IRS Debt: The stuff of sleepless nights and serious regrets.idea_lightbulb_cartoon2-thumb-375x491-53213

If you have a serious tax debt ,you may have some regrets and worse…you may feel as if there won’t be a viable solution.

I can tell you though that for many people with serious tax debt problems, there is hope. Many of my clients can attest that if you are willing to create a plan, and combine it with some patience and hard work, you can substantially reduce or even eliminate the debt.

The following legal methods are the most common ways we do it.

1. IRS Statute of Limitations

The time period the IRS has to collect is limited to ten years by 26 U.S.C Section 6502. The 10 year date is important, and we often use a payment plan or non collectible status to get to it.

Here is an example:

My client had a tax debt that had grown to $100,000.00 over the course of 7 years. He had been in and out of payment plans with the IRS. His tax debt had reached an age that it was dischargeable in bankruptcy but he didn’t want to file a bankruptcy. He would have “qualified” for an offer in compromise with the IRS as well.

However, he was going to retire and his income was going to drop in half. That reduction in income allowed him to negotiate a new and very small payment plan with the IRS of $50.00 per month. As his new income was not going to increase and his overall situation was going to stay substantially the same, he decided to finalize the payment plan negotiation and wait for 3 years.

At the end of the 3-year waiting period, he had paid approximately, $1700.00 toward the $100,000.00 debt, the remainder was wiped away and the IRS lien was released.

The above scenario is common, and much more common than you would think. In many cases it is wiser to “lay low” and let the clock run, than to take a more of a risk in terms of cost and file an IRS offer in compromise or a bankruptcy that will stop the statute of limitations clock from ticking away.

2. Challenge the Amount of the Tax Debt

The IRS assesses incorrect tax debts all the time. These incorrect assessments are typically the result of an IRS audit during which the taxpayer wasn’t able to prove the case or the creation of an incorrect return by the IRS because the original return was never filed.

Here are some options:

Appeal the Audit Result

IRS Audits can be appealed and they can be appealed all the way to the US Tax Court if the rules are followed. If you know that the IRS got it wrong, appealing the case may be the best option.

Appealing the IRS Substitute Tax Return

If the IRS files a return for you, it is usually incorrect, and often results in a debt that is larger than it should be. The IRS uses this incorrect debt to engage in collection activity.

These incorrect returns can be appealed as well. Most people don’t file the appeal on time, and in those cases a process called an “Audit Reconsideration” is used. The IRS will usually accept a correct return during the Audit Reconsideration process, and replace the incorrect return reducing or even eliminating the debt in some cases.

Trust Fund Recovery Assessment – It can be challenged

If you are signing checks, or making decisions about which bills should be paid for a business you can be held personally responsible for the trust fund portion of any employment tax the business should be withholding. If the IRS issues this assessment, you must consider appealing the decision or you will have a debt that is not dischargeable in bankruptcy and that is typically very large.

Innocent Spouse Relief – If you didn’t know you shouldn’t have to pay

Sometimes the spouse will hide some things from you like the fact that he or she didn’t disclose all of the income earned at the business on your joint return. There is often egal redress for the innocent spouse in these types of cases.

3. IRS Offer in Compromise

The US Tax Code at 26 U.S.C Section 7122 lays out the law regarding the IRS Offer in Compromise. The IRS Offer in Compromise is just the Government’s program for those it believes have little ability to pay all if the tax debt over a period of time. The amount the IRS uses to determine whether the debt can be paid or not, is called the “IRS reasonable collection potential”.

In the past, most IRS Offers in Compromise failed and they did primarily because the formula used to determine the reasonable collection potential was weighted in the IRS’ favor.

In May of 2012, the IRS changed the rules. We think that these rule changes will increase the number of successful Offers in Compromise. Anyone with serious tax debt should have an experience tax resolution attorney analyze whether an offer will make sense.

4. Bankruptcy

Many aren’t aware that bankruptcy can be a powerful option in dealing with IRS debt. Certain tax debts can be reduced or even eliminated in bankruptcy. bankruptcy.

The most important thing to understand about tax debt and bankruptcy is that the bankruptcy code trumps the IRS. If an offer in compromise doesn’t make sense, the taxpayer will often end up making unreasonable payments to the IRS on the debt over a long period of time. A bankruptcy must be considered in those instances.

An installment agreement is often used prior to the filing of a bankruptcy primarily in order to ensure that the date requirements for discharge of the tax debt are met. The Bankruptcy Code requires that the tax is based on a return that was due at least 3 years prior to the bankruptcy filing and that the return was filed by the taxpayer at least 2 years prior.

