Dealing with tax issues can be a stressful and time-consuming process. When taxpayers encounter disputes with the Internal Revenue Service (IRS), they may be unsure about their options for resolving these issues or whether they can negotiate agreements that will allow them to reduce the taxes or penalties they will be required to pay. In some situations, there may be methods available to resolve tax issues without going through time-consuming and expensive Tax Court, District Court, or Court of Claims litigation. 

Fortunately, the IRS offers several alternative dispute resolution (ADR) programs that aim to provide taxpayers with more efficient and cost-effective options for resolving their tax disputes. Taxpayers who are looking to settle tax disputes should consider working with an attorney who can provide guidance on the programs that are available and the best steps to take to resolve these concerns effectively.

The IRS's ADR Programs

The IRS has put a variety of options in place for taxpayers who wish to use alternative dispute resolution to address tax disputes. These programs include:

Because of the complicated nature of the tax laws in the United States, there are many methods taxpayers may use to reduce the amount of taxes they are required to pay. While some of these methods are legitimate, there are others that the IRS has identified as abusive tax schemes that could potentially lead to penalties for tax avoidance. Monetized installment sales are one method that has recently been identified by the IRS as a possible form of tax fraud. 

Taxpayers who engage in these types of transactions could face tax audits or investigations by the IRS. Those who need to respond to IRS queries or determine their requirements for reporting transactions should consider working with an attorney who can provide guidance on the applicable tax laws and regulations.

Monetized Installment Sales May Be Considered Listed Transactions

In a monetized installment sale, a seller who has agreed to sell property to a buyer for cash or in exchange for other assets will work with an intermediary to create an installment payment arrangement in order to defer the taxable gain from the sale. Typically, the seller will transfer the property to the intermediary, who will then transfer the property to the seller in exchange for payment. The seller will then obtain a loan from a lender in the amount of the property’s purchase price, and they will accept payments from the intermediary, which will be used to pay the interest on the loan. A balloon payment will be received at the end of the installment agreement, and the gain recognized from the sale of the property will be deferred until this payment is received.

Taxpayers who own retirement accounts can often take steps to maximize the amount of money they are able to save and ensure that they will have sufficient financial resources later in life. However, the rules regarding retirement account contributions have changed in recent years, and this has led to some confusion about the types of contributions that may be made and the taxes that may apply. To give taxpayers, employers, and retirement plan administrators more time to adjust to these changes, the IRS is providing a longer transition period before changes in the law will be implemented.

The SECURE 2.0 Act and Catch-Up Contributions for Higher Income Earners

The SECURE 2.0 Act, which was passed in 2022, made some changes to how taxes apply to retirement accounts. One provision of the act addressed catch-up contributions to 401(k) plans and other retirement accounts. These contributions may be made by people over the age of 50 beyond the annual deferral limit. In 2023, the employee deferral limit is $22,500, which is the total amount that can be withheld from a person’s income each year and saved in a 401(k) account. People who are at least 50 years old can contribute an additional $7,500, which is known as a catch-up contribution.

Under the SECURE 2.0 Act, certain limitations were placed on catch-up contributions for high income earners. Specifically, for taxpayers who earn at least $145,000 per year from a single employer, catch-up contributions must be made on a Roth basis. That is, contributions must be made after income taxes have been applied. Prior to this change, these taxpayers could elect to make contributions before taxes were withheld.

There are a variety of tax penalties that may apply when U.S. taxpayers fail to meet their legal requirements for filing tax returns, paying taxes, or reporting information to the IRS. Foreign tax compliance can be an especially tricky issue, since taxpayers who own foreign assets or receive income or gifts from foreign sources may not be aware of their reporting requirements. In some cases, failure to file the proper forms may result in international information return (IIR) penalties.

There is a common conception that IIR penalties are mostly limited to wealthy taxpayers who earn high incomes or own extensive assets. However, this is not the case, and according to the National Taxpayer Advocate, lower- and middle-income individuals and small-to-midsize businesses are more likely to be affected by these types of penalties. 

Low-income individuals, businesses with moderate resources, and immigrants who are unaware of their tax reporting requirements may be subject to large penalties if they fail to file the proper information returns. Unfortunately, these penalties may sometimes be assessed after taxpayers discover their errors and make a good-faith effort to comply with their reporting requirements. Taxpayers who are seeking to address issues related to foreign tax compliance should consider working with an attorney who can advise them of the proactive measures that may be taken to minimize penalties or receive penalty abatement.

There are multiple types of financial assets that U.S. taxpayers may own, and certain requirements must be met when reporting assets and income to the Internal Revenue Service (IRS). Many taxpayers may need to address issues related to retirement accounts or pensions, but when these assets are held in foreign accounts or retirement plans, they will also need to ensure they follow the correct procedures for reporting foreign accounts and assets.

Some of the most common foreign retirement accounts held by U.S. taxpayers include Canadian registered retirement savings plans (RRSPs). The IRS has provided guidance on what forms need to be submitted to report RRSP ownership. Taxpayers may want to consider working with an attorney to address these requirements and determine their options for disclosing RRSPs that had not previously been reported.

Forms Used to Report Canadian RRSPs

Until 2012, taxpayers with RRSPs were required to file Form 8891 each year, and in some cases, they were required to pay taxes on the income that accrued in these plans. However, Form 8891 has been discontinued. Currently, RRSPs must be reported using the following forms: