In beginning the series on Offer in Compromises ("OIC"), it is important to note that an "offer" is just what it implies- an offer. The IRS, due to public policy reasons, can reject an offer.
They do this often in some situations:
1. Civil Trust Fund taxes
2. Tax incurred due to fraud or other criminal activity
3. Stay-in-business taxes
4. If the taxes would put a business at a competitive advantage over other competitors in the industry
There are many other "public policy" reasons that may be used. However, this is at the discretion of the IRS and you better have a good fight in you to argue the "public policy" aspects in your favor. This is a long standing IRS position that was publically stated in IRS Policy Statement 5-89.
If you have any questions about OICs and public policy decision, please consult a competent professional.
Dec 31, 2007
In beginning the series on Offer in Compromises ("OIC"), it is important to note that an "offer" is just what it implies- an offer. The IRS, due to public policy reasons, can reject an offer.
Here is a General Accounting Office ("GAO") study on Offers in Compromise that was done in 2005 and 2006. I will be referring to it often in my series on the OIC Program and the options available for your tax debt.
It is a very telling document that gives great insight on to how the IRS works internally. If you have worked for the IRS, this study has many conclusion that you can see from your experience inside the IRS.
If you would like to speak with someone who has worked within the IRS, please e-mail us here at email@example.com or contact us.
State tax issues change constantly. Also, many States have a very limited and somewhat "undefined" due process. It always pays to stay current and access State forms and websites continually if you are dealing with State tax issues.
I am constantly reviewing changes to state laws for:
1. Tax debt collection procedures
2. Tax collection options: Currently not collectible, installment agreements and Offer in Compromises
3. Substitute for Return procedures
4. Audit activity
Each state is different. Here is a great link to look at particular state data. As it should, it refers to the source: the particular State Department of Revenue.
Always consult a professional when it comes to State tax issues. It has a myriad of issues.
Dec 29, 2007
In the next week, I will be posting a long series on the intricacies of the Offer in Compromise ("OIC"). I receive many calls each day from clients that want an OIC. Most clients believe that it is a mere offering of an amount and the IRS will accept, reject or counter offer without many facts. This could not farther from the truth.
The OIC is a detailed investigation by the IRS that should be completely investigated by a competent professional and the client PRIOR to submission. In an OIC investigation, the IRS will review your past, present and future financial data. They will look into all assets that you own and possibly assets that they think you should own (think of the possibilities that exist here!!). They will scrutinize your tax returns, your finances, your income potential, your living arrangements, your family's finances, and much more.
In the series to follow, I will give you some statistics on the OIC, the mechanics of the OIC, the types of OICs, what the IRS does in an OIC investigation, who should and should not file an OIC, and options other than an OIC.
Do not believe that the OIC is always the best option. It is the most publicized options and the one that says "settlement"- a buzz word that screams "free lunch." Remember, there is no such thing as a free lunch AND if it is too good to be true, it usually is not true.
There are many unscrupulous people that will talk you into an OIC. But IT MAY NOT BE THE BEST OPTION FOR YOU!! In fact, there are approximately 20 other options you should review before taking on the risk of filing for an OIC.
Do you feel comfortable that you know all the options??? Read on and see what is entailed in an Offer. But before you proceed, it is in your best interest to explore all options through a competent tax professional.
From the new movie "National Treasure- Book of Secrets:"
The supporting character, Riley Poole (played by Justin Bartha), runs afoul of the IRS after non-payment of taxes to the IRS. His earnings are implied to be from finding the treasure in the first movie, "National Treasure." At an apparently unsuccessful book signing, he notices his Red Ferrari being towed off. We find out that it is the IRS that has seized his car for non-payment of back taxes.
In the best line of the movie, Riley says to the main character Ben Gates (played by Nicolas Cage) in trying to explain why the IRS has seized his Ferrari, "What is the tax on $5 million (in income)- $6 million!!!"
It appears the seizure had proper timing with notices as this movie sets about a couple of years from the past movie. The seizure is highly probable if Riley did not make any attempt to pay his taxes or enter into some agreement based on his ability to pay. However, it would not look like a "repossession" as it did in the movie. The IRS would want you to know that it is seizing your property so that you would feel the enforcement.
At the end of the movie, the President of the United States returns the car to Riley with a note that says "tax-free." As we all know, this is highly unlikely in any case!!!
Enjoy this movie- it is better than the first and a load of action!
If you have problems similar to Riley, consult a very competent tax professional for advice- preferably now unless you want your Ferrari (or Ford) seized.
Dec 24, 2007
The IRS recently published another press release stating there is $110 million in unclaimed refunds. Mostly, unclaimed refunds are due to taxpayers moving and the IRS does not forward the refund check. However, alot of refunds are seized to pay many other items including you past tax debts. The IRS can seize your refund, take your refund if you are in currently not collectible or an installment agreement (in fact- they will take your refund if you are in this status), or owe some other federal debts (i.e. student loans) or child support.
Your IRS accounts are subject to the Treasury Offset Program. This program can summarily take your refund.
Hence, if you are one of the "unclaimed" refunds- the chances are greater that the government took your refund rather than it is "unclaimed."
If you owe tax debt and the IRS is taking your refund, it is best to consult a tax professional for all of your options.
Dec 20, 2007
Finally, the IRS has made it simple to contest your worker status. Some contend that between 30-40% of workers are misclassfied as independent contractors rather than employees. (The IRS has a study of 1984 data that has missclassification at 15%- but it is much greater due to the increased payroll tax obligations- however- it has not been studied since 1984) The IRS conducted 11,380 audits of "independent contractor status" in 1988-1994 and found over 483,00 misclassified workers or 42.4 misclassfied workers per audit. The tax effects to the misclassified worker is staggering (the tax effects to the employer who misclassified can be as much as 45.3% of the wages paid but not withheld):
1. Workers classified as independent contractors are responsible for all 15.3 % of the FICA and Medicare tax- if they were an employee, this tax would be withheld and the worker would only be responsible for 1/2 of this tax (7.65%)- not the full 15.3%- the employer is responsible for the other 1/2 of the tax.
2. Workers classified as independent contractors have no federal income tax withholding. Hence, if they do not make estimated tax payments (i.e. quarterly payments to the IRS that are an estimate of the total tax due at the end of the year), then they are going to have a large year end bill with significant estimated tax penalties.
On Dec. 20th, 2007, the IRS finally issued a Form (Form 8919) that will facilitate the contesting of the worker classification status on your current year tax return. Prior to this form, you would have to use a Form 4137 (which is a tip reporting form) to attempt to clarify this issue. Now, you will be able to get credit for the FICA tax while the worker classification issue is pending with the IRS (see my prior blogs on this issue in Worker Classification). Request for Determination of your Worker status is done on Form SS-8.
This is a complicated issue that needs to consider all factors- especially if you are an employee or an independent contractor. If you are incorrect in the assumption that you are an employee, the IRS will ask you for the remainder of the 7.65% of tax. Consult a competent tax professional if you have these problems.
The tax system is based on voluntary compliance. If everyone decided that paying taxes was a bad think, ultimately the tax system would deteriorate. Hence, similar to the changes in the tax preparer due diligence (and corresponding penalties) that is made to deputize tax preparers for the IRS, the IRS has issued a recent press release highlighting "whistleblower" efforts.
The IRS encourages taxpayers to inform on others about tax evasion. Per the IRS in the Press Release:
"Since the Whistleblower Office was created in December 2006, the IRS has received about 80 claims, half of those submitted in just the last two and a half months. To make a claim, an informant must file new Form 211, Application for Award for Original Information, which asks informants to provide an estimate of the tax owed, the pertinent facts in the case and an explanation of how the informant obtained the information"
This new IRS Whistleblower Office is clearly an attempt to deputize taxpayers against taxpayers- increasing the voluntary compliance rate among all taxpayers.
Watch for this in the future. The IRS will do two things this Spring:
1. Indict a high profile person for tax fraud (remember the Girls Gone Wild founder in 2007)
2. Continue to press tax preparers via the new penalties on tax preparer due diligence
The best way to avoid this looking over the shoulder is to comply with the tax law and stay in the system. If you are currently outside of the tax system and need to come back in, please contact irsmind.com- you information will be kept confidential.
Dec 19, 2007
Most believe the ultimate tax resolution is the Offer in Compromise or “OIC.” If you can pay this and it gets approved (the statistics show that the IRS is predisposed to not allowing OICs), it can be the best option. However, you need to consider all alternatives and options. For example, a partial pay installment agreement may in fact be less in payments over the long term (especially if there are not liquid assets with equity).
Some other items you may want to know about OICs (I will have an extensive blog series on this in the near future):
1. It is often referred to as a “Settlement”- however, this implies that the outcome is purely subjective. In fact, it is part subjective and part objective based on a financial investigation.
