Considering an IRS Offer in Compromise? 12 Things You Need to Know
1. Tax Returns must be filed
All required tax returns must be filed. If a return is missing the IRS won’t discuss settlement.
2. The amount of the settlement isn’t about the amount of the debt
The IRS looks at income, budget and assets to determine the amount that it will accept in exchange for forgiving the rest, not the amount of the Debt. The debt could be ten thousand or one million, the settlement should be the same.
3. The IRS can use a budget that isn’t your actual budget in determining settlement amount
In determining the amount of the Offer, the IRS gets to use a budget that it thinks you should be living on even if that is lower than what you actually spend.
4. The IRS will reduce value of property
In calculating the Offer in Compromise amount that it will accept, the IRS will reduce the value of your assets to quick sale value. This typically means a reduction in value by 20%.
5. You can appeal
If the Offer in Compromise is rejected, the decision can be appealed.
6. Collection Due Process Appeal stops collection activity and allows for Tax Court Involvement
A Collection Due Process Appeal can be filed after the IRS sends you a “Final Notice of Intent to Levy”. Filing the appeal provides you more than just additional time to figure out how to deal with the debt, it also provides you a “golden” Ticket to Tax Court. If you file the Offer in Compromise as a part of the appeal process and it is rejected, you can file a Tax Court Petition to appeal the decision. This is often a better option than an internal IRS appeal.
7. All Types of Tax Debt can be compromised
All Federal Tax Debt can be compromised. This includes debt based on Substitute Tax Returns prepared by the IRS. Not all tax debt is dischargeable in Bankruptcy.
8. Effective Tax Administration – Sometimes the IRS settles a debt because it is “fair”.
The IRS doesn’t always have to compromise a tax debt just based on assets, income and budget. It can also compromise the debt if taxpayer has special circumstances . These may be possible even if the taxpayer can afford to pay the entire debt.
9. Bankruptcy may play a role
If you have tax debt that could legally be wiped away in a bankruptcy and you are otherwise a candidate for bankruptcy, this may be important in convincing the IRS to settle the tax debt. It is important as a result to know your how bankruptcy may affect your debt and whether you may be a candidate for bankruptcy.
10.The Offer can be submitted anytime
The offer can be submitted anytime after the tax is assessed unlike in bankruptcy, which requires a waiting period for discharge.
11. Debt can be compromised before assessment
The tax debt can be compromised even before the assessment in an audit situation. Before agreeing to an amount with the IRS auditor, the IRS Offer In Compromise might be used to determine the amount of the accepted offer and then it can be compared to the costs of tax court litigation for the IRS and the taxpayer. This may result in a more positive audit result.
12. An Offer can be filed more than once
An offer in compromise can be filed more than once. Each filing probably makes success more difficult, but a poorly done and rejected Offer can be reworked and resubmitted.
Filing For Bankruptcy? 33 Dates You Should Be Aware Of
1. 10 YEARS BEFORE FILING BANKRUPTCY – NON-EXEMPT PROPERTY CONVERTED TO EXEMPT PROPERTY If you owned property within the last 10 years and it was “non-exempt” property, i.e. property not protected from creditors or from the Bankruptcy Court, AND you contributed the property to your otherwise exempt homestead or to a burial plot with the intent to hinder, delay or defraud a creditor, the value of that contribution may not be exempt. If you placed the non-exempt property in trust for the same purpose, the transfer could be avoided.
Lesson – If…any time during the last ten years you moved assets in relation to creditor problems, talk to an experienced bankruptcy attorney before you file for bankruptcy.
2. 8 YEARS BEFORE FILING BANKRUPTCY – PRIOR CHAPTER 7 BANKRUPTCY FILING PREVENTS CURRENT CHAPTER 7 BANKRUPTCY FILING
You aren’t allowed to receive a discharge in a Chapter 7 Bankruptcy if you received a discharge in a Chapter 7 Bankruptcy Case filed within the last 8 years. You can obtain a bankruptcy discharge if the prior bankruptcy was within the last 6 years and as a result of a chapter 13 case in which you paid 100% of unsecured claims or 70% of allowed unsecured claims and you proposed the case in good faith and used your best effort to complete it.
Lesson – If you filed a previous bankruptcy make sure that you have calculated the filing date right and prohibition date for the new case.
3. 4 YEARS BEFORE FILING BANKRUPTCY – PRIOR CHAPTER 7 BANKRUPTCY FILING PREVENTS CURRENT CHAPTER 13 BANKRUPTCY FILING
No discharge is allowed in a chapter 13 case if you received a discharge in a chapter 7 case that was filed within the last 4 years.