We have used bankruptcy to help our clients eliminate or substantially reduce millions of dollars in tax debt. For many, it will be the best option in the end.

5. Penalty Abatement

There are upwards of 140 IRS penalties and each one of them has an exception based on “good faith”.

The most common penalties we see are the failure to file and the failure to pay penalties. These can be removed even though you filed the return late and paid the balance late, if you acted in good faith and there was some reasonable basis for the failure.
Removal of these penalties can help in cases where the taxpayer will end up paying most of the debt in an IRS payment plan.

If the debt will be reduced in an IRS offer in compromise, or in a bankruptcy, the amount of the penalty is usually irrelevant and no request for penalty abatement is necessary.

Unfiled Tax Returns? There are some things you need to know

Sharing income with the Government is a burden and a responsibility we share. Many of us think that it is the now later-thumb-375x248-53125worst way to raise revenue, but it is the law and failure to do so can result in serious problems. Despite this, there are millions of people in the U.S. who are late filers. If you are a late filer you are worried and want to do something about it.

Here are several things to consider as you prepare the returns.

1. You are going to lose some refunds

The IRS is allowed to keep the refund you were supposed to receive if you don’t file the return in question within three years of its due date.

2. Lost Earned Income Credit

That same 3-year rule applies to the Earned Income credit. Don’t file the return within 3 years of due date? Lose it as well.

3. Your debt will be larger than it should have been

The IRS gets to tack on a penalty for filing the return late and a penalty for paying late. Interest is added to the debt and the penalty amounts. Old return filings cause the debt to be doubled in many cases.

4. IRS Substitute Return

The law requires that people who pay you tell the IRS about it. The IRS can use this documentation to create a return for you. It then uses the return to collect even though it is usually over-stated and incorrect. In our office, this is a big problem, as many of our clients could have removed tens of thousands of dollars of tax debt via bankruptcy if they had filed the return before the IRS filed the substitute return.

5. IRS Prosecution

The willful failure to file a tax return is a misdemeanor and can result in a sentence of up to one year in prison for each tax year not filed. The IRS does prosecute the cases.

6. Avoiding IRS Prosecution

Most people with unfiled returns aren’t charged with a crime for a few reasons:

a. It is difficult for the IRS to get to everyone. There are lots of non-filers and not enough employees in relation. This is changing thanks to upgraded computer systems.
b. If you come forward before an IRS investigation or examination ensues, you should avoid prosecution. This is current IRS policy.
c. The IRS can’t prosecute the failure to file a tax return if the return was supposed to be filed more than 6 years ago.

7. The substitute return can be “replaced”

The substitute return mentioned above can be replaced via the audit reconsideration process. The IRS will typically accept your correct return and replace its incorrect substitute return with it. There are situations in which you will want to leave the return the IRS has done in place. Get some help with this.

8. IRS files first? Bankruptcy probably won’t wipe away all of the debt

In most Jurisdictions, an IRS substitute tax return ruins your ability to treat the debt as dischargeable in bankruptcy. I constantly tell people with unfiled returns who think they may owe large sums when the returns are filed to file them right now. You must beat the IRS to the punch because bankruptcy may be your best option and you will ruin your chances to use it by filing after the IRS does.

9. The Tax Return doesn’t have to be perfect.

Many people don’t get the returns done because they feel like they don’t have all the proof they need to create a correct return. A perfect return isn’t required though. You can recreate the numbers using a reasonable basis and make a best estimate. The “Cohan Rule” has helped thousands who don’t have good records.

IRS LEVY: 13 Situations When the IRS Can’t or Won’t Levy your Assets or Garnish your Paycheck

IRS tax debt will result in an IRS levy unless one of following situations exist.


If an IRS payment plan has been arranged or you have been able to convince the IRS to place you on non -collectible status and you are following through with the agreement, and your situation hasn’t changed dramatically, the IRS cannot engage in collection activity.


Normally, the IRS has “retracted” the payment plan because you have failed to make a payment. There are other reasons as well, and if any of them apply the IRS CANNOT collect from you for a 30-day period after it sends the termination notice.


If you timely appeal the termination of the installment agreement, the IRS cannot collect until the appeal is heard.


The IRS won’t collect after you file a proper offer in compromise request and during it’s appeal.