2. The OIC is a long 9-12 month process (if everything goes smoothly) that is fully investigated by IRS OIC Units and Field Offices; the IRS has 2 years to investigate the OIC and the OIC is deemed accepted if the IRS does not decide on the OIC within 2 years of filing
3. The OIC acceptance requires past, present and future filing compliance for 5 years
4. The OIC acceptance requires future payment compliance for 5 years
5. Offers are open to a redacted public inspection for 1 year
6. The OIC investigation is very intrusive
All options need to be investigated before an OIC is submitted to the IRS.
It is recommended that you consult a competent tax professional for all of your options and questions.
Your tax debt- Part 18 – More on The Partial Pay Installment Agreement- an Offer in Compromise in disguise
The often underestimated and underused tax resolution option is the partial pay installment agreement or “PPIA”. This option is excellent if you cannot qualify or pay an Offer in Compromise for any reason and your monthly disposable income (“MDI”) and net realizable equity in assets cannot pay the tax liability in full before the collection statute (“CSED”) expires (normally ten years from the date of assessment)
A PPIA is defined simply as: an IA when the amount of payments do not pay the tax in full before the CSED expires.
It is almost as difficult to negotiate as an Offer in Compromise. However, it is better in many respects if you cannot qualify for an Offer for such reasons as:
1. You cannot pay the Offer amount
2. You cannot even pay the 20% down payment if you do not qualify for a low-income exclusion
for the 20% down payment
3. You do not want to extend the CSED
4. Your CSED are imminent
5. You have assets that are not liquid but have equity
6. You believe an Offer investigation to be too intrusive
One down side of a PPIA is that Internal Revenue Code § 6159 requires that PPIAs be reviewed every two years. We have found PPIA’s reviews to be inconsistent with the IRS policy. However, increased enforcement may breed more PPIA follow-ups, especially if the income reported to the IRS is substantially more than what was proven to them during the PPIA negotiation.
PPIAs are like OICs- very difficult. It is recommended that you consult a competent tax professional for all of your options and questions.
IRS agreements are especially difficult when you owe over $100,000 in tax, penalties and interest. This is due to the IRS special enforcement procedures at that level of tax debt.
If you owe that much to the IRS they will send you to one of two places (and neither are good):
1. The Automated Collection System- High Liability Unit, or
2. A local Revenue Officer who will be assigned your account to personally enforce collection
There are special IRS procedures outlined in the Internal Revenue Manual (“IRM”) and the Law Enforcement Manual (unpublished and known as the “LEM”), which include, but are not limited to the following:
–A complete review of your financial situation and documentation (as per normal procedures) and a review of your:
• Credit report
• DMV records
• Accurint program search and follow up- this is an asset/credit availability search as well as a detailed review of relatives, friends, neighbors, etc. that you may have given assets
• Property records
• Tax records
• A review of any suspected related returns and related taxpayers returns
Obviously, this is an intrusive investigation that should not be taken lightly. If you over $100,000 in tax debt, you should not represent yourself. You should consult a competent tax professional for all of your options and questions.
There are many types of payment plans or “installment agreements” to pay your tax liability. In fact, most people who are over the median income levels for the area, qualify for this option in tax resolution. Depending on how much tax that you owe, this can be a viable option for you.
There are several types of installment agreements (“IA”):
• The Full payment of tax agreements:
– The IRS “Streamline” IA (similar to no-income verification loan)
Do not fool yourself- this is not as easy as name implies.
– The negotiated IA to full pay based on ability to pay (your monthly disposable income
or “MDI”). There are many factors to this that need to be considered, including, but
not limited to:
• Will the IRS allow you actual expenses that you live on or the allowable living expenses, per their definition?
• Can you get an installment agreement based on actual expenses (i.e. a conditional expense installment agreement)?
• Can I get some time to adjust my lifestyle to the IRS allowed expenses (i.e. the 12 month adjustment for an IA)?
• What is allowed as an expense to the IRS? The IA is negotiated based on your ability to pay, how is this defined?
• The Partial Pay IA- the payment arrangement that does not pay the tax liability in full before the CSED expires
– This is much like receiving an OIC over the life of the collection statute of limitations or
– How are the equity in my assets considered?
The payment plan or “installment agreement” option has a maze of options that need to be explored before you attempt to negotiate with the IRS. It is recommended that you consult a competent tax professional for all of your options and questions.
Your tax debt- Part 15 – Currently Not Collectible- “CNC”- What are some other critical aspects and criteria?
In our continuing series on tax debt resolution options, it is important to note that there are some other criteria that the IRS can consider for any resolution option, including a CNC or an installment agreement. These criteria include, but not limited to, the following question areas:
• Can you use the equity in your current assets to pay off or pay down your liability?
The IRS will always, as they are programmed to do, request that you full pay, full pay in 120 days, borrow from credit lines, friends or family, and borrow against the equity in your assets. It is in their script in the Internal Revenue Manual. However, you need to ask yourself-
– Will the increased debt on asset equity able to be paid in the future or is my situation so
that I cannot afford this additional debt?
– Can I prove this with a loan denial letter from a lender?
• Is the CNC the best option if an OIC cannot work due to:
– Offer amount too large to pay currently
– Cannot get the 20% to pay the OIC down payment
– Dissipated assets that would raise OIC
– Will the IRS consider me just temporarily under-employed? Especially if I am self-
– Am I self-employed and the IRS will scrutinize my income and deductions to the extent
that the intrusion is not worth the Offer consideration?
• Because the CNC continues the running of the collection statute of limitations (“CSED”), am
I better off letter the toll run?
– This is unlike OIC which suspends the CSED for the Offer consideration period plus 30
days or bankruptcy which most likely does not resolve my tax debt and extends the
CSED for the time in bankruptcy plus 6 months
These are all healthy discussions and evaluations that need to be made in formulating your plan of tax resolution. Unless you have extensive experience in this area, you should not go this alone. It is recommended that you consult a competent tax professional for all of your options and questions.
Your tax debt- Part 14 - Currently Not Collectible (“CNC”) – What income and expenses are allowed on a CNC?
There are many questions on how the IRS will your Monthly Disposable Income or “MDI” for CNC status.
Common questions are:
· How does the IRS determine if I technically qualify as a hardship? How does the IRS determine my income?
· Does the IRS allow all actual expenses in determining whether you are currently not collectible?
· What Income/Expenses allowed for a CNC?
Remember the purpose of the CNC is that taxpayer cannot meet “necessary living expenses.” These expenses are defined in the Internal Revenue Manual.
The IRS computes income based on your current situation. However, if your income is seasonal, do not expect the IRS to be compassionate. The IRS will want to normalize your income based on the previous 3 months, year, or 3 years, based on whatever is most advantageous to them. However, if you are currently unemployed (or current “under-employed”), incarcerated, seriously ill, or under some other hardship that hinders your ability to meet your daily living expenses, there is hope. However, the IRS will investigate your income.
The IRS will allow actual expenses paid, but only for expense areas allowed (see the expenses allowed in the IRM) and up to their allowable living expense standards as defined most recently as 10/1/2007.
Always be prepared for the question: “How are you surviving?”
– Is it?
– Credit, loans from relatives, gifts, limited savings (not always a good story),
– You will need to be able document, especially if self employed
– What do your bank statements say (specifically the deposits)? The IRS is going to ask for these documents.
This is complicated. It is recommended that you consult a competent tax professional for all of your options and questions.
Your tax debt- Part 13 – Currently Not Collectible (“CNC”) - When will the IRS kick you out of a negotiated CNC?
When will your hardship, negotiated CNC be removed by the IRS and when will they start collection on you again?
In the IRS Internal Revenue Manual section - IRM 5.16.1-2 (as of 12-01-2006)-Report of Currently Not Collectible Taxes, the IRS states:
• CNC is Based on AGI and the living expenses needed in the Form 433A, Collection Information Statement, and documentation filed to negotiate CNC status:
• A hardship closing code is input in the IRS computer system based on the Form 433A/Fdata that indicates the amount of income that, if attained, will remove the taxpayer from CNC status:
• Values for the hardship closing codes are as follows: Closing code/AGI Floor
AGI is the “Adjusted Gross Income” from the most recent filed tax year. If the tax return is not filed, the IRS will use the information that they have on filed Forms W-2, 1099 and other statements filed with the IRS from various payors.
Because CNC is temporary, it is recommended that you consult a competent tax professional for all of your options and questions.
Clients commonly ask this question: “Does CNC status last forever?”
If the IRS is doing their job, its system will determine the answer to this question. The IRS sets up systemic follow-ups to review CNC’s periodically (and it sends an annual notice of balance due- it does not tell you that you are in “CNC”). The IRS rarely does not like to set up mandatory CNCs as it does not have the resources to follow up on them. Also, it believes that its systemic review will catch all undeserved CNCs. Mandatory CNCs usually require the scrutiny of an IRS Revenue Officer. These resources will determine and usually do the follow up on mandatory CNC follow ups.
