This case started in July 2021. The taxpayers were living in Australia and received an IRS tax notice demanding payment for over $600,000 in overdue tax, interest, and penalties for the 2016 tax year. They had no idea why or how they could possibly owe this much in back tax debt to the IRS. Not knowing what to do, they contacted TaxAudit for help.
After conducting a comprehensive assessment of the taxpayer’s situation, TaxAudit was able to determine that the IRS had issued an underreporting notice reflecting unreported income from a real estate sale that took place in 2016, assessing tax, interest, and penalties on 100% of the sale price. Because the taxpayers were residing in Australia and neglected to change their address with the IRS, they consequently did not receive the initial underreporting notice or the statutory Notice of Deficiency (NOD), which is generally the final notice that is issued before a federal proposed tax assessment becomes final. It was not until they filed their 2020 tax return with their Australian address that the IRS finally updated their records with their current address, allowing the taxpayers to begin receiving the collection notices.
After reviewing the findings with the taxpayers, their TaxAudit tax professional determined that the real estate sale was related to their personal residence, and should, therefore, qualify them for the Section 121 exclusion, allowing them to exclude up to $500,000 of the gain from the sale of their home. Their TaxAudit tax professional also determined they had not previously had an opportunity to submit the proper documentation to dispute the proposed tax assessment. Therefore, the taxpayers were eligible to request an audit reconsideration, which reopened their case to dispute the tax assessment.
TaxAudit quickly went to work requesting the necessary documentation needed to support their case with the goal of getting the IRS’ tax assessment corrected. Once the taxpayers provided the necessary documentation, TaxAudit prepared a response and submitted the request for audit reconsideration in August 2021. The case was still far from over and it would be a long road until a resolution would be reached.
At around the same time that TaxAudit had submitted the response for audit reconsideration, the taxpayers received a final Notice of Intent to Levy from the IRS, threatening to levy or seize the taxpayer’s property to satisfy the tax debt. Again, TaxAudit quickly stepped in and filed for a Collection Due Process (CDP) Hearing in order to prevent the IRS from issuing any levies or seizures of assets until the hearing could be conducted to determine if the collection action the IRS was proposing was appropriate. The taxpayers could have some peace of mind knowing that the CDP process would stall all potential collection efforts by the IRS, at least for now.
The next hurdle facing TaxAudit and the taxpayers, in this case, is that this was all taking place one year into the COVID-19 pandemic. The IRS was struggling with being seriously understaffed and unable to handle the volume of correspondence it was receiving in a timely manner. With the understaffing issues, the IRS was many months and, in some cases, a year or more behind in processing correspondence. Consequently, the IRS erroneously enforced a levy on the taxpayer’s pension income. TaxAudit quickly stepped in again to contact the IRS Special Compliance Personnel, the department that handles larger balance-due accounts, to try to rectify the issue and prevent any further levy enforcement. TaxAudit was successful in getting the levy released, but, unfortunately, not before one more erroneous levy on the pension income took place.
After several months of waiting for the IRS to review the audit reconsideration, the taxpayers received a Notice of Federal Tax Lien from the IRS, adding insult to injury. The IRS uses liens as a way to protect the government’s interest in the owed tax liabilities. TaxAudit again stepped in and filed another Collection Due Process Hearing to dispute the filing of the tax lien.
After a few more months of waiting with no movement in the case, TaxAudit decided to open up a case with the Taxpayer Advocate Service (TAS) in an effort to try to expedite the case for audit reconsideration. Finally, in May of 2022, TaxAudit received a call from a TAS representative requesting a copy of the documentation submitted for audit reconsideration.
Shortly thereafter, in June of 2022, the taxpayers received notice that not only had the issues been resolved and the over $600,000 in assessed tax, interest, and penalties have been eliminated, but they would also be receiving a refund of over $8,000. This refund was attributed to the erroneously levied pension funds, as well as prior-year tax refunds that were applied to the outstanding balance.
In conclusion, it was the knowledge, expertise, and quick action of TaxAudit that helped eliminate an over $600,000 tax debt and turn it into an over $8,000 refund!