Lesson – Same as lesson in number 2 above
4. 3 YEARS 4 MONTHS BEFORE FILING BANKRUPTCY – HOME EQUITY EXEMPTION LIMITED POSSIBLY
You cannot exempt equity in your home more than $125,000.00 if acquired 3 years, 4 months prior to filing. (Time Limit doesn’t apply if moved equity from prior residence located in same state and in Arizona see the McNabb case).
Lesson – This is a tricky rule and one you should speak to counsel about if your home has more than $125,000.00 in equity.
5. 2.5 YEARS BEFORE FILING BANKRUPTCY – PAY MARKET VALUE FOR CAR
A highly relied upon rule exists that says that if you purchased a vehicle more than 2.5 years before your chapter 13 filing, you may be able to pay the lender just the value of the car and not what is owed on it if it is upside down. Car must be for personal use.
Lesson – Car older than 2.5 years and underwater? One reason to consider a chapter 13 bankruptcy instead of a chapter 7 bankruptcy
6. 2 TO 2.5 YEARS BEFORE FILING BANKRUPTCY – WHICH STATE’S EXEMPTION LAWS YOU GET TO USE
When you file for bankruptcy you are entitled to protect certain assets. Bankruptcy Lawyers call those protected assets “exempt” or the laws that protect the assets “exemptions”. Which set of laws or exemptions you get to use to protect your assets in a bankruptcy case are determined by the State of your residence for the last 2 years before you file the case.
BUT if you didn’t live in a single state of 2 straight years, then the exemption laws you use are determined by where you were domiciled the 6 months preceding the 2 years before filing.
BUT if that state doesn’t permit a non-resident to use it’s exemption laws, then you may choose the Federal Exemption Law to protect your assets.
Lesson – Talk to an Experienced Bankruptcy Lawyer if you have been moving around a bit and have assets you are concerned about.
7. 2 YEARS BEFORE FILING BANKRUPTCY – CHAPTER 13 TO CHAPTER 13
You can’t receive a discharge in a chapter 13 case if you filed a chapter 13 within the last two years and received a discharge. Rare.
8. 2 YEARS BEFORE FILING BANKRUPTCY – TRANSFERRING ASSETS – POTENTIALLY BIG PROBLEMS
You can be denied the bankruptcy discharge if you tried to hinder, delay or defraud a creditor by transferring, destroying or hiding an asset within one year prior to the bankruptcy filing. The Trustee can retrieve the property if the same was done within 2 years if the transfer was completed for less than market value.
Lesson – Don’t give stuff away, sell stuff for less than it is really worth, or hide things just to avoid creditors. You should be especially careful if you have done these things within the last two years and are considering a chapter 7 or chapter 13 bankruptcy. Also take into account your State’s Fraudulent Transfer Statute. In Arizona the look back period is 4 years.
9. 1 YEAR BEFORE FILING – PAYMENTS TO RELATIVES OR “INSIDERS” FOR DEBTS OWED CAN CAUSE A PROBLEM
If you pay someone back money you owe them and you know them pretty well, the Bankruptcy Trustee may be able to ask for the money back if the payment was made within a year of the bankruptcy filing. There is a small amount you are entitled to pay back. In a chapter 13 case you may be able to pay the amount transferred to your other creditors in the plan and protect your Auntie Velma from having to pay the money to the Bankruptcy Trustee.
Lesson – If you have paid money back to a creditor who is also related to you, or close to you in some way, talk to an attorney about what could happen to that person…but only if you want to be comfortable at your next Thanksgiving Dinner.
10. 180 DAYS BEFORE FILING – NO FILING NEW BANKRUPTCY CASE
If you filed for bankruptcy previously and the case was dismissed because you ignored the judge, didn’t show up for a hearing, or filed a request for dismissal after an automatic stay was granted to a creditor (difficult in a chapter 7)…you may not be able to file another bankruptcy for 180 days.
Lesson – Recent filing? It may be best to wait the creditors out before filing again.
11. 91 DAYS BEFORE FILING – MINIMUM RESIDENCY REQUIREMENT
You have to be a resident in the state in which you are filing for at least 90 days. It isn’t true that you can move to a new state and file a bankruptcy the next day, unless that new state has been their principal place of business or the location of their principal assets for the majority of the last 180 days.
Lesson – Get your calendar out right after you drop off the U-Haul.
12. 90 DAYS BEFORE FILING – PAYMENTS TO CREDITORS
The amount you can pay to creditors within the 90 days prior to filing the case is limited. It can be considered a “preference” and recovered by the bankruptcy trustee unless it was a payment made in the ordinary course of business or “financial affairs of the debtor”.