The IRS Internal Revenue Manual defines Systemic and Mandatory follow ups. In IRM 188.8.131.52 (12-01-2006) Systemic and Mandatory Follow Up on CNCs are defined as:
• Systemic follow-up is limited to hardship, unable to locate, and unable to contact cases. IRS CNC closing codes were defined in a previous blog entry. Systemic follow up is done in:
• Cases where there are assets able to full pay at a later date (an action must happen to remove a client from CNC)
• Request mandatory follow-up only when required or when there is a likelihood that revenue will be collected by taking the requested action.
• ACS or RO puts in a date to make the client a TDA
• Financial information shows the taxpayer's allowable expenses exceed income and no equity in assets. The taxpayer has fallen on hard times but expects to be back to work in a year and able to pay the tax debt. Allowable expenses are $22,000. Report the account CNC using closing code 25. Do not request a mandatory 53 (CNC) follow-up. The account will be reissued systemically when the taxpayer files a return with income of $28,000 or more. (NOTE: these closing codes are in my next blog)
• Financial information shows the taxpayer's allowable expenses exceed income. The taxpayer has equity in their home sufficient to pay the tax debt and requests an eight-month extension to pay to allow them time to refinance their residence. Do not report this account as CNC with a mandatory follow-up in 8 months.
• The IRS will request mandatory follow-up when there is evidence that the taxpayer's ability to pay will improve and either computer generated reactivation is not available or the improvement will happen significantly sooner than systemic reactivation can occur. Generally, the expectation is that revenue will be collected as a result of the follow-up request.
If the details and the resolution of your tax debt are important, it is recommended that you consult a competent tax professional for all of your options and questions.
Your tax debt- Part 11 – Currently Not Collectible (“CNC”)- does the IRS always require Financial Statements and documentation?
A common question from clients is: “I am obviously in financial hardship, will the IRS require full information to put me in a non-collectible status?”
Technically, the answer is no. However the reality is different.
According to the IRS Internal Revenue Manual:
• Under certain conditions, a Collection Information Statement, Form 433A/F is not required before reporting an account CNC. The aggregate assessed balance, including any prior CNC's, must be less than the amount in LEM 184.108.40.206.9(3) (not published by the IRS) and at least one of the following conditions must exist:
• the taxpayer has a terminal illness or excessive medical bills
• the taxpayer is incarcerated
• the taxpayer's only source of income is social security, welfare, or unemployment
• the taxpayer is unemployed with no source of income
• Note: these do not require IRS managerial approval- but IRS must confirm the conditions with all data available
The key is the IRS collection person must feel comfortable with the above conditions. The reality is that most are not comfortable with taxpayer testimony of unemployment, terminal illness, incarceration, or hardship. Full financials are generally required with the proof of hardship.
Most individuals have a difficult time with this negotiation. Assuming the IRS will be compassionate to any of the above situations is not realistic. It is recommended that you consult a competent tax professional for all of your options and questions.
Will the IRS only do a financial review to put you in a CNC (i.e. only a Form 433A/F and documentation review??)
In short, it depends on the amount of tax that you owe. If your balance is above an undefined amount (defined in the unpublished IRS Law Enforcement Manual or “LEM”), outside investigation is warranted. If you owe above $100,000 it is commonly known that a full financial investigation will occur. What is that financial investigation??
According to the IRS Internal Revenue Manual, the investigative procedures are as follows:
For domestic accounts with an aggregate unpaid balance at certain
Amounts (in the LEM), research of the following resources is required:
o telephone directories
o postal tracers
o IRP (i.e. Forms W-2 and 1099, etc. filed under the liable parties SSN or EIN)
o DMV listings
o employment commissions
o real and personal property records
o local licensing authorities when a taxpayer has a business that requires a license
o on-line services that help in locating taxpayers, such as Accurint
o RTVUE (which is the IRS computer data on your filed tax return) if the due date of the last filed return was within the past two years. Use RTVUE to determine if a copy of the return should be secured to further develop leads to locate the taxpayer, assets or levy sources
For international accounts, the same sources will be checked whenever available
for the country in question.
It is recommended that you consult a competent tax professional for representation in this investigation. Find a professional that can discuss all options and what will happen to you in the IRS investigation into paying your tax debt.
Your tax debt- Part 9 – More Currently Not Collectible (“CNC”) Hidden Details- your CNC status with the IRS
In previous blog entries, I stated that there are many reasons that the IRS will put you in CNC status. These reasons are defined in “closing codes” by the IRS in the Internal Revenue Manual section – IRM 220.127.116.11:
Accounts may be reported currently not collectible (CNC) for a variety of reasons.
The appropriate closing codes (cc) are in parentheses. The most commonly used
closing codes are as follows:
· inability to locate the taxpayer or assets (03)
· partial expiration of the assessment prior to issuance (04)
· complete expiration of the statutory period for collection or suit initiated to reduce tax claim to judgment (05)
· For International casework, inability to collect a liability from a taxpayer living in a foreign country (06)
· a corporation or LLC classified as a partnership or association taxable as a corporation liquidated in bankruptcy (07)
· death of an individual with no collection potential from the decedent estate or no collection potential for estate taxes (08)
· accounts below tolerance (09)
· a corporation, certain limited liability partnerships, or an LLC classified as a partnership or association taxable as a corporation which is inactive and defunct with no assets (10)
· inability to contact a taxpayer although the address is known and there is no means to enforce collection (12)
· a corporation or LLC classified as a partnership or association taxable as a corporation remains in business and is current but is unable to pay back taxes (13)
· when suspending collection of BMF balance due accounts when the key individual is deployed to a combat zone; see IRM 18.104.22.168.3.1 for additional information (14)
· corporate income tax liabilities owed by a financial institution certified as insolvent by the Office of the Controller of the Currency or the Office of Thrift Supervision (15)
· collection of the liability would create an undue hardship for taxpayers by leaving them unable to meet necessary living expenses (24-32) – this is the NEGOTIATED CNC
It is recommended that you consult a competent tax professional for all of your options and questions.
Sometimes clients ask: “Why has the IRS not tried to collect on me so far? I owe them but I have received no correspondence or enforced collection (i.e. a levy).
That is why it important to know the details of a CNC and know that the chances are that it will not last forever. Sometimes clients who have tax debts “fall through the IRS cracks” but not very often. Increased IRS enforcement and collection programs have left very few untouched.
The reason why some are not being collected by the IRS can be two-fold (if in fact there is a liability assessed):
1. They are under criminal investigation and the IRS Criminal Investigation Division is working behind the scenes (hence, civil collection activity would need to cease), or
2. The IRS has you in CNC status for one of the following reasons:
-They cannot find or locate you – the “default” CNC
-A CNC was negotiated in the past and you have not reached the threshold to put
you out of CNC (i.e. your income is not high enough to warrant the IRS seeing you as
If the IRS has you in a default CNC, collection can occur at anytime. However, if you have negotiated the CNC, the closing code that the IRS uses to put you in CNC will determine when you are removed from CNC and but put back into IRS Collection as a Taxpayer Delinquency Account (“TDA”). These closing codes will be reviewed in the next blog entry. It is important to know what the potential CNC closing codes are so that you know what the IRS believes is your allowable living expenses.
Some other details:
1. The information statements filed with the IRS (accumulated on the IRS “IRP” reporting file) will show the IRS how much “total positive income” or “TPI” you have. Hence, the IRS knows your gross income. This may give the IRS all the information they need to remove your CNC status.
2. Adjusted Gross Income or “AGI” filed on your last year’s tax return will have a factor in determining if CNC status is removed by the IRS. If AGI is over the closing code amount (defined in a future blog), then CNC status is removed.
3. Annually IRS sends a statement of balance due (a Letter CP 89 or equivalent letter)
– This letter requests the taxpayer to contact IRS
– The IRS will want to see if anything changes
Note: A TAX LIEN will be filed if you are in CNC status no matter how much tax you owe.
It is recommended that you consult a competent tax professional for all of your options and questions including CNC .
CNC Status is for those in a current hardship that does not allow them to pay the IRS anything at the moment.
Some common questions are:
1. How does the IRS determine CNC? What expenses do they allow me to have?
2. How long does it last?
3. If I have some liquid assets, do I need to give them up first?
4. What triggers the IRS to put us out of CNC?
5. How often does the IRS review CNC status?
The CNC calculation is simple:
1. You have no monthly disposable income (using the IRS allowable living expense (“ALE”) standards), and
2. There are no liquid assets to pay liability (or it would not be reasonable to liquidate these assets as it would further diminish the financial hardship of the taxpayer)
CNC has it advantages and disadvantages.
