The Internal Revenue Service has broad enforcement powers that can create severe financial consequences for businesses and individuals who face tax assessments, audits, penalties, or collection actions. From a notice of deficiency following an audit to a federal tax lien that attaches to all of a taxpayer’s assets to a wage garnishment or bank levy, the IRS’s collection tools are powerful and can be devastating without skilled professional intervention. A Houston Tax Attorney who specializes in federal tax controversy and collection defense is the most important professional you can retain when facing serious IRS action.
Understanding the IRS Audit Process
An IRS audit is an examination of a taxpayer’s tax return and financial records to verify that the tax liability reported is accurate. Audits range from correspondence audits, in which the IRS requests documentation by mail to support specific deductions or income items, to field audits, in which an IRS revenue agent conducts an in-person examination of the taxpayer’s books and records at their home, office, or the IRS’s offices. Field audits of businesses are particularly intensive and can take months to complete.
A Houston Tax Attorney will represent you throughout the audit process, handle all communications with the IRS agent, ensure that only the requested documentation is produced, and challenge any proposed adjustments that are legally incorrect or factually unsupported. The most important rule in an IRS audit is that every communication with the IRS should go through your attorney. Statements made directly to an IRS agent can be used against you and may reveal issues beyond the scope of the original audit.
Tax Liens and What They Mean for Your Financial Life
When the IRS assesses a tax liability and the taxpayer fails to pay it within the required period, the IRS automatically has a federal tax lien that attaches to all of the taxpayer’s current and future property and rights to property. The IRS may then file a notice of federal tax lien in public records, which gives other creditors notice of the IRS’s priority and affects the taxpayer’s credit. A filed tax lien makes it virtually impossible to obtain credit, refinance real property, or sell assets without first satisfying the lien.
A Houston Tax Attorney who handles tax collection defense will evaluate the options for addressing the lien: an installment agreement that allows the lien to remain while the taxpayer pays down the liability, a lien subordination that allows a specific asset to be sold or refinanced despite the lien, a lien discharge that removes the lien from a specific piece of property, or a full resolution of the underlying liability through an offer in compromise or other means.
The Offer in Compromise: A Potential Second Chance
An offer in compromise is an agreement between a taxpayer and the IRS that allows the taxpayer to settle their tax debt for less than the full amount owed. The IRS will consider an offer in compromise when the full liability cannot be collected because the taxpayer lacks sufficient assets and income, when there is genuine doubt as to the amount actually owed, or in certain cases based on effective tax administration principles. The calculation of an acceptable offer amount is based on the IRS’s reasonable collection potential formula, which accounts for the taxpayer’s disposable monthly income and the equity in their assets.
A friend in my professional network faced a six-figure IRS tax debt that had accumulated over several years of business financial difficulties. He retained a Houston Tax Attorney who prepared and submitted a carefully documented offer in compromise that accurately presented his financial situation, demonstrated his inability to pay the full liability within the collection statute, and argued for acceptance on effective tax administration grounds given his cooperation with the IRS throughout the proceedings. The offer was accepted at significantly less than the full amount owed, resolving a debt that had been threatening his financial stability for years.
Penalty Abatement and the First Time Penalty Abatement Program
IRS penalties can be substantial, often adding twenty to twenty-five percent or more to the underlying tax liability. The IRS has the authority to abate penalties when the taxpayer demonstrates reasonable cause for the failure that triggered the penalty. In addition, the IRS has a first time penalty abatement program that allows taxpayers who have a clean compliance history for the prior three years to request abatement of failure-to-file, failure-to-pay, and failure-to-deposit penalties for one year without having to demonstrate specific reasonable cause. A tax attorney who is aware of this program and who knows how to request abatement properly can often achieve significant penalty relief.
The Difference Between a CPA and a Tax Attorney in IRS Disputes
While CPAs provide valuable tax compliance and planning services, a Houston Tax Attorney is the appropriate professional for IRS disputes, audits, and collection matters. Tax attorneys are bound by attorney-client privilege, which means that communications with your attorney regarding the tax matter are protected from disclosure to the IRS. No such privilege exists for communications with a CPA in the context of a tax controversy. The attorney-client privilege is an essential protection in any matter where the IRS is involved, and it is available only through legal counsel.