To anyone who falls behind on their taxes and ends up owing money to the IRS, the agency can seem like a faceless government institution that can’t be influenced by your actions. But it’s easy to forget that like all institutions, the IRS is composed of people, and those people can sometimes even be reasoned with.
“People think the IRS is all powerful and you have no rights and you have to do whatever they say,” said E. Martin Davidoff, an accountant and tax attorney based in Dayton. But that’s not true, Davidoff said, and he has a track record of successful negotiations to prove it. Davidoff will share his expertise in how to make deals with the IRS on Thursday, July 14 at 8:30 a.m. at Mercer County Community College. Tickets are $100. For more information, visit www.copeseminars.com or E-mail email@example.com
For example, Davidoff recently had a client who owed money to the IRS and didn’t pay for several years. Penalties stacked up until the man owed $400,000. Davidoff wrote an eight-page letter to the IRS explaining his client’s position, and asking that they waive the penalties, but the letter was rejected. So Davidoff followed up with a phone call and spoke with a manager, persuading him to bring the balance down to a manageable $97,000.
“They are not easily influenced, but people do forget that on the other end of that phone is a human being,” Davidoff said. “Sometimes those human beings are awful, some of them are okay, and some of them are actually very helpful. I was dealing with people who are normally just okay, and I made an argument that hit them.”
While it may be difficult for an average person to negotiate like Davidoff does — he has years of experience dealing with the Byzantine workings of the IRS — there are a few easy tips that are good to keep in mind in case of tax trouble.
The first thing is that if you fall behind on taxes, it’s more important to pay the current year’s taxes before starting on the back taxes. “A lot of people pay back years first, and then they get behind the current year and have to pay penalties and interest,” Davidoff said. “A lot of people think you have to pay first in, first out, but in order to resolve anything in the past, the IRS will want you to be current for the year.”
Another thing to keep in mind is that when the IRS starts sending you letters demanding payment, your case manager cares only about getting paid, not about how much you owe. There is a separate appeals division that has the power to waive penalties. The case manager however can put you on an installment plan so that you can pay smaller amounts while negotiating to reduce the balance owed.
Davidoff said the most common way for to get in trouble with taxes is when people who are used to working for an employer, where their taxes are deducted from their paycheck, switch to being self-employed or business owners, and have to keep track of their own taxes. Many fail to pay estimated taxes and are caught without the necessary cash when April 15 rolls around. “When people find themselves in that situation, they should at least get a consultation with a tax attorney or a CPA. They have to understand the rules of the game,” Davidoff said.
The IRS has little-known rules that taxpayers can use to their advantage. For instance, Davidoff said, if a taxpayer makes an offer that is accepted, but they can’t pay right away, a call to the monitoring division will yield a 120-day extension almost automatically. “That’s written down but impossible to find for a layperson,” Davidoff said.
Another rule has to do with a problem that arises sometimes between estranged spouses, when one files their taxes before the other, and they are both claiming each other and the children as dependents. Davidoff said that in this case, when the second spouse files their taxes electronically, the accounting programs will detect that they have been claimed as a dependent and then block them from doing the same. But if they file their taxes on paper, checking the box by hand, it becomes the IRS’s job to solve the discrepancy.
Many taxpayers also don’t realize the IRS has not just a national but a global reach when looking for assets. He said many of his Asian clients are surprised to discover the IRS knows about their bank accounts back in their countries of origin, and that they have to pay taxes on the assets there.
Davidoff grew up in Rockland County where his father was a dentist and his mother was a Hebrew school teacher. He won’t reveal what the “E” stands for in his name, but jokes that his mother said it stands for “excellent.” He never majored in accounting in school, instead going straight to law school. “I ended up doing tax representation totally by accident,” he said. “In 1996 somebody asked me to do a case, and I said, ‘oh this is interesting, let me do another one.’ And another one. It kind of just became a thing for me.’”
He said he likes to represent taxpayers with the IRS because the work is very gratifying. Dealing with the IRS can be complicated for ordinary people, especially because the agency is chronically underfunded and it is difficult to get an employee on the phone. “The system is not user friendly at all,” Davidoff said. He added that it makes a big difference in the lives of his clients when they are able to come up with a plan of action to escape their tax troubles.
“It changes their lives because they get a fresh start,” he said. “What we see is a physical change in the person from the time they walk in for a first meeting with me to the time they walk out. Once they have a plan of action and they know they can handle it, that’s when the exhaling starts.”