1. Advantage: IRS will hold off payment of taxes
2. Disadvantage: It is reviewed annually based on the return filed or the information reports filed for you.
· You are put in uncollectible status with a “closing code” that determines when you will be sent back to collection
– Hence, IRS reviews this status with the tax returns you file annually or, if you do not file, the information returns (W-2s, 1099s, etc.) the IRS has in their possession
· If AGI > CC amount = back into collection
3. Advantage: the 10-year collection statute of limitations (“CSED”) continues to toll and is not suspended
The main pain point for CNC is that the IRS will only allow the ALE’s for expenses. Hence, other options should be considered including Installment Agreements that allow for a lifestyle adjustment (the IRS will allow this for 12-months on “actual” expenses and then revert to the IRS standards- if the IA will pay the tax in full before the expiration of the collection statute of limitations).
It is important that you know all of the options that are available to you and what your financial situation dictates. It is recommended that you consult a competent tax professional for all of your options and questions- this is a very fact intensive process and knowledge of all options is needed before you proceed.
Your tax debt- Part 6 – Analyzing your Financial Situation to determine what Collection Option “fits” you
In order to start resolving your tax debt, you need to analyze your financial situation- past, present, and future. Remember, step one is to make sure that you truly owe the tax debt in question (or in this case- collection!). The best option is always to lower your tax liability to the minimum if you are over-assessed. However, if you owe the tax, choosing the best collection options will need to consider at least all of the following items:
1. Whether you have all your tax returns filed
2. Whether you are in payment compliance for the future
3. Your income from all perspectives (recent three months, currently, past three years, normalized, etc.)
4. Your expenses and how they compare to the IRS Allowable Living Standards (“ALE”s)
5. Your assets and liabilities- and what is the net realizable equity in these assets and the liquidity in these assets
6. Whether you have transferred any assets out of your name (referred to as “dissipated assets” by the IRS) that was not used to pay your taxes or necessary living expenses since the date of assessment of the tax debt due (this includes loan refinancing, 401K/IRA distributions, sales of assets, transfer of assets to family or friends, etc.)
7. Amount of tax debt owed and the time period the IRS has to collect (referred to as the Collection Statute of Limitations or “CSED”)
These facts will determine the Monthly Disposable Income (“MDI”) that the IRS will want as an installment agreement payment (if MDI is $25 or less- the IRS will put you in “Currently not collectible” or “CNC” status). If the MDI reasonable collection potential (i.e. MDI multiplied by a factor of 48, 60, or the collection statute depending on the “Offer” terms selected) added to all of your net realizable equity in assets (dissipated assets also) is less then your tax, you may want to consider the Offer in Compromise (if you can pay the Offer amount).
However, it is not that easy. There are many considerations- most financial. I recommend that you consult a competent tax professional for all of your options and questions so that you do not put yourself in a worse situation.
The Offer in Compromise is the most desired of all tax resolutions, if the price is right. The price is the amount of the Offer that is accepted by the IRS. It is the best option if you can remain compliant for 5 years after the Offer is accepted and if you can pay the Offer amount. The problem is that most people do not qualify for an Offer (see my past blogs on this subject). Remember, there is no such thing as a free lunch. The Offer is not a subjective amount that you can suggest to the IRS and they will accept. It requires a detailed financial investigation of past, present and future ability to pay with income, assets, and other collectible items within the collection statute of limitations (generally 10 years from the date of assessment).
The collection Offer is referred to as an OIC- Doubt as to “Collectibility” (there are other Offers that deal with collection issues known as Effective Tax Administration (a future blog topic to come) and non-collection issues- Doubt as to Liability- i.e. you do not believe you even owe the tax liability)).
There are four factors to determine Reasonable Collection Potential (“RCP”)
1. Future Income: Monthly disposable income
2. Assets: Net equity in assets
3. Assets Collectible from 3rd parties: Transferee liability, assets held by others
4. Income/Assets out of reach of the Govt.: i.e. foreign assets and income
There are several other hidden factors that can determine whether the IRS will even entertain an Offer:
3. Business owner, value of business
4. Future earning ability
5. Asset appreciation
7. Education level
These are not all of the “other” factors that may disqualify an Offer or predispose an Offer to rejection but they are some of the most significant. I will blog an entire series on this option in the near future. This is a very extensive process that only a seasoned tax professional should handle. It is recommended that you consult a competent tax professional for all of your options and questions before filing an Offer.
One option for resolving your tax debt problems, if for the IRS to put you in Currently Not Collectible (referred to as “CNC” or “status 53”- the master file code used in the IRS computer system to denote your account as currently not collectible). Except in certain circumstances (I will go over these in a future blog), this status requires the same level of documentation and negotiation needed in other tax resolution options (i.e. Installment Agreements (“IA”), Offers in Compromise (“OIC”)). Also, the amount of tax owed does not correspond with the level of documentation and negotiation required (unless you owe over $100,000 and the IRS will do its’ own investigation). Hence, CNC for $10,000 is the same as CNC for $90,000 in tax debt.
Hence, CNC is merely an IA that the MDI and liquidated asset ability is -0-. It:
Requires full negotiation with IRS
– 433A/F, 433B (if needed)
– Proof of assets, liabilities, income and expenses
Multiple negotiation contact points with IRS
– Note: This is not an easy process
It is recommended that you consult a competent tax professional for all of your options and questions.
Your tax debt- Part 3 - Collection Tax Resolution- “Streamline” Installment Agreement- Simple, but can you pay it?
The simplest manner to pay your tax debt is the “streamline installment agreement.” If you qualify, it requires the least amount of intrusiveness by the IRS.
The qualification standards are simple:
– Assessed Amount owed is under $25,000,
– The Collection Statute of limitations will allow for full payment,
– You agree to make regular monthly payments to the IRS, and
– You agree to give the IRS information to contact you and enforce collection in the case that you default the Installment Agreement
Hence, it is important that the years owed and assessed are not too old, or the the installment agreement payment will be high.
What information does the IRS need in order to enforce collection in the event of default:
– Banking and employment information
– Phone #
– Date of Birth to identify you
If you have any questions if this option is right for you, you should consult a competent tax professional for all of your options and questions.
For tax debt collection resolution, there are generally 3 major options that can occur:
1. Installment Agreement (“IA” – i.e. a payment plan), or
2 general payment plan options:
Streamline, or Fully negotiated (Full payment or Partial Payment of total liability)
2. Currently Not Collectible (“CNC” or “53”) or
3. The Offer in Compromise
This series will focus on the Installment Agreement and Currently not Collectible options in detail and give a brief overview of the Offer in Compromise, the ultimate relief for your tax debt.
It is recommended that you consult a competent tax professional for all of your options and questions.
In dealing with people with tax debt issues, I constantly receive questions on options available for “settlement” of tax debt or dealing with the IRS on tax debt issues. In the next series of blog entries, I am going to attempt to address the process and procedures the IRS Collection function will utilize in resolving your tax debt. Always remember, the IRS Collection function is a collection agency, first and foremost.
This series will address the following commonly asked questions on how to resolve your tax debt with the Collection function of the IRS:
• Can I not pay the IRS for awhile why I get back on my feet?
• I cannot afford to pay them, surely the IRS will see that, won’t they?
• If the IRS denies my Offer, what else can I do?
• What options are available to me?
• I want a settlement, do I qualify?
• If you get me in CNC, will it last forever?
• Can the IRS change my Installment Agreement?
It is recommended that you consult a competent tax professional for all of your options and questions.
NPR Marketplace Morning Report stated that there were over 200,000 home foreclosures in November, 2007, up 68% from November, 2006. It was projected at the gloomiest of outcomes, that there would be 1.4 million foreclosures in 2008. Given the November report, this projection does not seem so gloomy now- but rather optomistic.
Also, the Bush bailout and the Hillary Clinton response bailout does not seem to offer any more relief. The initial reactions annd commentary appear to state that neither will pass nor will they help.
The tax effect of the foreclosures are tremendous if a taxpayer is not insolvent, bankrupt, or it is not their primary residence. The IRS tries to give some help on this subject, but taxpayers do not really understand the ramifications. The bottom line is that the cancelled debt related to a foreclosure can be income to you.
If this is income, you may have a large tax debt bill at the end of the year. Because there is no withholding on this income (it is reported on a Form 1099-C), your tax debt can be large. Further complicating matters is the fact that you are probably financially strapped (hence the reason for the foreclosure). Possibly a currently not collectible status may be applicable. In any event, consulting a competent tax professional is needed.
Merry Christmas to all!
Just some insight on the IRS and Christmas time. We have just completed a parody on the IRS and Santa on youtube. If you have ever been audited or owe tax- you will know how Santa feels in this video. Follow the link to watch the video....it is hilarious.