Lesson – If you owe your favorite dentist a heap of money, and just prior to filing the bankruptcy you want to sell your non-exempt Star Wars memorabilia collection and pay him or her off, think twice. The Bankruptcy Trustee may sue the Dentist to recover the funds and your Dentist won’t like you anymore anyway.
13. 90 DAYS BEFORE FILING – 90 DAY CREDITOR ADDRESS RULE
If the creditor has contacted you within 90 days of the filing date, you really need to make sure that you have included any address(s) that were contained on the correspondence in the master mailing list.
14. 70-90 DAYS BEFORE FILING – CERTAIN DEBTS WON’T GO AWAY
If you borrow money or take a cash advance that are not necessary for the support of the family and do it within 70 or 90 days of your bankruptcy filing date, those amounts are presumed to be non-dischargeable if they are above 750 (cash advance) and 500 (luxury good and services).
Lesson: Just don’t borrow money for a long time before you file for bankruptcy.
15. 1 DAY BEFORE FILING OR 180 DAYS
You have to take a class before filing. You have to take the class within 180 days of the filing date and ideally at least the day before.
Lesson: People forget to take the class, take it and forget that it was a long time ago and then file or take it after filing. Map this out.
16. BANKRUPTCY FILING DATE – THE PETITION AND OTHER STUFF
A Bankruptcy is kicked off when you file a bankruptcy petition with the Bankruptcy Court. This creates an automatic stay that prevents most creditors from continuing collection activity unless you filed a prior bankruptcy in the last 12 months then the stay is only good for 30 days unless the Judge decides otherwise. If two cases were filed in the last 12 months no stay exists at all.
Don’t forget to file the Verified statement of your social security number and the credit counseling certificate for the class you took within 180 days of filing.
You must understand exemption law when you file and what is or is not property of the bankruptcy estate. You must have also correctly completed the means test.
The process of filing the case comes with it’s own set of rules and requires the preparation of 60-100 pages of detailed disclosures and information.
Lesson: Sometimes it’s better to have some help
17. AFTER FILING – DOMESTIC SUPPORT OWED
If you owe child support or spousal maintenance on the date you file the bankruptcy, then the Bankruptcy Trustee is required to provide the person owed money that assistance is available and when the case is “discharged” the Trustee is required to give up your last known address and where you work.
Lesson: Make sure you disclose whom you may owe and amounts in your schedules.
18. 5 DAYS AFTER YOU FILE THE BANKRUPTCY PETITION – MASTER MAILING LIST, SOCIAL SECURITY NUMBER STATEMENT AND CREDIT COUNSELING CERTIFICATE
Three things you must do within 5 days of filing.
The Master Mailing Matrix has to be filed
The Statement of Social Security Number has to be filed
The Credit Counseling Certificate must be filed.
Failure to do the first or third results in automatic dismissal of case, failure to do the second is potential dismissal.
Lesson: It is always the small things that can ruin your day.
19. 10 DAYS AFTER FILING THE BANKRUPTCY PETITION – PRESUMPTION OF ABUSE
The Clerk of the Bankruptcy Court must give notice to all creditors if there is a presumption of abuse to within 10 days of filing.
Lesson: It is important to understand the bankruptcy means test and it’s relation to the success of your case.
20. 15 DAYS AFTER FILING THE BANKRUPTCY PETITION – REMAINING DOCUMENTS FILED
If you haven’t filed the schedules, paystubs, means test, receipt of 342(b) notice, and the chapter 13 plan if not filing a chapter 7 bankruptcy, when you filed the petition they are due within 15 days.
Lesson: It is usually best to have the schedules and plan completed and filed with the petition and schedules. Not only to avoid problems with filing them late but also to make sure the case will work before you file the bankruptcy petition.
21. 14-21 DAYS AFTER FILING THE BANKRUPTCY PETITION – THE COURT MAILS NOTICE OF BANKRUPTCY TO EVERYONE
The Bankruptcy Clerk is going to mail a notice to everyone, this takes about 2-3 weeks. The notice tells creditors when the 341 meeting is, when to object to discharge and when to file proofs of claim:
Lesson: Sometimes creditors need to know about the bankruptcy long before 2-3 weeks arrives. If you are being garnished, facing a foreclosure or repossession, you may want to let specific creditors know about the Bankruptcy the day you file.
22. 30 DAYS AFTER FILING THE BANKRUPTCY PETITION – STATEMENTS OF INTENT
You have to file a document called a “Statement of Intention” within 30 days of Petition filing. This statement tells everyone what you intend to do with property that is security for a loan. There is a requirement to file the same thing regarding unexpired leases as well.
