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Let’s face it, we all hate to pay taxes.  Filing our tax returns is often painful and time-consuming, not to mention expensive.  Unfortunately, many people encounter some type of tax problem during their lifetime.  Whether it is failing to file their taxes on time, not having the money to pay taxes that are owed, or failing to file a tax return for years at a time.  Tax problems are common.

The best way to avoid tax problems is, obviously, to file and pay your taxes on time.  The next best way to avoid problems is to file your tax return or extension on time, even if you do not yet have the money to pay outstanding taxes.  The filing of the tax return will stop hefty penalties from being assessed against you.

The penalty for failure to file your return on time is 5% of the amount owed for each month the return is late to a maximum of 25%!  For example: If the amount of tax owed is $10,000 and you file your return six months late, you will be liable for the $10,000 tax plus $2,500 in failure to file penalties plus interest.  This is a rate that would make most loan sharks foam at the mouth.  Thus, even if you cannot afford to pay your tax, you can save yourself a significant amount of money by simply filing your return on time.

Potential solutions where you owe taxes

Most individuals and small businesses that encounter IRS problems are not aware that there are several potential options available to reduce their IRS debt.  Like most things in life, even IRS taxes are negotiable. 

Before the IRS will consider any negotiations you must be up to date by filing all delinquent returns.  Once your returns are up to date you can negotiate with the IRS to abate penalties, interest and even reduce significant tax liabilities if payment is beyond your means. 


The IRS, where appropriate, will “abate” penalties.  If a taxpayer can show “good cause” any penalties that have been incurred may be wiped out and the taxpayer will not be responsible to pay them.  There is no hard and fast definition of “good cause” for which to abate penalties.  All sorts of problems can fit under this term.  Thus, it is important to consult with your tax professional to discuss your options.

Payment Plan

Instead of paying the IRS everything that you owe in one big chunk, the IRS may agree to accept regular payments to pay back taxes.  A payment plan can help you avoid embarrassing wage garnishments and inconvenient levying of your bank account by the IRS

Offer in Compromise

Another alternative for paying off a large tax liability is the Offer in Compromise.  This is where you make a lump sum payment to the IRS to resolve all outstanding taxes owed.  Generally, this occurs where you are simply unable to pay back taxes.  Often, an Offer in Compromise can be made for a percentage of what you owe.

It is important to take care of your tax problems as soon as possible.  Procrastinating only results in more penalties and interest being assessed against you.  You can deal directly the IRS, or have an attorney or other tax-preparer represent you.




Most people that stumble into IRS problems suddenly find themselves owing thousands of dollars without having the money to pay what they owe.  They then fail to file subsequent tax returns because they owe back taxes.  This is often the beginning of a horrible cycle that results in the IRS assessing even greater monetary penalties and interest.

What most taxpayers do not understand is that the very best time to deal with the IRS is when you do not have the ability to pay the full amount owed.

"The best time to deal with the IRS is when you do not have the ability to pay the full amount owed . . ."

Over the last several years the IRS has become much more realistic in trying to collect taxes.  The IRS has come to the realization that it is better to receive money now even if it is less than the full amount owed rather than to receive nothing.

The more money you have the more the IRS will collect.

Many people that owe back taxes and penalties believe they should wait until they have more money before attempting to resolve their IRS problem.  The problem with waiting until you have money to deal with the IRS is that the IRS will want as much of that money as possible to pay the taxes owed.

For example: Jim is currently unemployed, recently divorced and his only asset is his 1982 Honda Civic. He owes $22,000 in personal and employment taxes.  Now is the perfect time for Jim to negotiate with the IRS.  Since the IRS has become much more realistic, they understand that they are not going to be able to collect much from Jim.  Therefore, Jim is likely to be able to significantly reduce his $22,000 tax bill.  If Jim waits to deal with his IRS problem until he is again gainfully employed and has inherited property from relatives it is likely that the IRS will want full payment.

Therefore, the best time to deal with your IRS problem is before you get that high-paying job, or inherit property.  Even if you have to borrow a small amount of money now, you may be able to save thousands over the long run and rid yourself of tremendous stress by dealing with your IRS problem now.

All back taxes owed are negotiable

Many people that fall behind in their ability to pay the IRS for back taxes are unaware that they can pay less.  In fact, the IRS has set up a special program for taxpayers that cannot afford to pay the entire amount owed on their taxes.  This program is called an "Offer in Compromise".  There are specific guidelines that the IRS follows in determining whether to accept an Offer in Compromise. The IRS requests specific information about your assets and liabilities in deciding whether to accept less than the full amount owed.