The IRS has not held off its efforts during this time of year with one exception: the wage levy. Traditionally, the IRS has a wage levy moratorium from the middle of December until the beginning of the New Year. This is kindler and gentler. However, if you have a levy in place or in (wage or bank), it will not be released until resolution is completed.
So, Merry Christmas to you and those of you that may think they are going to get a wage levy on Christmas Day. If you have any questions please e-mail us or visit a competent tax professional.
Dec 3, 2007
Per the IRS- the Taxpayer Advocate's Office mission and criteria are as follows:
The Taxpayer Advocate Service is an independent organization within the IRS that assists taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. Taxpayers may be eligible for assistance if:
They are experiencing economic harm or significant cost (including fees for professional representation);
They have experienced a delay of more than 30 days to resolve a tax issue; or
They have not received a response or resolution to their problem by the date promised by the IRS.
The IRS Taxpayer Advocates Office (known as "TAO") handles problems from taxpayers that are of a hardship or "outside of the box."
The format for a TAO complaint or TAO "Order" is to file a Form 911. The best way to do this is to be reduntant:
1. Complete the Form 911 and fax it to the TAO office in YOUR STATE. The number is on the IRS website.
2. After you fax the Form 911- follow up immediately with a phone call (the phone number is also listed with the address on the website). Reiterate your hardship and circumstance to the IRS TAO.
3. Send a copy by certified mail to the IRS. If there are more documents that you can fax, include them in the certified mailing.
If you have a serious problem, consult a professional or e-mail me with a your specific problem and I will reply with assistance.
Dec 1, 2007
Handicapped related expenditures are eligible to be included for meeting the medical expense deduction on Schedule A of the Form 1040 (subject to the non-deductible 7.5% floor). To be deductible, these expenses must 1) be made to accommodate a residence for a handicapped condition of the taxpayer, taxpayer’s spouse, or dependents living with the taxpayer and 2) not increase the market value of the residence.
Some examples of allowable expenses are:
–Construction of entrance or exit ramps to the residence to help persons in wheelchairs,
–Widening of doorways at exits or entrances to the residence to accommodate wheelchairs,
–Modifying hallways, stairs or interior doorways to accommodate wheelchairs,
–Installation of railings, support bars, or other modifications to bathrooms,
–Modifying kitchen cabinets or equipment to accommodate wheelchairs,
–Relocation of electrical outlets,
–Modifying areas in front of entrance and exit doorways, and
–Grading of ground for better access to the residence.
This list is certainly not all-inclusive. But in the right circumstance, this type of deduction can go a long way toward satisfying the medical expense floor and possibly attain some amount of deduction on the Schedule A.
Recently the IRS stated that they are going to combine these notices in order to shorten the collection process. In review, a CP 504 is sent on a balance due account (CERTIFIED) and gives the client 10 days before a Final Notice of Intent to Levy, L 1058, is sent. The L1058 is sent, as required by law, to give the client their Appeal Rights, as required by law. This gives the client 30 days from the Final Notice date to appeal the collection proceedings.
Recent IRS chatter has speculated that the CP 504 and L 1058 will be combined into one notice, allowing the IRS to shorten the collection process. Eventually, the IRS will shortent the collection time as the CP 504 and L 1058 could be legally combined (as it was prior to 1998) to enforce a levy. It will happen in the future, it is just a matter of time and our efforts to notice it.
1. The change in language on the certified mail to say 30 days instead of 10 days and offering a “Collection Due Process” appeal
2. Any other notice before the CP 504 that comes certified (other than the CP 523- Default on Installment Agreement)
3. Any other notice that gives 30 days to comply or levy
4. Any other notice that gives collection appeal rights
An SFR or Substitute for Return DOES start the 10-year collection statute of limitations (”CSED”). The rationale is that the IRS can start collecting on the balance due if they have followed collection due process (see the notice requirements in previous blog entries). The IRS, in IRM 22.214.171.124.15, explicitly state that they cannot collect past this date.
What does this mean?? Those debts in the “closet” may be closed by statute. A practical example is as follows:
The IRS files an SFR for 1993 and assesses the tax on 1/15/2006 (the IRS sometimes takes up to 6 years to do SFRs but most likely about 2.5 years later if in the Automated SFR Unit or “ASFR”). Unless you file a return that adds tax to the SFR amount and/or extend the CSED by some other action (see my prior blog entry on extending the CSED), the IRS cannot collect on the amount due after 1/15/2006.
Sometimes taxes do die….if you need help on computing your CSED or if you owe that tax debt that is in the “closet,” contact an expert in IRS collections.
Normally the IRS has 10 years from the date of assessment to collect on the tax debt due. However, it starts as of the date of assessment which means, if you file late, the statute runs from the date the IRS assesses the late filed return.
Also, there are many actions that extend the CSED date. Here are some of these actions:
Form 900- Waiver of the CSED
Assets in Custody of the Court that prohibit levy
Taxpayer Assistance Order (TAO)
Offer in Compromise
Wrongful Seizures that are returned to the taxpayer
Collection Dur Process hearings
Each of the above above have different rules and effects on the CSED. You can ask the IRS directly for the CSED date. If you have any questions on the CSED, you should consult a tax expert.
The current IRS policy is that filing compliance constitutes the last 6 years tax returns. Why is that? This is an administrative directive by the IRS because they do not have the real-time capability to go back more than 6 years (the IRS only keeps your income documents in real-time for the last six years). The IRS reserves the right to ask for more than the past six years and they often do in two situations:
1. When you file an Offer in Compromise
2. When you have a business that is formed as a corporation or partnership
It is virtually impossible to file accurate returns for the last six years without some professional help. Make sure the professional assistance you obtain has the ability to gather the IRS records for the past six years to make the delinquent returns you file at least minimally processable.
The IRS can reject an OIC for public policy reasons. In their Policy Statement since 1960, they can just reject for this reason:
IRM 126.96.36.199.15 (Approved 07-26-1960)Policy Statement 5-89
Offer may be rejected for public policy reasons :
If the acceptance of an offer might in any way be detrimental to the Government’s interests, it may be rejected even though it is shown conclusively that the amounts offered are greater than could reasonably be collected in any other manner.
Some of these reasons may be:
1. Liability is from an audit where fraud was present
2. Liability is from tax on an illegal activity
3. There is a criminal investigation ongoing
4. There is involvement in an abusive tax avoidance transaction (”ATAT”)
5. The taxpayer is a tax protestor
There are some other reasons the IRS may summarily reject an OIC. Before an OIC is submitted, it is important that you consider all of the options available. Consultation of a tax professional is imperative as an error may mean you have exposed your financial situation and extended the collection statute of limitations.
File a tax return late and owe tax- you could owe a lot more than you think. The penalties (failure to file and failure to pay) along with the interest accruing (currently at 8%) can be 35% or more if you file more than 8 months late. This can make a $10,000 liability- $13,500. Obviously, the manner to save most of this penalty is to file on time (the penalty is 4.5% per month up to 5 months).
However, anxiety of owing causes a lot of people not to file. Hence , they compound their misery. Most believe that the IRS routinely abates penalties if you just ask- the answer to that is the IRS does not often abate penalties.
You must have rationale for penalty abatement - “I forgot” - “I do not have the money” - “I did not know I needed to file” are usually not good answers. Documented, reasonable cause arguments must be made. Even with reasonable cause, the IRS usually summarily disallows penalty abatement and challenge you to take it to their Appeals Division.
The data is not in favor of penalty abatement. IRS Data on penalty abatement is complicated but gives some insight as to your chances of penalty abatement. Less than 13% are abated (in number of penalties) and less than 39% (as measured in dollars). However, the amounts “abated” appear to include penalties that are written-off due to the collection statute of limitations expiration. One item is true: paying the tax prior to requesting penalty abatement is almost an absolute must.
Can the IRS be so adamant about your tax debt that they levy your social security benefits? The answer is yes. The IRS can levy up to 15% of your social security retirement income. In fact, if you do not reply, they often levy this source of income until you resolve your tax situation. Also, they will continuously levy this source until the tax debt is resolved by payment in full or another tax resolution option (abatement of tax, CNC, OIC, or Installment Agreement, etc.)
Interesting to note, the IRS does not levy SSI payments for hardships. Technically, they are leviable, but the current IRS policy is not to do so.
If your SSA benefits are levied, you may want to seek professional help.
1. The tax liability is paid in full (i.e. the amount of the levy ceiling is paid)
2. You enter into an agreement to pay (i.e. an installment agreement) or convince the IRS through a financial disclosure (i.e. Form 433A/B and or F and supporting documentation) that you are not collectible (referred to as “CNC” or “Currently not collectible” status)
3. You get the tax abated (either by successfully filing an amended return, an offer in compromise, or other abatement method)
4. You show the IRS you have a true hardship that a levy is compounding
Unfortunately, most people believe they fall into #4- not by IRS standards. Many require #2 or #3 or eventually succumb to #1.