In order for the IRS to collect on an assessed debt, it must send you via certified mail its “Final” notice of intent to levy account or garnish wages. It can’t collect until it has done this unless it can show that the situation meets the requirements for “jeopardy” collection. An appeal can be filed when the Final Notice is received. Collection action is stayed during this appeal process as well, which may last for a number of months.


The Bankruptcy Code is a powerful document. Section 362 says that a bankruptcy filing stops virtually all collection activity, even IRS collection activity. A side benefit is that it also can help to reduce or eliminate certain tax debts.


The IRS only has 10 years to collect a debt from the date it is assessed. More people than you might think use the 10-year rule to their advantage by combining with an IRS payment plan or non-collectible status that pays a fraction of the debt before the statute removes the remainder.


The IRS won’t take assets if there won’t be “”sufficient net proceeds” after the sale of the asset to apply to the debt. The IRS is prohibited from taking household goods and furniture valued to $7900.00. It is also barred from taking child support, clothing, or unemployment checks.


If you have personal assets that will pay the debt and you own business assets that are being used to keep your business running and income flowing, the IRS won’t take the business assets without approval from the IRS Area Director.


If you meet the requirements to file an Innocent Spouse claim, and you file it properly the IRS should stop collection activity.


Try to provide some proof to the IRS that the debt calculation is wrong. This should slow down collections. (IRS Policy Statement 5-16)


If you are facing a real hardship as a result of the collection activity, i.e. inability to pay for basic expenses, keep the lights on, pay rent; the IRS will temporarily suspend collection activity while you prove your financial condition.

Debt Settlement Plans – Watch out! It’s a Trap

A few weeks ago, the National Association of Consumer Bankruptcy Attorneys (NACBA) issued a “Consumer Road_runner_cartoon-5216-thumb-375x405-52308Alert” regarding Debt Settlement Companies. I have attached the document and you can read it here: NACBA debt settlement trap consumer alert.pdf

The paper makes some points that I think every person in Arizona with serious credit card or other consumer debt needs to be aware of.

The main point is that most “Debt Settlement” companies promote a scheme that usually doesn’t work.

Problems with most “Debt Settlement Plans”


The first problem the article points out is that most debt settlement companies encourage consumers to default on the debt. Most creditors and collectors won’t discuss the reduction of principal balances unless the consumer is late on the payment.

The problem is that If the debt isn’t settled, the default causes a higher interest rate, penalty, collection calls and letters, credit score reductions and an eventual lawsuit.
Of course, the debt isn’t usually settled, and the situation is much worse as a result.

Taxable Income

If the debt settlement is successful, the creditor will issue a 1099 to the IRS. The IRS considers the forgiven portion of the debt to be income and unless the consumer meets the “insolvency” test, he or she will have to pay income tax on the forgiven debt.

If the consumer is embarking on a debt settlement plan, he or she should first seek some guidance about whether the best settlement will result in a large tax bill and if so, whether that will negate the effectiveness of the settlement.


Most companies that sell debt settlement services charge a percentage of the debt or a percentage of the savings. I have seen fees as high as 33% of the overall debt. Often the fee is comprised of some sort of set up fee as well, and maintenance fees each month and in addition to a percentage of savings.

If the debt is $50,000.00 and the settlement is 50% of the total, a fee structure based on a set up fee of $1500.00, a monthly maintenance fee of $250.00, and a percentage of savings Fee of 1/3 could be as high as $12,750.00.

If the consumer is forced to pay tax on the forgiven $25,000.00 at 10% that is an additional $2500.00 cost.

Using that example, the cost of the settlement could be as high as $15250.00, an overall total savings in that scenario of about $10,000.00

There are two problems with this:

1. In exchange for what the company is doing, the fees can be really high

If the debt settlement company charged a $250.00 hour rate for all the work related to settling a $50,000.00 debt for 50%, over a period of several months, the fee would be a fraction of what the typical debt settlement fee is.

Most debt settlement work is clerical and phone call oriented. There is no “secret”. The debt settlement company is not typically a Law Firm. It can’t represent the consumer in court, threaten bankruptcy, represent the consumer in a lawsuit, or file a Fair Debt Collection Practices Act claim. It can’t even stop phone calls, collection letters, or a lawsuit from being filed.

Debt Settlement companies aren’t regulated. Fees are based on sales skills, which are often better than negotiation skills.

2. The consumer can usually obtain a result that is superior overall, to what the Debt Settlement Company can provide

If a creditor sees that the consumer is delinquent and has a debt settlement policy in place, it may offer to settle the debt for a reduced amount just because it has been asked to do so. It is often the case that a debt collector will immediately offer 40% to 50% reductions in principal for cash payment.

Debt Negotiation Firms are hoping that the debt collector will fold quickly. The percentage of savings or debt fee structure relies on it.

I have seen many consumers obtain terrific settlements on delinquent debt and without paying any fee.

If the consumer needs representation, he or she will be far better served paying an hourly rate for services. A licensed and regulated debt attorney who knows the law and can actually use it to the consumer’s advantage should at least be consulted.

Many Debt Settlement Plans Fail Even Though a Settlement is Reached

Even if the creditor or collector agrees to the reduction in debt, the agreement usually requires that the settlement be paid in full. Most debt settlement schemes attempt to solve this problem by making the consumer set aside money each month.

The problem? In many cases, the company is keeping their fee or getting it pre-paid from the savings the consumer is sending to them. Many will make sure the fee is paid before any money is set aside for settlement purposes.

As a result, it often takes many months or even years before there is enough money in the “account” to “settle” the debt. By the time the day comes that the money is saved, the debt has grown out of reach, and the consumer’s wages are being garnished.


If you live in Arizona and have credit card debt or other consumer debt you should think long and hard about the following before you hire a debt settlement company to help you:

1. Will you have the money to settle the debt and when?

2. Can you do it yourself or would it be wiser to hire someone to help at an hourly rate?

3. Are you prepared to hire an attorney to help you defend or deal with a lawsuit while the debt negotiation process is in place?

4. Have you discussed bankruptcy with an experienced attorney so that you understand all of your options and compared those options to the debt settlement program you are considering?

5. Have you made sure that you won’t owe tax on any forgiven debt or at least that the additional tax will be justified by the amount of the settlement?

I suggest that you review all options before embarking. Contact an experienced attorney who has settled debt and who deals with bankruptcy so that you can get both sides of the story, and read the NACBA Consumer Alert about Debt Settlement before you proceed.


Dealing With IRS Automated Collections: 5 Tips to make it easier

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When the IRS “assesses” a debt or enters the amount you owe into it’s system, the case is sent to the IRS Collections Division.

There are two types of IRS Debt Collectors:

1. The IRS Revenue Officer
2. IRS Automated Collections

In the very old days, the case always went to a warm body. Someone who could make a knock at the door and sits down with you at the kitchen table. In the 1980s, the IRS developed an automated system in an effort to streamline the collection process.

Most cases start with this system which is called the Automated Collection System (ACS). ACS employees have the authority to issue levies, correspond in writing and deal with you over the phone. The first verbal interaction with the IRS you will likely have, will be with an ACS Employee.

Dealing with the ACS Personnel Can be Frustrating

Dealing with the IRS ACS can be frustrating for a variety of reasons. The most common are these:

1. The employees aren’t always as knowledgeable as local Revenue Officers about substantive tax law. Most of the employees don’t even know what your “rights” are.
2. The telephone wait can be very long. Calls are often dropped and mistakes are made on their end, causing the call wait time to re-start.
3. You will not be working with the same person every time you call. The new employee must read the previous employees’ notes, which are often incomplete and surprisingly incorrect.
4. The ACS employee can be impersonal and will sometimes be rude.
5. The ACS employee won’t/can’t explain your legal options are and how they work. Many end up in a payment plan with the IRS that is much too high as a result.
6. The ACS employee’s authority is limited. There are situations that fall outside their employee’s guidelines and that will have to be dealt with by a Revenue Officer.

5 Tips that will make it easier to deal with ACS

1. Speak kindly. Rudeness may make the situation worse. ACS Employees will hang up the phone. A political lecture will go nowhere as well. If the employee is not following the law, ask for her manager. If the employee is rude, it may be best for you to hang up and try to call back later and deal with someone else.

2. Don’t lie. The ACS employee is going to ask you a number of questions. It is a felony to give false information.

3. Speak with an experienced tax and bankruptcy attorney first. Knowledge will give you confidence and help you to avoid a mistake.

4. Be aware that the ACS employee isn’t trying to help you. No matter how nice the ACS employee is, his goal is to get a payment amount from you to pay the debt in full. The employee doesn’t care about bankruptcy, offer in compromise, or other legal options and unless you press the issue, he doesn’t care that much about your actual budget.

5. Be prepared. Study the rules regarding installment agreements, non- collectible status, and IRS allowable budget standards. Know your income, budget and asset numbers cold.