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Michelle Drumbl of the Washington and Lee Tax Clinic shares what taxpayers can do when the IRS takes issue with a return.
Sunday, May 5, 2013
With the passing of April 15, many taxpayers are now relieved. Their taxes have been filed. Returns and payments have been tallied. Another tax season is in the books.
But for anyone who had a tax dispute with the Internal Revenue Service or the Virginia Department of Taxation, talk of taxes will continue for longer than anticipated.
Taxpayers with filing issues could hire a lawyer or accept what the IRS says and just pay the difference. However, some Virginia residents have another option through the Washington and Lee Tax Clinic.
W&L law students have been providing help for low-income taxpayers since 2008. While they don’t prepare taxes, they do help out with audits and other issues involving the IRS.
Eight students staff the center during the school year, with fewer students working during the summer.
Because the clinic received a federal grant, it can only represent taxpayers whose income does not exceed 250 percent of the annual Federal Poverty Guidelines.
The clinic also will represent taxpayers who have an issue with the Virginia Department of Taxation as long as they also have a federal problem.
Michelle Drumbl, an associate clinical professor of law, has been the clinic’s director since it opened.
Drumbl recently talked about tax controversies and what taxpayers can do when the IRS takes issue with a return.
Q: What kind of training do tax center students receive?
They have all taken the federal income taxation of individuals class at the law school, so that they have some foundation in the basics of tax law. I start each semester with an orientation that quickly introduces them to issues of low income taxpayers to tax procedure, how to do a client interview and the specific context of the tax controversy. As soon as they’ve had that orientation, they are ready to meet with their clients right away.
A lot of it is learning as you go because there may be a specific tax issue that they haven’t worked with before. I work with them closely and try to give them the primary lead in the case.
Q: What was the inspiration for opening the clinic?
It was a combination of things. Washington and Lee Law School was looking to expand its clinical opportunities for third-year students as part of our broader curricular reform. They are now required to have a clinic or live client experience as part of their third year so that they are better prepared for practice after they graduate.
I proposed the tax clinic. My background is in tax law. I was formerly with the IRS office of Associate Chief Counsel (international) for three years in the national office in D.C. and actually learned about clinics there on the other side.
Q: How are audits resolved?
The first thing we would do is to talk to the taxpayer, hear their story and read the audit notice. Often the letter from the IRS will state clearly what they are challenging and what they are asking for in response.
Sometimes I hear their story, and I have to unfortunately say, “You weren’t entitled to what you claimed on the return.” If that’s the case, I try to either amend their return or minimize the financial consequence of that by sometimes challenging the penalty assessed by the IRS, or we can try to help them get into a payment plan or other arrangement for what they are going to end up owing.
We can try to work with them to get the documentation to substantiate their position on their return. Sometimes the things being disputed are very fact-intensive. One common audit is for the earned income credit, which is the credit that is available to lower income working families who have children. The things that often come up in those types of cases are often who are the children, and the IRS will ask you to prove that you are related to them and that they lived in your household.
We can and do often represent taxpayers in tax court. We often see cases that we can resolve at that level without actually having to go to trial. If we have a good set of facts, we are able to resolve that through settlement with the IRS.
Q: Are audits the most common issue you see at the clinic? What other problems do you see?
I’d say it’s one of the three most common things. We see a lot of collections issues. The best case is when a taxpayer gets an audit and calls us right away. There are always more procedural options if you get help right away.
Unfortunately, what we see a lot of is people where the IRS is trying to collect from them, and the IRS has already assessed them additional tax due. If you don’t file a tax return, the IRS will do a substitute assessment for you, which is taking all the information they know about what you’ve earned and file for you. They give you notice before they do this. But a lot of people don’t respond.
If we work with you to file a return after the fact that they have given an assessment, we can lower liabilities for people by coming forth with an original return and explaining what should have been on the return.
We can help taxpayers determine what their collections options are. Sometimes that might mean entering into an installment agreement. Sometimes it’s requesting a financial hardship called “currently not collectible” status.
There’s offering a compromise option like what you see on television when people say settle your debt for pennies on the dollar. You can’t just call and make an offer arbitrarily. You have to submit a detailed financial analysis. There are some people for whom an offer compromise is a good option, but those are going to be people who truly can’t make any payments, or who don’t have access to any equity or funds that they could use to pay the IRS.
Q: Are there any audits or disputes that you won’t handle? How much is too much?
I would never represent a tax protester who says the 16th Amendment wasn’t properly ratified and therefore the government has no jurisdiction of tax. Also, if there is something unethical going on, I can’t proceed with that case as well. Most people are honest taxpayers who have either not complied properly with the law because they are overwhelmed with it, or they had something else going on in their life like an illness or bankruptcy, or tried to comply but made a mistake.
Q: Have you ever worked with a client who could not be helped?
The hardest people to help are those who haven’t filed for many years and who have no records. Generally to help somebody, you have very few options on the table if you’re not in filing compliance.
I think people don’t realize that there is a penalty for failure to file and failure to pay. The added penalties approach 47.5 percent. If the IRS catches up to you, you are suffering from penalties plus interest on all of the amount.
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