Lesson: What you are going to do with property that is securing a loan can be a bit complex. Get some advice.
23. 30 DAYS AFTER FILING – DEADLINE TO MAKE FIRST PLAN PAYMENT IN A CHAPTER 13
If you filed a chapter 13 Bankruptcy case, you have to make your first plan payment by sending it to the Chapter 13 Bankruptcy Trustee’s special address for receipt of plan payments. He or she should provide you instructions regarding this prior to the deadline.
Lesson: Remember Chapter 13 Bankruptcy is different than Chapter 7 Bankruptcy. You are paying money into the Trustee to be distributed typically on a monthly basis for a defined period of time.
24. 45 DAYS AFTER FILING THE BANKRUPTCY PETITION – AUTOMATIC DISMISSAL
Your case gets dismissed automatically if you filed some of the thing mentioned above like, creditor mailing matrix, schedules, paystubs, etc. Lesson: You are seeing that the bankruptcy code is full of deadlines. Pay close attention.
25. 20 TO 50 DAYS AFTER FILING OF BANKRUPTCY PETITION – MEETING OF CREDITORS
The Bankruptcy Code requires that you attend a creditors meeting. You get noticed of this date, time and place when the court issues the Notice of Bankruptcy. If you don’t show your case can be dismissed. As a side note: prior to this hearing by 7 days, you have to have a copy of a tax return for the last year a return was actually filed to the Trustee.
Lesson: Everyone with an interest in your case gets a shot at questioning you. Most won’t but that doesn’t mean you shouldn’t be prepared.
26. 60 DAYS AFTER FILING – PROOF OF INSURANCE
In a Chapter 13 case you have to provide proof that your personal property that is acting as collateral is insured.
Lesson: Nice little side issue that routinely is forgotten about until it isn’t.
27. 30 DAYS AFTER CREDIT MEETING – YOUR EXEMPTIONS MAY BE IN TROUBLE
The Trustee and Creditors have 30 days after the creditor meeting is over to object to any exemptions you have claimed as to your property.
Lesson: Make sure before filing the case that your property is exempt or that you have accepted the fact that it isn’t.
28. 35 DAYS AFTER CREDITOR’S MEETING – CHAPTER 13 TRUSTEE HAS TO FILE A RESPONSE TO YOUR PROPOSED PLAN
In a Chapter 13 case, you have to propose a “Plan”. That plan must comport to a number of rules, laws and customs in order to be approved by the Judge. The Trustee gets his or her say in the matter and files this response about 35+ days after the Creditor’s Meeting. This response will typically pick apart your plan if it has weaknesses.
Lesson: Most Chapter 13 Bankruptcy cases filed without experienced legal counsel fail. The vast majority. Many fail even with experienced counsel. If a Chapter 13 bankruptcy is necessary, you have a much better chance if you enlist the help of someone who has done it many times before.
29. 45 DAYS AFTER CREDITOR’S MEETING – STATEMENT OF INTENT AND ANOTHER CLASS
Remember the Statement of Intent you filed? Whatever you intended has to be done by now. You also have to take a second class and file the certificate proving that you took it with the Court.
Lesson: Just because you went to the 341 meeting, the work isn’t over. Deals with creditors and more class time are just two examples.
30. 60 DAYS AFTER CREDITOR’S MEETING – CREDITORS AND OTHERS HAVE TO TAKE ADVANTAGE OF MOMENT IN THE SUN
You are proposing to reduce or eliminate debt you owe. Don’t be surprised if some feelings are hurt. Your creditors can and must within the 60-day deadline object if they are going to do so to the discharge of a debt or all debt. The same deadline applies to motions to dismiss for abuse of the code under 707(b).
Lesson: There is a lot of research you need to do about which debts are non-dischargeable, what activity can cause a debt to be considered non-dischargeable and the effect your income and budget may have on your case.
31. 90 DAYS AFTER CREDITOR’S MEETING – NON GOVERNMENT CREDITORS NEED TO GET A MOVE ON
A creditor has to tell the Court what it is owed and prove it to some degree in order to get paid. In Arizona, the Trustee in a Chapter 7 case will often tell the creditors to hold off until it is known whether there is going to be any money to share.
Lesson: Whether a Creditor files a Proof of Claim or not may be important to your case.
32. 120 DAYS AFER FILING THE BANKRUPTCY CASE – IN A CHAPTER 7 CASE – DISCHARGE ENTERED
In a Chapter 7 case the Discharge of Debt is calendared. It isn’t necessarily permanent though. It can be revoked or maybe even left “un-entered” if you have been “naughty” and don’t comply with certain requests or get other things done on time.
