved a few years ago, so I was only getting my mail once a week or so and because I have paperless billing I had NO idea.  When I realized this was going on, I opened  PO box and here we are.

Anyway, the bill is from 2012.  I called to get their adjustment of my 1040 because I just cannot believe this.  It appears they removed all of my deductions and credits (I have a dependent) and adjusted what I should have paid in.  I got a refund that year, but it was only $1700, not one of these massive $10k refunds I hear about.  So before interest and penalties, it was about $8k they think I should have paid in.  Here's the kicker... I made $28k that year and was barely scraping by.  I mean, there is just NO WAY I would owe that much.

So I called a couple tax attorneys who want a massive retainer.  I mean, if I could afford to pay them I'd just pay off the IRS and be done with it.  Does anyone have any experience with this?  The interest is not a small amount and to make payments they are charging me $125/mo in an installment fee, not even taking it off the amount owed.  I'll never pay it off at that rate.  I have some theories on what exactly happened (I think my 1099 income was way over reported by someone who got very angry with me), but I've never had to deal with this before.  

The kicker?  I was an accountant for 10 years.

[pipeguy]

Without giving you any direct advice, if you made $28k there is no way you should owe $8k before P&I. I understand your situatuion very well (in general) I got hit with a $167,000 bill when they disallowed 100% of my costs of inventory for 6 years. Dispute the bill and make them prove it ! Again I'm not going to any specific legal advice, but I disputed it over and over and $167k went to $62k then went to an offer in compromise  which they disallowed my first offer, but accepted my second offer of about 25% of the lower figure.

I will say that I do NOT believe I ever owed them a penny, but I couldn't prove my case 100% and I "settled" for the least pain possible given the original IRS demand. Look up the "Taxpayers Bill of Rights" which the IRS enacted last year (currently pending in Congress is a bill to make it law rather than policy), then get your records in order and tell them in writing that you dispute their demand and you want to go to tax court (you won't). You'll get set up a with a meeting with IRS personel above the local file clerk, if you prove your case it's over, if not then tell them you don't agree and you'll take your day in front of a judge - this'll get you another meeting.

My case took over 2 years and I never did see the inside of a courtroom or courthouse. Now....on the other hand, if you actually owe the money, set up a payment plan and don't get upset if different IRS offices have no clue what you are doing with you case - we got threats and demands from 3 different offices and actually said "don't you guys talk to each other? Your system doesn't show this is under review" and we supplied our contact info for who we were working with which the other offices never acknowledged, but they "quit collection".

Other than paying money I don't believe I actually owed, but couldn't prove otherwise and with the exception of the local clueless and rude "audit clerk", everyone at the IRS that I dealt with that actually "advanced" my case was professional and pleasant.

If you do end up with an accepted OFFER IN COMPROMISE do not, I repeat do not - screw up and not pay on time. If you do you are going to wipe out all the work you did and it'll void the  the settlement with everything you've paid credited against the grand total plus P&I that you started with. You CAN do this without an attorney, just read up on it and prove your case (and) be stubborn but not obnoxious.

Good luck !

Edit add: I'm not an accountant or an attorney, but I was a small business owner for 18 years.

[DaveInAZ]

Well, for starters call or write them and tell them you dispute their finding and ask them to send you their calculations so you can better see what they did. It's a federal crime to file a flase 1099, if that's what happened. And they should have sent you letters about the descreptency between the income you reported and the 1099s they received. For several years I worked for a hotel co and did alot of traveling for which they paid me a per diem. They insisted on filing a 1099 for the per diem and the IRS would send me a letter stating I didn't report the income from the 1099, so I'd print out the section of the IRS code & highlight it where it says per diem travel compensation is not taxable income, and they'd send me a letter basically saying "OK".

Even if they removed deductions & credits you would not owe $8k on an income of $28k, so your theory of a bogus 1099 makes the most sense. You can fight that, showing bank statements that show you didn't have that kind of income, and if the IRS rules in your favor you can file a lawsuit against that person if you're so inclined.

[camera_jen]

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@DaveInAZ wrote:

Well, for starters call or write them and tell them you dispute their finding and ask them to send you their calculations so you can better see what they did. It's a federal crime to file a flase 1099, if that's what happened. And they should have sent you letters about the descreptency between the income you reported and the 1099s they received. For several years I worked for a hotel co and did alot of traveling for which they paid me a per diem. They insisted on filing a 1099 for the per diem and the IRS would send me a letter stating I didn't report the income from the 1099, so I'd print out the section of the IRS code & highlight it where it says per diem travel compensation is not taxable income, and they'd send me a letter basically saying "OK".

Even if they removed deductions & credits you would not owe $8k on an income of $28k, so your theory of a bogus 1099 makes the most sense. You can fight that, showing bank statements that show you didn't have that kind of income, and if the IRS rules in your favor you can file a lawsuit against that person if you're so inclined.

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My new working theory is that the owner of the company decided to spread his misery by reclassifying  me as a W2 employee without voiding the 1099.  The person who took over the accounting wasn't the sharpest tool in the shed and wouldn't have known to void it (or that she increased his already HUGE tax bill with now owing 6.45% of my wages). So essentially, it would have been the 28k reported twice.  Still not ideal because reclassifying me would have wiped out all of my deductions, and I did in fact have other clients, just not in 2012.  However, I still can't believe that even in doing that my taxes would be near 8k because I was still a single mom making 28k.  

