FAQ Tax Attorney: Your Tax Law Questions Answered

Navigating the complexities of tax law can be a daunting task, and it’s not uncommon to have questions and concerns. In this FAQ Tax Attorney guide, COTTS LAW aims to provide answers to some of the most frequently asked questions related to tax law, federal liens, offer in compromise, and more. Whether you’re an individual taxpayer or a business owner, understanding these crucial aspects of tax law can help you make informed decisions and manage your tax obligations effectively.

What is the Difference Between a Tax Attorney and a CPA?

While both Tax Attorney and certified public accountants (CPAs) can help you with tax-related issues, there are some key differences between the two professions. A CPA is an accountant who has passed the Uniform CPA Exam and is licensed by the state to provide accounting services. A Tax Attorney, on the other hand, is a lawyer who has passed the bar exam and is licensed to practice law.  They might also be licensed to practice in Federal Tax Court.  While both professions can help you with tax issues, a Tax Attorney is better equipped to handle legal matters, such as tax litigation.

What's The Most Important Thing About The Tax Code?

Arguably, the most important thing about the tax code is its impact on fairness and equality. Tax brackets play a major role here, determining how much different income levels contribute to public revenue. As Daniel Cotts points out, nearly 50% of Americans don’t know which tax bracket they are in or if there are any tax brackets at all. People who try to figure things themselves usually make a mistake, and the IRS will let you know about this.

A progressive system with rising brackets for higher earners promotes fairness by requiring those with greater ability to pay a larger share. Conversely, a flat tax treats everyone equally regardless of income, potentially placing a heavier burden on those with less while benefiting the wealthy. Understanding one’s tax bracket and the implications of its structure is crucial for taxpayers to navigate the tax code effectively and for policymakers to ensure a just and equitable tax system.

What's The Biggest Misconception About Tax Law?

One of the biggest misconceptions about tax law, as identified by Daniel Cotts and widely prevalent, is the belief that social security benefits are untouchable by the IRS. This simply isn’t true. While it’s correct that regular Social Security benefits are generally not taxable income, the IRS can and does deduct from them in certain situations:

  • To repay unpaid taxes or student loans: The IRS can use a process called “garnishment” to withhold up to 15% of your monthly Social Security benefit to settle outstanding tax debts or defaulted student loans.
  • To pay child support or alimony: If you have court-ordered child support or alimony obligations, the IRS can divert a portion of your Social Security benefit to ensure those payments are made.
  • To offset overpayments: If you received excessive Social Security benefits due to an error or reporting mistake, the IRS can recoup the overpayment by deducting it from your future benefits.

Another common misconception is that filing your taxes electronically increases your chance of an audit. In reality, the opposite is true! E-filing is generally viewed favorably by the IRS as it’s faster, more accurate, and easier to verify compared to paper returns. This often translates to a lower audit risk because it eliminates potential red flags associated with manual processing.

What is a Federal Tax Lien?

A federal tax lien is a legal claim by the government against a taxpayer’s property or assets when the taxpayer has unpaid tax debt. This lien serves as a security interest for the government, ensuring that it has a claim to the taxpayer’s property until the tax debt is satisfied. 

What Are the Consequences of Ignoring a Federal Tax Lien?

Ignoring a federal tax lien can lead to severe consequences, including

  • Damage to your Credit Score: A federal tax lien can negatively impact your credit score, making it challenging to secure loans or credit.
  • Asset Seizure: The IRS may eventually seize your property or assets to satisfy the tax debt.
  • Difficulty Selling Property: Selling or transferring property with a federal tax lien can be complex and may require IRS approval.


What Are My Options If the IRS Places a Lien on My Property?

When the IRS places a lien on your property due to unpaid taxes, it can feel like a daunting situation. However, there are several options available to manage and potentially resolve this issue. Consulting with a Tax Attorney like COTTS LAW can help you navigate these options effectively.

  1. Payment in Full: The most straightforward way to remove a federal lien is by paying the owed tax amount in full. Once the debt is cleared, the IRS will release the lien within 30 days.
  2. Installment Agreement: If immediate full payment isn’t feasible, you can negotiate an installment agreement with the IRS. This plan allows you to pay off the debt over time. In some cases, the IRS may agree to withdraw the lien once you establish a consistent payment record.
  3. Offer in Compromise: This option involves negotiating with the IRS to settle your tax debt for less than the full amount owed. If the IRS believes that the offer reflects the maximum amount they can expect to collect within a reasonable period, they may accept it and will then remove the lien.
  4. Discharge of Property: Under certain circumstances, you can apply for a discharge of the lien from a specific property. This means the lien remains in effect, but it no longer encumbers that particular property, making it easier to sell or transfer.
  5. Subordination: Through subordination, other creditors can be allowed to move ahead of the IRS lien. This doesn’t remove the lien but can make it easier to get a loan or mortgage, as it improves other creditors’ positions relative to the federal lien.
  6. Withdrawal: A withdrawal of an IRS lien means that the IRS agrees to remove the public notice that says they have a claim on your property because of your unpaid taxes. This can happen if the lien was placed by mistake, if you set up a plan to pay your taxes through automatic deductions from your bank account, or if removing the lien actually helps the IRS collect the tax you owe. Even when the lien is terminated, you still need to pay the tax debt. This removal helps improve your credit situation, as it shows other creditors that the IRS no longer has a priority claim on your assets, but it doesn’t erase the debt itself.