Lesson: The Chapter 7 Discharge is the goal right? Pay attention so that you don’t lose it.
33. 180 DAYS AFTER FILING – PROOFS OF CLAIM BY THE GOVERNMENT BE FILED – A SPECIAL NOD TO THE IRS
The IRS and other government entities owed money by you have longer than the average bear to tell the Court how much is owed and why. This applies in both a Chapter 13 and in a Chapter 7 case.
Lesson: If you have government debt, especially tax debt, there may be some important issues here. Learn about what they are.
Millions of Americans fail to file tax returns each year for various reasons. The most common reason we see is simply procrastination combined with a dash of fear. Every late tax return filer worries about what the consequences might be. Some think about it every day of their lives. If this sounds familiar, here are nine things you need to know.
1. Lost Refunds In order to receive a refund if you are owed one, the return must be filed within three years of the due date. Yes ¦they will keep it no matter how large it is, and yes it is often a very large windfall for the government.
2. Lost Earned Income Credit
The 3 year rule strikes again. Failure to file within that time period means that your “Earned Income Credit” will be lost as well.
3. Lost Social Security Benefits
If you are self employed, you have to file returns reporting self employment income within three years of the due date in order to receive social security credits toward retirement.
Income is reported to the IRS both from employers and from others. So, even if you are self employed, the IRS may have information about how much your clients paid you in a given year. At some point, the IRS will use that information to create a tax return for you. It won’t be correct, as it won’t contain correct deductions. It can be used to assess a debt and begin the collection process however. The assessment of the tax based on a substitute return can also create other serious problems related to future tax debt options like bankruptcy.
The IRS is starting to catch up to the computer age. As a result, it has ramped up it\’s pursuit of non-filers. It can charge non-filers with a crime. The willful failure to file is a misdemeanor and can result in a sentence of up to one year in prison for each tax year not filed.
7. Avoiding Prosecution
Most people with unfiled returns will avoid criminal prosecution for three reasons.
Numbers: It is difficult for the IRS to get to everyone right now. There are just too many non-filers and too few employees in relation.
The Voluntary Compliance Program: If the non-filer attempts to come forward before an IRS investigation or examination ensues, he or she will usually avoid prosecution related to the failure to file the returns.
IRS can’t prosecute after six years: The IRS is barred from prosecuting the failure to file a tax return if the return twas due to be filed more than 6 years ago.
8. The substitute return can be challenged
The substitute return mentioned above can be challenged via the audit reconsideration process. This means that even though the IRS has filed the return with incorrect numbers, it will consider and usually accept your correct return even if filed much later. Whether it makes sense to use this process to deal with the debt, depends on the individual circumstances of the case.
9. If the IRS files Substitute Returns First – You can probably forget using Bankruptcy later to discharge the debt.
In most Jurisdictions, the filing and assessment of a substitute return by the IRS before you file the correct return makes it difficult to treat the tax debt as dischargeable in bankruptcy. If you suspect that you may owe a large amount of income tax debt and want to preserve the ability to discharge it in bankruptcy later, your returns should be filed before the IRS gets a chance to do it for you.
IRS DEBT? Don’t give the IRS more time to collect it by stopping the Statute of Limitations
The IRS Offer in Compromise isn’t the only way to reduce IRS debt. If you read our website and blog, you will find that it may not even be the best way.
Unfortunately, many Americans think that is the only way and that if it fails the IRS will be able to chase them around forever. It is important to understand that this isn’t correct. The IRS has a limited amount of time to collect a tax debt and it is often the case that taxpayers needlessly and unknowingly give the IRS more time to do so.
Internal Revenue Code Section 6502 places a time limit on the IRS’ ability to collect a debt. The time frame is 10 years from the date the IRS “assesses” the tax or writes the amount of the tax in a book. The IRS term for this statute is the Collection Statute Expiration Date or CSED for short. We often call it the IRS statute of limitations on collection but for purposes of this article we will call it the CSED as well.
The problem is this: Most of the popular legal methods used to deal with tax debt also stop this CSED “clock” from running, and in many cases it would make more sense for the taxpayer to just…let it run. Before attempting to discharge a debt in bankruptcy, settle it in an offer in compromise, remove it with an innocent spouse claim, or delay it with the filing of a collection due process appeal, you should be certain about a few things:
That you have a good chance of success
The success will result in less debt than waiting for the CSED
HOW DO LEGAL OPTIONS STOP CSED
IRS Offer in Compromise
A filed IRS Offer in Compromise stops the CSED for the time it is open plus an additional 30 days. The time an Offer is typically open is 6-12 months, but it can be open for longer than 1 year when time for appeals is included. Multiple offer filings exacerbate the problem adding the new time frame in the offer plus the additional 30-day time “penalty” each time.