Getting through this maze is difficult. Also, what are your options. In short, the options can be summarized into about 21 different options.
There are two types of levies:
1. A continuous levy (i.e. referred to as a “wage levy”) that can take earnings from wages, salaries and other income (this is the nebulous term- subject to interpretation and negotiation) until the tax is paid (on a Form 668-W for wages)
2. A one-time levy (i.e. a bank levy or an “accounts receivable” levy) that only takes the proceeds that are owed to the IRS (up to the amount of the tx due) at the time of the levy (a Form 668-A is generally used for this one-time levy).
Payors, employers and contractors constantly get these confused and send the erroneous amount to the IRS.
The main issue I see is that the IRS is starting to send business owners continuous levies when it is not appropriate. Business owners are subject only to one-time levies (which may happen often). I have had many arguments of the applicability of a Form 668-A v. 668-W.
If you have a levy, resolution of your tax problems is the only way to removing this levy. The IRS issued over 3.5 million levies last year alone and their enforcement is increasing this year. Consult professional representation for a complete resolution and release of a levy.
More to come on levies in the future.
In my last post, I mentioned that 29 states are sharing “employment tax” information with the IRS as of November 6th, 2007.
Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin.
Remember, the SSA already shares information with the IRS relative to Forms W-2 filed.
If the IRS has filed returns for you based on information from the States or SSA or any other source, please consult professional representation to remedy this matter.
Yesterday, the IRS signed a Memorandum of Understanding with 29 States and their taxing agencies to share information with regards to employment tax examinations.
According to the IRS, here is what the MOU means:
1. The IRS and the participating state workforce agencies will exchange employment tax information for civil cases, which primarily are intended to evade or inappropriately reduce employment tax liabilities.
2. The IRS and the states may exchange information using either actual employment tax reports or a template compatible with federal and state information that the oversight team has developed.
3. The IRS and the states may participate in coordinated enforcement efforts. The MOU will allow the IRS and the state workforce agencies to share independently conducted examination results or work side by side on an examination.
4. The IRS and the states will strive to be consistent with their examination results, reducing the chances that states might classify a worker as an employee while the IRS classifies the worker as an independent contractor, or vice versa.
5. The IRS and the states will share employment tax training opportunities and materials.
6. The IRS and the states will also share outreach opportunities to the business community whenever practical.
The IRS already has many information sharing with other federal and state agencies (SSA, income tax with states, etc.).
This is a sign of the future - the IRS will have many external sources of information for tax compliance. The moral of the story is to do it right the first time. If you cannot, you need representation.
More on this to follow in the future.
According to the General Accounting Office (”GAO”) study and House Ways and Means Committee study on independent contractors v. employees highlighted that many workers were erroneously treated as “independent contractors” (i.e. those receiving Form 1099-MISC). The last IRS measurement of this was in 1984 where they stated 15% of workers erroneously were misclassified as an “independent contractor.” That equated to 3.4 million workers at that time. This problem has not been eleviated- in fact, it has worsened. The workforce that is made up of independent contractors has risen from 6.7% in 1995 to 7.4% in 2005 according to a May 8th, 2007 GAO Study.
Clearly, the IRS has not studied this issue in years and no other federal agency has identified the extent of the problem. However, they all realize the severity of the issue of misclassification.
How does this effect you?
For federal tax purposes, if you are misclassified, you will owe the full social security and Medicare taxes (referred to as “Self-employment tax”) individually. Also, you will most likely have no federal income tax withheld unless you are making the required estimated tax payments. The SE Tax is 15.3%.
Hence, come April 15th- there is a big surprise on your tax return- a large balance due.
Fortunately, the IRS has some remedies available for contesting your worker classification. Request a Determination of Worker Classification and subsequent filing of your tax returns with notification of this request can save you some liability. If the determination that you are in fact a IC is made- the tax is put back on you. The IRS has just completed the draft of the Form to request preliminary relief while worker classification is determined.
More later on what defines an independent contractor v. employee. It is very technical and requires a extensive review on whether the worker can be controlled and directed.
It depends on several factors:
1. What is your balance due? Under $10,000? Over $25,000?
2. Who is enforcing collection- ACS or a Revenue Officer?
3. What type of tax is due? Payroll? Income?
4. Are you in an agreement to pay?
5. Do you have assets to pay the liability if sold?
Generally, if you owe over $25,000, a lien will be filed if you are in an agreement or not, no matter what the type of tax owed.
After that, there is no general rule. The IRS will file a lien, under most conditions, (and you do not get a Collection Due Process hearing until after it is filed and the damage is done!) unless you can prove to them that it would ruin your ability to pay the liability (i.e. your job requires that you cannot have a tax lien; i.e. you are a State Revenue Officer- ha!).
The principle is simple. The IRS can act like a secured debt holder. If you had a mortgage or a car loan, you would expect there to be a lien filed by the mortgage holder/lender. Similar is the IRS.
If you have questions on a tax lien, rather than call the IRS and get the standard answer, call a professional tax resolution firm and get the full answer.
Roth IRA’s are becoming very popular these days due to the fact that account distributions are normally not subject to income tax. But wait! There are restrictions to non-taxability of Roth IRA distributions. Here are the qualifications to make distributions not subject to tax:
- Distributions are made after the 5-year period beginning with the first tax year for which a contributions was made and;
- occurs on or after the taxpayer attains age 59 1/2
- the taxpayer becomes disabled
- the estate or beneficiary of the account owner following death or,
- comply with requirements for first-time homebuyer exception to the 10% penalty for early distributions.
Now, distributions can be made at any time. Those not made within the limits above are tax free up to the amount of regular after-tax contributions made. Withdrawals of accumulated earnings may be taxable and subject to the 10% penalty for early distributions. Remember that Roth IRA contributions are not tax-deductible.
They must disclose…..follow the link….very interesting reading
Bush, Clinton and some of the other presidents and vice-presidents…..
Feel free to add in the comments…some of these bear stricking resemblience to the real life IRS Agent:
Happy Gilmore (a definite classic- more misconceptions in this movie than all of the others combined!- but still funny)
Untouchables (makes you want to be a Treasury Agent until Capone gets him)
For Richer or Poorer
Grumpy Old Men (hiding from the IRS in this one is a classic)
The Little Drummer Boy II (TV Version- the Romans are the IRS)
Blues Brothers (property taxes- but still funny)
Robin Hood- Disney version- (a classic tale of tax collection)
You can see my previous entries that have addressed the situations in which the Offer in Compromise (”OIC”) is successful recently. However, it is not the IRS policy to not allow OICs- it is just an institutional mindset. IRS personnel are predisposed to enforcement- this means that their view is no tax return is correct and no tax debt is uncollectible. In fact, most audits end in a balance due and most collection efforts are successful from an IRS perspective.
Recently, the Taxpayer Advocate’s Office recommended (as they do annually) for the IRS to conduct the OIC program more liberally. However, this will lost likely fall on deaf ears as Congress, with a push from the IRS, enacted TIPRA 2005- the law that made filing an OIC much more difficult.
The key to an OIC is to know your options. You need to know if you should file an OIC or seek other options. You will need a tax professional that is astute in your options.
More and more taxpayers are being subject to an old law that was intended to reach those who were taking advantage of accelerated tax benefits to avoid paying tax- the Alternative Minimum Tax or “AMT”. This law was never intended to effect the middle class, but because of several factors, including not indexing the tax rates for inflation since the law was enacted. Unless serious overhaul or repeal is passed (each year new legislation is proposed and this year another 1-year relief proposal has been passed), it will effect more and more of us. The IRS Taxpayer Advocate’s Office has expressed concern over the over-reaching, never-intended law for the middle class.
Here are ten items you should ask yourself to see if AMT may apply to you (at least you should consider AMT and prepare a Form 6251 for your return):
- Personal Exemptions
- Standard deduction
- State and local income, sales adn property taxes
- Mortgage interest on refinanced or second mortgages and home equity loans not used to buy, build or improve a home
- Medical Expenses
- Miscellaneous itemized deductions subject to the 2% floor
- Exercise of incentive stock options
- Long term capital gains
- Tax-exempt interest from private activity bonds
- Business tax deductions
If these factors exist or your tax situation appears complicated, you should consider consulting a tax professional in this area.
The IRS announces each year what they are going to be looking for in their annual “Dirty Dozen” report. They also make the audit statistics available in order to see that they are auditing taxpayer’s returns.
The following are the top five red flags for audits. They include:
Location. Where you live makes a difference in determining whether you are more at risk from an audit. You are more likely to get an audit if you live in one of these places:
Los Angeles, North Central District (ND, SD, MN), Southern California, Northern California, Manhattan, Central California, Brooklyn, Southwest (AZ, NV, NM), South Florida and Houston.