How Can I Avoid Federal Liens?

To avoid federal liens:

  1. Promptly pay your taxes and file your returns on time. If you’re unable to pay in full, immediately arrange an installment agreement with the IRS.
  2. Regularly review and adjust your tax withholdings to prevent underpayment.
  3. In case of financial difficulties, communicate with the IRS to explore options like temporary relief.
  4. For complex tax situations, seek advice from a tax professional to ensure compliance and avoid liens.

How Does an Offer in Compromise Work?

An offer in compromise is a program offered by the IRS that allows taxpayers to settle their tax debt for less than the full amount owed. To qualify for an offer in compromise, taxpayers must meet specific eligibility criteria and demonstrate their inability to pay the full tax debt. This program provides a valuable opportunity for individuals and businesses to resolve their tax liabilities and achieve a fresh start.

What Determines My Eligibility for an Offer in Compromise?

Determining eligibility for an Offer in Compromise (OIC) with the IRS involves assessing your financial situation, including your ability to pay, income, expenses, and asset equity. The IRS looks at whether you can realistically pay the full tax debt, considering your current and future income, allowable living expenses based on national standards, and the value of your assets.  Additionally, you must be up-to-date with all tax filings and not in active bankruptcy proceedings. Sometimes, even if you can pay the full amount, an OIC may be accepted due to special circumstances that would make full payment inequitable or cause economic hardship.

What Are Common Tax Law Changes I Should Be Aware Of?

Keeping abreast of tax law changes is essential for effective financial planning. Notable areas to monitor include adjustments in federal tax rates and brackets, which can directly impact your income tax liability. Equally important are the annual updates to the standard deduction, which can influence your decision between itemizing deductions and opting for the standard deduction. For those saving for retirement, be aware of any changes in contribution limits to IRAs and 401(k)s, as these can affect both your retirement planning and immediate tax situation.

Additionally, healthcare-related tax provisions can see shifts, impacting tax credits and penalties associated with health insurance. For estate planning, changes in estate and gift tax exemptions are crucial. Finally, staying informed about the introduction, expiration, or alteration of various tax credits and deductions, like those for education, child care, or energy efficiency, can lead to significant tax savings. These changes often result from new legislation, inflation adjustments, or policy shifts, and understanding their implications can significantly benefit your personal and business tax strategies.


Is the IRS Easy To Work With?

Working with the IRS can be a complex and sometimes challenging experience, and the perception of how “easy” or “difficult” it is can vary significantly depending on individual circumstances and the specific issue at hand.

Daniel Cotts, a professional in the field, highlights an important aspect of interactions with IRS revenue agents. He suggests that these agents are trained to be disarming and charming, which can potentially lead to a taxpayer inadvertently saying something that could be disadvantageous. According to Cotts, if a taxpayer makes a mistake during such interactions, it can benefit the agent’s performance metrics. This perspective underscores the importance of being cautious and well-prepared when dealing with the IRS.

Cotts strongly advises against communicating with the IRS without professional representation. The rationale is that trained professionals, such as tax attorneys or certified public accountants, are familiar with the IRS’s procedures and know the boundaries of what agents can and cannot ask. For instance, questions about personal assets like cars, artwork, or other luxury items are generally not within the scope of what the IRS should inquire about in standard tax-related discussions. However, without professional guidance, a taxpayer might not be aware of these limitations and could inadvertently provide information that isn’t required or could be used against them in some way.

What Should I Watch Out For On My Return?

When preparing your tax return, it’s crucial to approach it with honesty, accuracy, and a focus on proper documentation. As Daniel Cotts advises, avoid the temptation to overstate deductions or invent expenses, as these actions can lead to audits and penalties. The IRS is willing to accept your claims as long as you can provide proof, so “truth and honesty wrapped in proof” should be your mantra. Be diligent about reporting all sources of income, use the correct filing status, and beware of identity theft. If you have complex financial situations, consider seeking professional guidance to ensure compliance with tax regulations. Remember, transparency and accuracy in your return can help you avoid potential issues and ensure a smoother tax filing experience.

Final Thoughts

Navigating the ever-changing landscape of tax laws can be a complex and daunting task. Whether you’re dealing with personal tax planning, business tax strategies, or facing specific challenges like federal liens or offers in compromise, staying informed and seeking professional guidance is key. At COTTS LAW, we are dedicated to providing you with the expertise and support you need to manage your tax matters effectively and confidently. Contact us now for personalized advice and solutions tailored to your unique tax situation. Let us be your guide and advocate in the world of tax law.

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