Additionally, the vast majority of Offers in Compromise fail. In 2010 the acceptance rate was about 25%. The 2012 changes should increase that rate but we don’t expect the rate to increase dramatically.
The CSED is tolled while the offer is pending and the tolling ends when the offer in accepted. However, many offers in compromise require that the taxpayer pay the majority of the settlement amount over time during and after the offer is accepted. As a condition of an accepted Offer in Compromise, the taxpayer must remain current on all filings and payments for 5 years.
Imagine the following scenario and make the following assumptions about “Mr. Rogers”.
He has $100,000.00 in tax debt.
The CSED is 4 years away.
The best possible offer in compromise he will obtain is $20,000.00 payable over 2 years.
He files the offer in compromise and after appeal, it is accepted. He has been making payments toward the offer amount for 18 months at the time of acceptance and has 6 months remaining.
If he had negotiated a payment plan with the IRS instead of filing the offer in compromise, the payment amount would have been $400.00 per month.
As a result of the payment plan, he would have paid a total of $19,200.00. Again, he only had 48 months left on the CSED.
If the above were true, the payment plan would likely made more sense for four reasons:
The payment plan doesn’t stop the CSED.
The best offer amount is more than the highest payment plan amount.
The offer would stop the clock from running and if it failed for any reason, it would place him back where he started in terms of “time”.
If the Offer fails, the IRS keeps the money Mr. Rogers has paid in and the taxpayer still has 4+ years to make the $400.00 payments.
Bankruptcy extends the CSED by the time in bankruptcy plus an additional six months after it is closed. If the bankruptcy isn’t going to rid you of the tax debt obligation, the IRS will have this additional time frame to collect it.
Time is of course an element in relation to whether the Bankruptcy case can eliminate your income tax burden. The obligation on the income tax can be wiped away if the debt was from a return that was due to be filed more than 3 years before the bankruptcy filing and the return was filed more than 2 years before the bankruptcy filing. If the reason you are filing the bankruptcy is the result of the tax debt, than again, you must first compare the time remaining on the collection statute versus the time spent in the potential bankruptcy case.
A Chapter 13 Bankruptcy Case can last as long as 5 years. If the remaining time frame on the collection statute were less, filing the bankruptcy wouldn’t make a ton of sense unless you were using it to deal with other debt OR if the payment in the chapter 13 case were much less than the amount you would be paying the IRS in a payment plan arrangement. Chapter 7 bankruptcy cases don’t require a payment to be made over a long time frame. The typical chapter 7 case is about 6 months long. In many cases, it is wiser to wait for the tax debt to meet the time periods for discharge while waiting in an arranged payment, than to stop the clock in an Offer in Compromise. The payment plan allows the statute of limitations clock to continue running and the time periods for dischargeability of the income tax debt.
IRS Collection Due Process Appeal
The ability to file a Collection Due Process Appeal (CDPA) is an important legal right. If filed timely, it will stop IRS collection activity until an appeal hearing is held to determine collection alternatives. The downside? While waiting for the appeal hearing, the CSED is stopped. The time in appeal can include the 3-7 months waiting for the hearing date, and the time spent appealing the decision to Tax Court and wait for a decision. This may add up to a few years. Again, the IRS cannot collect during this time, but it gets that time back when the case concludes.
In certain cases, it makes sense to file the CDPA late as a result. A late-filed CDPA, if filed within one year of the date of the Final Notice of Intent to Levy, entitles you to an appeals hearing but DOESN’T stop the clock.
The right to an Equivalent Hearing doesn’t exist in Tax Law. No such verbiage exists in the Internal Revenue Code. The IRS has made it a matter of IRS administrative practice however.
The Internal Revenue Manual at 220.127.116.11.6 and the Treas. Reg 301.6330-1 contain the directive to IRS personnel. It also isn’t agreed to in every case, but the IRS usually agrees to stop the collection activity, provide the appeals hearing and all while the CSED continues to run.
There is another benefit to filing the request for a hearing late. Bankruptcy Code Section 507(a)(8) says that the timely filed CDPA request stops the time periods needed to make a tax debt dischargeable plus 90 days. The equivalent hearing doesn’t stop anything in relation to bankruptcy discharge timing rules.
The IRS cannot take collection action when a request for an installment agreement has been made and is being worked through. See IRC Section 6331(k).
It also can’t take collection action for 30 days after the Installment Agreement request is denied or terminated or while the appeal is pending.
