A woman recently came to me with an IRS debt that had followed her for more than a decade.

She was holding a recent collection notice and a Notice of Federal Tax Lien showing a balance close to seven figures. She was frightened and looking for a way out.

Initially, I was excited to help. Then I began reviewing the records.

Understanding the Tax Debt

Before recommending a solution, I needed to understand the problem.

I reviewed the taxpayer’s IRS transcripts to determine:

• How the debt arose;
• When the tax was assessed;
• Whether the balance was accurate;
• Whether bankruptcy affected the collection period; and
• How much longer the IRS had to collect the debt.

The transcripts showed that the taxpayer had filed for bankruptcy. That is not unusual in a tax-resolution matter. Bankruptcy can affect both the collectibility of a tax debt and the time the IRS has to collect it.

In this case, however, the bankruptcy records revealed something more troubling.

A Six-Figure Refund

Years earlier, the taxpayer had filed an income tax return claiming an unusually large refund. The IRS processed the return and issued her a six-figure payment.

The IRS later determined that the refund was improper. It sought repayment of the money, along with interest, penalties, and other charges.

The bankruptcy records also identified an organization accused of promoting tax-defier theories. The available information suggested that the questionable return may have been connected to positions promoted by that organization.

This case highlights an important fact:

Receiving a refund does not mean the IRS has examined and approved the return.

The IRS may process a return and issue a refund before reviewing the claims made on it. If the refund is later disallowed, the taxpayer may be required to repay it—with substantial additions.

What initially appeared to be a financial windfall had become a crushing tax debt.

Bankruptcy Did Not Solve the Problem

The taxpayer apparently believed bankruptcy would protect her from IRS collection.

Bankruptcy can be a valuable tax-resolution tool, but it does not eliminate every tax liability. The result depends on the type of debt, the filing and assessment dates, prior collection events, and the circumstances that created the liability.

When bankruptcy failed to provide the relief she expected, the IRS resumed collection activity.

The taxpayer was now in a serious bind. She wanted to know whether the debt could be resolved through an offer in compromise.

The Professional’s Responsibility

Our job is to investigate the facts, explain the risks and identify the lawful options. We can challenge an incorrect assessment, oppose an improper collection action and negotiate an appropriate resolution.

We cannot make the history of a tax debt disappear.

Sometimes effective representation means fighting aggressively for the taxpayer. At other times, it means explaining that the solution the taxpayer wants may not be available.

That is the meaning behind my professional philosophy:

Do Your Job, Do No Harm

Advocate for the client, but do not mislead the client.

Explore every lawful remedy, but do not reinforce the conduct that created the problem.

Taxpayers should be cautious of anyone promising:

• A secret way to avoid federal income taxes;
• An enormous refund based on an unconventional theory;
• Guaranteed protection through bankruptcy; or
• A settlement with the IRS for “pennies on the dollar.”

When you hear someone mentioning one of these ideas, encourage that person to obtain competent advice before the situation becomes worse.

Ron Friedman CPA helps taxpayers understand their IRS collection options and build a strategy around their actual financial situation.

If you or someone you know owes back taxes, has been contacted by an IRS revenue officer, or is worried about IRS collection action, call Ron Friedman CPA at 914.712.6919 for a consultation.