How Much You Make. This statistic is fascinating. It would seem to make sense that the IRS is more likely to audit people who make more money. But, the fact is that they are actually more likely to audit people who make LESS money. In fact, the most likely return to be audited is a return that includes a business that makes less than $25,000 per year. If you do not have a business, you have the most chance for an audit if you file a Form 1040A and make less than $25,000 per year. Business Entities. If you have a business, you are much more likely to be audited if you operate in a Sole proprietorship, Schedule C. In fact, you are ten times more likely to be audited as a Sole Proprietorship than if you are an S Corporation or C Corporation. Why? That is because most Sole Proprietorships do not have great recordkeeping systems and the IRS knows that.
Under-reporting Income. the IRS receives copies of your K-1s form Limited Partnerships and S Corporation, 1099s from interest, dividends and sales, and W-2s. If you do not report these items on your return, or you report a different amount, your return will get pulled for inquiry.
Who Files Your Return Matters. If you have a complex return and prepared it yourself or if your return was prepared by someone on the IRS’s problem preparer list, you are more likely to be audited.”
In short, no. For the most part, a State Installment Agreement does take prcedence over the federal liability. The IRS Policy does not allow State or local tax repayments as an expense toward lowering your monthly disposable income (”MDI”).
However, state and local tax repayments (i.e. installment agreements) are allowed for federal installment agreement purposes.
This deliniation may effect your choice of tax resolution options. You should consult a tax professional if your situation is this complicated.
Surprisingly, unknown to most, the IRS traditionally, around the second or third week of December has a wage levy moratorium until about the first week of January- after the holidays are over.
However, if you have a wage levy currently in place, it will stay in effect until you pay the tax or resolve your problem. Professional consultation should be sought to resolve wage levies unless you plan just to pay the tax in full and handle the IRS yourself.
In the early 1990’s the IRS filed many liens and seized many assets of taxpayers. Liens are not as high as the IRS peak in 1992 (over 1.45 million liens filed in 1992 v. 629,813 in 2006). Also, seizures are no longer an IRS threat unless you are a serious target of the IRS.
The IRS has become much more business focused in their collection. Hence, they use the most cost effective approach: the levy. Last year, they issued an all-time high of over 3.7 million levies.
The data is clear. The IRS intends to focus on collecting the tax debt in the most effective manner. If you are subject to a levy, the only way to resolve it is to the pay the tax or resolve your tax debt by other available options.
Most IRS enforcement, collection and examination, is done at their Service Centers. However, the number of field personnel (Revenue Agents (audits), Revenue Officers (collection) and Special Agents (criminal investigations)) are increasing after a lull in staffing.
Physical enforcement requires a “go-between”- i.e. professional representation. The old adage- “Self Representation is no Representation.”
The IRS has definitely stepped up their audit activity- here is the data a attached for face to face audits.
|IRS Face to Face Audit Statistics- Comparison|
With the exception of high income farmers, face to face audits are at an all time high.
IRS audits should be taken very seriously and you should not represent yourself.
Remember, face to face audits are done by Revenue Agents. They do not audit your tax return, they audit the TAXPAYER. There is a very big difference.
Many taxpayers routinely throw away business expense receipts without thinking of the potential tax deduction associated with them. Here are just a sample of the types of business-related expenses at 50% of cost:
1) Food/drink furnished on company premises primarily for employees,
2) Recreational or social activities, including facilities primarily for employees,
3) Entertainment and meal expenses for employees if they report the value as taxable compensation,
4) Entertainment and meal expenses at business meetings,
5) Costs of entertainment and meals sold to customers,
6) Expenses directly related to and necessary for attendance at business meetings, and
7) Expenses incurred for goods, services, and facilities provided to non-employees (i.e. customers, vendors)
These are but a few of the business expenses allowed by the IRS. One thing to remember–write the time, place and business purpose on every receipt you keep. Proper documentation is the key to ensuring that you get credit for allowable expenses on your tax return.
Single taxpayers with qualifying dependents are normally aware of the “Head of Household” filing status available which can result in a lower effective tax rate. However, most taxpayers are not aware that in some conditions this filing status is applicable even if they are married.
For purposes of qualifying for Head of Household filing status, married taxpayers must be CONSIDERED Unmarried. Someone is considered Unmarried if he (she):
1) Files a separate tax return;
2) Paid more than half the cost of keeping up a home during the tax year;
3) Spouse did not live in the same home during the last 6 months of the tax year;
4) The home was the principal place of residence for a qualifying child for more than half of the tax year; and
5) Can claim the child as a dependent (subject to dependency tests and divorce decrees or separation agreements).
With more taxpayers living today in split households, this issue is becoming ever more relevant. It has the potential to result in significant tax dollar savings. If you feel like this situation is applicable to you, talk a tax professional soon.
We all have heard the terms “Innocent Spouse Relief” and “Injured Spouse” by way of newscasts or even our friends. But just what does each term refer to?
INNOCENT SPOUSE RELIEF - Tax rules are designed to protect married taxpayers who file joint returns from being held responsible for taxes due to erroneous actions by their spouses, such as failing to report income or claiming unsubstantiated deductions. If the innocent spouse can show that he or she didn’t know and didn’t have reason to know about an error that resulted in the underpayment of tax on the joint return, that spouse may be relieved of responsibility for that underpayment. The innocent spouse has two years from the time the IRS begins collection of the underpaid tax to petition for relief by filing Form 8857, Request For Innocent Spouse Relief.
INJURED SPOUSE - A spouse can be considered an injured spouse when a joint return is filed and one spouse owes past-due federal tax and/or child support, a federal debt, or past-due state income tax. The injured spouse can request his or her share of a joint refund by filing Form 8379. Injured Spouse Claim and Allocation. A taxpayer may be considered an injured spouse if:
1) A joint tax return was filed;
2) The taxpayer has reported income (i.e. wages, interest, etc.)
3) The taxpayer has made and reported tax payments (i.e. federal tax withheld or estimated tax payments or claimed the earned income credit; and
4) The taxpayer has an overpayment, all or part of which can be applied against the past-due balance.
If you have a wage levy and you are military in a combat zone, you should be eligible for deferment of tax debt payments. However, note that the IRS will not be without loss- they will extend your collection statute of limitations so that they are not without loss in ability to collect.
Here are the combat zones per the IRS:
Combat zones are designated by an Executive Order from the President as areas in which the U.S. Armed Forces are engaging or have engaged in combat. There are currently three such combat zones (including the airspace above each):
- Arabian Peninsula Areas, beginning Jan. 17, 1991 — the Persian Gulf, Red Sea, Gulf of Oman, the part of the Arabian Sea north of 10° North latitude and west of 68° East longitude, the Gulf of Aden, and the countries of Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
- Kosovo area, beginning Mar. 24, 1999 — Federal Republic of Yugoslavia (Serbia and Montenegro), Albania, the Adriatic Sea and the Ionian Sea north of the 39th Parallel.
- Afghanistan, beginning Sept. 19, 2001.
Public Law 104-117 designates three parts of the former Yugoslavia as a Qualified Hazardous Duty Area, to be treated as if it were a combat zone, beginning Nov. 21, 1995 — Bosnia and Herzegovina, Croatia, and Macedonia.
In support of Operation Enduring Freedom (Afghanistan combat zone):
- Pakistan, Tajikistan and Jordan - Sept. 19, 2001
- Incirlik Air Base, Turkey - Sept. 21, 2001 through Dec. 31, 2005
- Kyrgyzstan and Uzbekistan - Oct. 1, 2001
- Philippines (only troops with orders referencing Operation Enduring Freedom) - Jan. 9, 2002
- Yemen - Apr. 10, 2002
- Djibouti - July 1, 2002
- Somalia - Jan. 1, 2004
In support of Operation Iraqi Freedom (Arabian Peninsula Areas combat zone):
- Turkey - Jan. 1, 2003 through Dec. 31, 2005
- Israel - Jan. 1 through July 31, 2003
- the Mediterranean Sea east of 30° East longitude - Mar. 19 through July 31, 2003
- Jordan - Mar. 19, 2003
- Egypt - Mar. 19 through Apr. 20, 2003
For further information on the impact of being in the military and its impact on your tax debt, please contact a tax professional and refer to the IRS information on the military.
From the IRS today:
IRS Has $110 Million in Refund Checks Looking for a Home
WASHINGTON — The Internal Revenue Service is looking for 115,478 taxpayers who are due refund checks worth about $110 million after the checks were returned as undeliverable.
The refund checks, averaging about $953, can be claimed as soon as taxpayers update their addresses with the IRS. Some taxpayers have more than one check waiting.
“Taxpayers should not miss out on getting their money back,” said Richard Morgante, commissioner of the IRS Wage and Investment Division. ”The IRS makes it as easy as possible for taxpayers to update their addresses and claim their refunds.”