 The IRS may sometimes even agree to waive penalties and interest.  This, of course, depends upon the circumstances.  However, if you have gone through particularly difficult times that made it near impossible to pay your taxes and/or file your returns on time, a request to waive penalties may be accepted.

 It is important when dealing with the IRS that you retain the appropriate advisor.  Make sure that you hire someone with the appropriate skills. 


With the passage of the IRS Restructuring and Reform Act of 1998, many new taxpayer rights provisions now allow businesses to function more smoothly despite IRS audit or collection efforts.  The new law expands, clarifies, and fine-tunes many of the most significant small-business oriented provisions in the Taxpayer Relief Act of 1997. Some of these provisions can just be pulled off the shelf and implemented when the need arises, while others require careful planning in order to fully realize certain tax benefits.

The 1998 Reform Act resulted in large measure from the numerous horror stories of small businesses dealing with IRS agents' abusive tactics. The new law attempts to level the playing field for a small business when dealing with the IRS in certain key areas.  Here is a brief review of some of the new provisions of the tax laws that may affect individuals and small businesses:

1.  Improved procedure for IRS offers-in-compromise where businesses and other taxpayers can negotiate a settlement of outstanding taxes owed. These improvements include more liberal acceptance criteria making it easier for the taxpayer to settle for less than the full amount owed) as well as a requirement that the IRS suspend collection activities during the compromise process or while the taxpayer appeals.

2.  Imposing procedural safeguards upon the IRS while an issue is in the collections process. When a business is contesting a tax liability, it frequently finds itself caught by an aggressive IRS collecting machine where assets vital to the continued operation of the business are seized. The new law requires the IRS to give 30 days notice before any levy or seizure. During this period the taxpayer can request a hearing by IRS Appeals and immediately halt the collection process.

3.  Shifting the burden of proof to the IRS in a tax case in which the taxpayer introduces credible evidence relevant to a disputed issue.  For a case that is litigated before the tax court, the shifting of the burden of proof cannot be underestimated.  This change should reduce a great deal of pressure on the taxpayer and place it on the IRS.  It should also make it easier on a taxpayer to dispute a tax liability that the IRS is claiming.  Thus, it is easier to take a case to tax court.

Small business provisions.

 The 1998 Reform Act also makes several important substantive changes to existing tax law.

Taxes can be deferred on gain from the sale of a business.  Partnerships and S corporations can roll over gain on the sale of qualified small business stock, provided all interests in the partnership or S corporation are held by individuals, estates, or certain trusts. 

Ordinarily the owner of a business has to recognize as taxable income all of the gain from the sale of the business.  For example: Joe sells his printing business this year for $100,000.  He initially invested $10,000 to get the business up and running and took a periodic salary.  Joe would typically be liable for a taxable gain of $90,000 after the sale.  Applying the 20% capital gain rate, this would mean Joe would have to pay tax on this gain of roughly $18,000 for the sale of his business.

The new rule allows Joe to invest the gain that would ordinarily be taxable into a new company.  This investment "rolls over" the gain so that Joe does not have to pay taxes on the gain until he sells his interest in the new company.  This permits tremendous tax savings on the sale of a business.

Home office deduction.

Under the prior law in order to get a tax deduction for a home office deduction, the principal place of business had to be the home office.  A deduction could not be taken where the home office was used only for administrative or billing purposes even where the sole use of the home office was for the business.

Starting in 1999, taxpayers who set up offices at home to take care of the administrative or management side of their businesses will not be barred from taking a home office deduction, since the home will now be considered a principal place of business. You should be mindful, however, that the other home office deduction rules must be followed (for example, exclusive use for business) and the advantage of the home office deduction should be weighed against the qualification rules for the $500,000/$250,000 exclusion of gain on the eventual sale of your principal residence.


J. Caleb Donner and Lori Donner are attorneys and partners in the law firm DONNER & DONNER, a full-service law firm practicing throughout Central and Southern California. They can be reached at (805) 494-6557 or e-mailed at for legal questions. Donner & Donner is a full-service law firm that represents individuals and businesses with IRS Problems, litigation, business formation, copyrights, trademarks, trade secrets, contract negotiations, estate planning and other legal areas.


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