I can do better than my own bank statements... Not only do I have those but I have a copy of their Quickbooks file from 2012

[camera_jen]

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@pipeguy wrote:

Without giving you any direct advice, if you made $28k there is no way you should owe $8k before P&I. I understand your situatuion very well (in general) I got hit with a $167,000 bill when they disallowed 100% of my costs of inventory for 6 years. Dispute the bill and make them prove it ! Again I'm not going to any specific legal advice, but I disputed it over and over and $167k went to $62k then went to an offer in compromise  which they disallowed my first offer, but accepted my second offer of about 25% of the lower figure.

I will say that I do NOT believe I ever owed them a penny, but I couldn't prove my case 100% and I "settled" for the least pain possible given the original IRS demand. Look up the "Taxpayers Bill of Rights" which the IRS enacted last year (currently pending in Congress is a bill to make it law rather than policy), then get your records in order and tell them in writing that you dispute their demand and you want to go to tax court (you won't). You'll get set up a with a meeting with IRS personel above the local file clerk, if you prove your case it's over, if not then tell them you don't agree and you'll take your day in front of a judge - this'll get you another meeting.

My case took over 2 years and I never did see the inside of a courtroom or courthouse. Now....on the other hand, if you actually owe the money, set up a payment plan and don't get upset if different IRS offices have no clue what you are doing with you case - we got threats and demands from 3 different offices and actually said "don't you guys talk to each other? Your system doesn't show this is under review" and we supplied our contact info for who we were working with which the other offices never acknowledged, but they "quit collection".

Other than paying money I don't believe I actually owed, but couldn't prove otherwise and with the exception of the local clueless and rude "audit clerk", everyone at the IRS that I dealt with that actually "advanced" my case was professional and pleasant.

If you do end up with an accepted OFFER IN COMPROMISE do not, I repeat do not - screw up and not pay on time. If you do you are going to wipe out all the work you did and it'll void the  the settlement with everything you've paid credited against the grand total plus P&I that you started with. You CAN do this without an attorney, just read up on it and prove your case (and) be stubborn but not obnoxious.

Good luck !

Edit add: I'm not an accountant or an attorney, but I was a small business owner for 18 years.

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Thank, you!  Did this cause any other issues besides the stress of it?  I am working on getting my credit in order so I can buy a house next year.  I also can't afford to have my wages garnished or my bank accounts to be cleaned out one morning.  

[compassion101]

I have gotten bills from the IRS three times, and all times I explained to them why they are wrong and a couple months later they rescinded the bill.

I'm trying to understand your situation. Did you report it as 1099 income, take deductions, and pay self-employment tax? If so then if it changes to a w2 you may lose the deductions but you also get back the self employment taxes. Unless they didn't take it out of your pay, in which case the company might have some liability for that (basically paying you all year as 1099 then issuing a w2 with no FICA taken out). Even if that is the case, certainly not gonna be 8k difference on the deductions. You are probably onto something that they likely double reported your income. In which case just send a letter stating what the IRS's confusion is.

[pipeguy]

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@camera_jen wrote:

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@pipeguy wrote:

Without giving you any direct advice, if you made $28k there is no way you should owe $8k before P&I. I understand your situatuion very well (in general) I got hit with a $167,000 bill when they disallowed 100% of my costs of inventory for 6 years. Dispute the bill and make them prove it ! Again I'm not going to any specific legal advice, but I disputed it over and over and $167k went to $62k then went to an offer in compromise  which they disallowed my first offer, but accepted my second offer of about 25% of the lower figure.

I will say that I do NOT believe I ever owed them a penny, but I couldn't prove my case 100% and I "settled" for the least pain possible given the original IRS demand. Look up the "Taxpayers Bill of Rights" which the IRS enacted last year (currently pending in Congress is a bill to make it law rather than policy), then get your records in order and tell them in writing that you dispute their demand and you want to go to tax court (you won't). You'll get set up a with a meeting with IRS personel above the local file clerk, if you prove your case it's over, if not then tell them you don't agree and you'll take your day in front of a judge - this'll get you another meeting.

My case took over 2 years and I never did see the inside of a courtroom or courthouse. Now....on the other hand, if you actually owe the money, set up a payment plan and don't get upset if different IRS offices have no clue what you are doing with you case - we got threats and demands from 3 different offices and actually said "don't you guys talk to each other? Your system doesn't show this is under review" and we supplied our contact info for who we were working with which the other offices never acknowledged, but they "quit collection".

Other than paying money I don't believe I actually owed, but couldn't prove otherwise and with the exception of the local clueless and rude "audit clerk", everyone at the IRS that I dealt with that actually "advanced" my case was professional and pleasant.

If you do end up with an accepted OFFER IN COMPROMISE do not, I repeat do not - screw up and not pay on time. If you do you are going to wipe out all the work you did and it'll void the  the settlement with everything you've paid credited against the grand total plus P&I that you started with. You CAN do this without an attorney, just read up on it and prove your case (and) be stubborn but not obnoxious.

Good luck !

Edit add: I'm not an accountant or an attorney, but I was a small business owner for 18 years.

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Thank, you!  Did this cause any other issues besides the stress of it?  I am working on getting my credit in order so I can buy a house next year.  I also can't afford to have my wages garnished or my bank accounts to be cleaned out one morning.  

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No judgement, no tax lien, no public record - part of the deal.

When you settle a payment plan or offer in compromise, the IRS says they have the right to file a tax lien, but that doesn't mean the will or "have to", I just said, I know you CAN, but I'd really perfer you don't unless I default and I'll sleep in my car before I default - they never filed a lien. As far as a judgement, that has to be done by a court and you have to be notifed - as long as you are actively seeking a settlment, they won't take you to court because you can say "Judge, I don't agree with the IRS claim and I have and am actively working with the IRS ro find a solution. They won't get the judgement....

Again, I'm not an attorney - I just went through it and the people I dealt with in the IRS (above the local audit GS-5) were professional and honest to work with.