There is a difference between the two statements above in relation to the CSED though. When the installment agreement is requested and is in place the CSED isn’t stopped. While the appeal of it’s denial or termination is taking place the CSED is stopped.
Appeals of a denied or terminated IRS installment agreement typically don’t take long so the extension of the CSED is not a huge deal. What is important here though is this, the Installment Agreement is often the most important tool you can use if you are trying to get to the CSED in the least amount of time. The amount you will have to pay in a properly arranged Installment Agreement when looked at in light of the CSED will often result in less tax debt in the end than an offer in compromise or a bankruptcy.
Innocent Spouse Requests
“Innocent Spouses” must be especially careful when deciding whether to use the Innocent Spouse rules to file a claim for removal of the debt, versus using the CSED. There is often an emotional element to the filing of the innocent spouse claim that overpowers the use of simple math.
Normally, a husband and wife who sign a tax return together are both liable for the tax debt. The IRS can try to collect the debt against each of them and it can do so even if one of the spouses didn’t earn the income and even if one spouse promises or is ordered to pay the tax debt as a result of a divorce decree or settlement.
The IRS rules allow for some relief but only if all the following are true:
There was a joint return filed for the year that resulted in the disputed debt.
There was a substantial understatement of the tax that was caused by an erroneous item on the return or the negligence of one spouse.
The “innocent” spouse didn’t know or didn’t have reason to know there was a substantial understatement of the tax liability.
It would be inequitable or unreasonable to hold the spouse liable for the liability
The problem is that, you guessed it…the filing and appeal stop the CSED from running. If the innocent spouse claim is weak and the CSED isn’t far off, it may be better to do the math, negotiate an installment agreement and wait for the date.
Anyone with serious tax debt should consult with an attorney well versed in tax collection law and bankruptcy law. That attorney should check the CSED as part of analyzing the situation as that date will be a determining factor in relation to what is done to reduce or eliminate the debt.
If you are thinking about filing an Offer in Compromise, an Appeal, a Bankruptcy or an Innocent Spouse Claim and haven’t considered whether the CSED will make a difference, find out before you start the process.
The IRS has the ability to file lien notices and to garnish paychecks, levy bank accounts and a myriad of other nasty things to collect a debt. It can do this all without a court order. Once the debt is “assessed” the collection arm of the IRS is able to begin the collection process.
There are a number of ways to stop the IRS from collecting without resorting to bankruptcy. Negotiation of a payment plan, filing an offer in compromise, appealing a final notice of intent to levy are all examples. Sometimes people aren’t great candidates for an offer in compromise, or can’t come to a reasonable agreement with the IRS on a payment plan or have missed an appeal deadline. In these circumstances and many others, the IRS will continue to collect.
Bankruptcy will stop IRS levy and IRS seizure immediately. Yes, the instant the bankruptcy is filed. The filing of a bankruptcy case creates what is called a “stay” and unless that stay is changed or modified by a bankruptcy judge, it continues the entire time the bankruptcy case is open. Read Section 362 of the Bankruptcy Code.
This stay applies even if the IRS has already issued a wage garnishment, a bank levy or has seized property. Those types of collection actions have to stop and be released immediately upon the filing of the bankruptcy case.
My favorite part of this is that there is no need to negotiate with the IRS in order to stop the collection activity. The stay is imposed by operation of bankruptcy law and trumps the administrative power the IRS has.
Now…just because the bankruptcy filing will stop the collection activity doesn’t mean it should be filed. Filing for bankruptcy is the result of a detailed analysis of all the facts, pros and cons by an experienced attorney and a lengthy discussion(s) between you and that attorney.
If after that process, a bankruptcy makes long term sense, filing it will put the IRS in it’s place.
If you have unfiled tax returns and the IRS is looking for them as they always do, you should know a few things:
1. The IRS has income and other information about you. You can get the info from them.
The IRS maintains a record of w-2 forms, 1099s, mortgage interest and other items that are legally required to be reported by employers and others on your behalf. If you haven’t filed in quite a while, you will probably need to ask the IRS for your “income history” for each year that is un-filed to help you in recreating your income and deduction numbers. You shouldn’t just rely on the IRS’ documents alone to re-create your history however.
2. The IRS typically requires the last six years’ returns be filed to be considered “compliant”….but,
IRS Policy Statement 5-133 and the Internal Revenue Manual at 18.104.22.168, tell the IRS to consider you to be “in the system” for purposes of working with you if the last 6 years have been filed. However, that doesn’t mean that the IRS will only ask for the last 6 years of returns. It may ask for returns that are older than 6 years. You need to talk to an experienced tax resolution attorney before deciding which returns should be completed and which should be filed.