The “Where’s My Refund?” tool on IRS.gov enables taxpayers to check the status of their refunds. A taxpayer must submit his or her social security number, filing status and amount of refund shown on their 2006 return. The tool will provide the status of their refund and in some cases provide instructions on how to resolve delivery problems.
Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.
The number of undeliverable refunds each year is a relatively small portion of all refunds returned to taxpayers. So far in 2007, the IRS has processed nearly 105 million refunds, totaling about $240 billion, either by mail or direct deposit.
In fact, undeliverable refunds account for less than one-tenth of one percent of all refunds, or about one in a thousand.
A refund check is normally returned as undeliverable when a taxpayer moves without updating his or her address with either the U.S. Postal Service or the IRS.
Telephone Tax Refund
The list of taxpayers due undeliverable refunds this year rose about 21 percent from 95,746 last year. The sharp increase is due in part to the Telephone Excise Tax Refund. The refund is a one-time payment available on 2006 federal income tax returns. It was designed to return to taxpayers previously collected long-distance telephone taxes. Individuals, businesses and tax-exempt organizations are eligible to request it.
Updating Your Address
Refund checks are mailed to a taxpayer’s last known address. Checks are returned to the IRS if a taxpayer moves without notifying the IRS or the U.S. Postal Service.
Taxpayers can update their addresses with the IRS on the “Where’s My Refund?” feature. Also, taxpayers checking on a refund will be prompted to provide an updated address if there is an undelivered check outstanding within the last 12 months. Taxpayers checking on a refund over the phone will be given instructions on how to update their addresses.
A taxpayer can also ensure the IRS has his or her correct address by filing Form 8822, Change of Address. Download the form from IRS.gov or request it by calling 1-800-TAX-FORM (1-800-829-3676).
Those who do not have access to the Internet and think they may be missing a refund should first check their records or contact their tax preparer, then call the IRS toll-free assistance line at 1-800-829-1040 to update their address.
Direct Deposit Can Stop Lost Refunds
Signing up for Direct Deposit can put an end to undelivered refunds, as well lost or stolen refund checks. Taxpayers can receive refunds directly into personal checking or savings accounts. Direct Deposit is available for filers of both paper and electronic returns. Taxpayers can sign up for direct deposit on their tax form.
In the 1990’s, the IRS often requested taxpayers to sign a waiver to extend the period to collect on your taxes (i.e. a Form 900). Many taxpayers, facing high payment plans, signed these waivers that extended the CSED far past the 10 years the IRS normally has to collect.
In 1998, Congress put an end to all of the waivers and also nullified many PRIOR WAIVERS!
Per the Internal Revenue Manual:
1. As of January 1, 2000, the ten-year collection statute cannot be extended unless a special situation exists, such as a levy on the taxpayer’s property, an installment agreement, or if the debt has been reduced to judgment. IRC 6502.
2. Extensions that were executed on or before December 31, 1999, may expire earlier than their original terms pursuant to a special transitional rule. An extension, requested on or before December 31, 1999, will expire on the latest of (1) the last day of the original ten-year period, (2) December 31, 2002, or (3) in the case of an extension in connection with an installment agreement, the ninetieth day after the extension. RRA 98 sec. 3461(c)(2).
Does this apply? Would you like to know?? Consult an experienced tax professional to find out.
If you do not reply, they will try. It will most likely not be like Grandma in “Happy Gilmore” where they take your house, but, technically, a levy is a seizure of property.
Here is the process:
1. You incur tax debt- either by filing a return and self assessing, the IRS filing a return for your (an SFR), or as a result of additional liability from an audit
2. The IRS sends you a balance due notice- this will come within 60 days of the assessment of tax
3. The IRS makes you into a TDA- Taxpayer Deliquency Account and starts sending letters in progression - CP 501, CP 503, CP 504 (sent certified)- this process can take from 40 days to 120 days depending on your situation
4. You do not respond- the IRS makes you into a TDI- Taxpayer Deliquency Investigation and starts to ENFORCE collection- about 10-25 days after your CP 504 (Certified Letter) is sent to you.
5. You are now in collections- this is when the levy seizure starts- the IRS issues you a L1058 (or equivalent if they are specifically looking to levy a specific income source or asset). You have 30-40 days after that date (depending on the source- whether it is automated or by a physical person- i.e. a Revenue Officer) until you are levied.
6. The IRS then issues a Form 668 (there are several forms of this depending on what the IRS is trying to levy) and your wages are immediately garnished (by the way- garnishment is a nice word for SEIZURE) or your bank accounts frozen (for 21 days and then the funds are sent to the IRS).
The IRS had under 600 actual seizures last year (actually 590 according to the IRS)of physical property (i.e. homes, etc.). However, they issued over 3.7 million levies. It is cumbersome and not cost effective for the IRS to physicial take possession of your property and sell it. Forthermore, they do not need to: they have the power of levy.
In any event, if it has gone this far, you need professional help as your tax matters are more than you can handle.
Tax liens are painful. They kill your credit rating (out of the three credit reporting agencies, TransUnion usually reports it first), hinder your ability to buy/sell assets, and put you on public display for your tax debt.
How do you rid yourself of a tax lien. Tax liens exist until the amount of tax is paid or abated in full. In short, until the IRS says you have a -0- balance due. Tax liens are filed by years. Hence, it is possible that the tax lien has several years filed and several unfiled. Payment of one year’s liability may in fact release a tax lien (for that year only) if there are no other years on the tax lien.
Obviously most cannot pay their tax debt- hence, the only manner to release the lien is via abatement. Abatement is via: offer in compromise (if applicable), penalty abatement request (if this is all you owe), expiration of the collection statute of limitations, and/or filing amended returns, if warranted.
If an Offer in Compromise is accepted and paid, the IRS reduces you balance to -0- and releases the lien(s). If you are successful in eliminating your debt (including penalties and interest) via penalty abatement or amending tax returns, then your lien(s) will be released. Furthermore, if you have waited the IRS out through its ten-year collection statute of limitations, then the lien will self-expire on the date according to the lien.
Absent these methods, the lien is there to stay.
When you pay off your tax debt, the IRS is required to file a lien release, Form 668Z, within 30 days after the tax debt. If you pay it with a certified check, the IRS will process your lien release within 7 days. Publication 4235 from the IRS is well versed in the approriate contacts at the IRS for lien releasing. However, the procedures for doing such can be complicated. The IRS utilized their Automated Lien Unit (”ALU”) to file most liens. Other liens can be filed locally by the IRS Revenue Officer.
IRS Publication 1468 provides the complexity of the IRS lien processing and options.
I am often reminded of my grade school economics education and some basic principles of capitalism and allocation of resources from the late economist Milton Friedman- “There is no such thing as a free lunch.” In essence, it means that someone is going to foot the bill. I do not say this to be a scrooge on settling or reducing your tax debt- in fact I am in favor of lower taxes and less burden on the taxpaying citizen. However, I say this to remind all of the reality of settling their tax debt: if the solution sounds too good to be true, it is too good to be true. Consider this: The IRS Collection Statute of Limitations (CSED) is at least ten years from the date of assessment. Why would the IRS want to settle their debt for “pennies on the dollar”?
I recently attended a CPA forum of fellow professionals who deal with IRS matters. The panelists all agreed that there are only three situations in which an Offer in Compromise, Doubt as to Collectibility, is appropriate:
1. The taxpayer is disabled and their income is equivalent to their expenses, now and in the foreseeable future
2. The taxpayer is elderly, on a fixed income, and their income is equivalent to their expenses, now and in the foreseeable future. Also, the taxpayer has no equity in assets.
3. The taxpayer is incarcerated for a considerable period of time
I agree with their assessment on the OIC program. But there are other, more realistic options, that may get you peace of mind. These solutions are tailored to the taxpayer’s financial situation. These solutions include, but are not limited to:
Tax Abatement programs
1. Offer-in-Compromise: Doubt as to Liability
2. Offer-in-Compromise: Doubt as to Collectibility
3. Offer-in Compromise: Effective Tax Administration
4. Offer-in Compromise: The Partial Pay Installment Agreement
5. Innocent or Injured Spouse Relief
6. Amended tax returns to reduce liability
7. Audit Representation
8. Civil Penalty Trust Fund Negotiation
9. Collection Appeals Program
10. Collection Due Process Appeal
11. Audit Reconsideration
Affordable payment plans
12. 60 month payment terms
13. Ability to pay payment terms
14. Use of net realizable equity to pay-down liability- lien subordination
15. Currently Not collectible Status (CNC-Status 53)
16. Negotiated 30 to 120 day extension to pay
17. Negotiated 12 month payment plan for the lifestyle adjustment
Penalty Abatement programs
18. Penalty Abatement request for reasonable cause
19. Penalty Abatement request for IRS error
Tax Expiration Programs
20. Statute of Limitations
21. Defunct Business