3. Sometimes it makes sense to leave the IRS’ Substitute Tax Return in place and not do your own tax return.
If you don’t file a tax return for a while, the IRS will do it for you. It will do it wrong because it will only treat you as single and take no itemized deductions. This often results in really large debts as well. BUT…the IRS only has 10 years to collect a tax debt and even though it doesn’t have to respect this 10-year rule if you didn’t file the return, it usually will. So, if several years have passed since the IRS did the incorrect return and if your correct return will still leave a substantial debt, it may not be wise to file it in an effort to replace the IRS’ Substitute Return. Again, talk to an experienced tax resolution attorney about this.
4. Before filing the returns it is wise to determine how you are going to deal with the debt.
There are several options for most people. You may be able to settle it for a fraction in an IRS Offer in Compromise, pay a small amount or nothing in an IRS payment plan or non-collectible status, or you may be able to use the Payment Plan or Non-Collectible Status help you to get to bankruptcy and possibly wipe out most or all of the debt. If you cannot pay the debt in full in a reasonable amount of time, then bending over backward to get the returns just right especially if there are complicated expenses and deductions that must be estimated may be a waste of time. In fact, in some circumstances the higher the debt the better…again talk to an experienced attorney about why I say that.
5. In certain circumstances, the returns need to be filed very quickly
There are several common situations that mean you should get the returns done and with the advice of legal counsel get the returns filed….asap.
The IRS is getting ready to file a Substitute Tax Return
If the IRS is getting ready to file a Substitute Return and you know two things, one, that the debt will be high whether they file it or you do, and two, you may be a bankruptcy candidate down the road…you need to beat the IRS to the punch. Walking it into the local IRS office and getting a copy stamped isn’t a bad idea. The reason, if they beat you to it, the principal debt may not ever be dischargeable in bankruptcy.
The IRS is garnishing your wage or levying your bank account
Missing tax returns will create a situation in which the IRS can simply ignore your request to resolve the collection activity.
3 years are about to pass since the date the return was due to be filed and you expect a refund
If you file the return 3 years and 1 minute late, the refund you were owed is legally confiscated by the IRS and isn’t applied to your other debt.
6. Having someone with an experienced set of eyes review your tax return history is usually a wise investment
It’s important to have someone who deals with the IRS all the time, review the situation.
The result of an IRS audit is often a balance due. We are often asked several questions at the end of an Audit as a result. Questions like:
Will the IRS accept an amount less than what I owe and forgive the balance?
Will the IRS agree to a payment plan?
Will the IRS place a lien on my property if I am in a payment plan?
Can I use Bankruptcy to get rid of the debt?
Shortly after the audit related debt is placed in the IRS’ books it will start shooting letters to you. “Balance Due” letters and “Final Notice” letters will issue over a period of several weeks. You’ll receive a letter at the end of the string of letters called a “Final Notice of Intent to Levy”. This letter is important because it provides you the ability to challenge collection action by the IRS and request an alternative solution IF you properly reply to it within 30 days of it’s mailing date. The time between the assessment of the new debt and the date you get to discuss alternative solutions with the IRS usually provides enough time to analyze and plan your case.
Back to the common questions above:
Will the IRS accept an amount less than what I owe and forgive the balance?
The IRS will settle the debt IF you can prove that your “reasonable collection potential” (RCP) is less than the amount of the debt during an Offer in Compromise proceeding. Proving your RCP isn’t done by discussing your situation with the IRS. It is based on a formula. The formula is simple in theory, but the majority of people who try and prove that their RCP is low enough to require settlement of the debt…fail.
They fail for all sorts of reasons, but primarily because the filers aren’t great candidates. Or in other words, the RCP is high enough that the IRS believes it can collect all of the debt before the statute of limitations on collections runs out.
No matter what the IRS Offer in Compromise calculator you are seeing online says about your RCP, be skeptical, and get a second opinion from someone experienced with the process.
If you are a good candidate for an Offer in Compromise, then the answer to the question is yes, the IRS will likely settle the debt for less than what is owed and forgive the rest.
Will the IRS agree to a payment plan?
Yes in almost every case. There are several types of payment plans and which type you request and end up getting will depend on the amount of the debt, the time left in the statute of limitations period, your income, your budget, the budget the IRS believes you should have and your assets.
The most common type of payment plan(s) we see are streamlined plans. The debt in these types of plans are less than 50000.00 and the taxpayer can afford to pay the balance over 72 months. These types of plan allow the taxpayer to avoid submitting a full financial statement and if done properly can even prevent the filing of an IRS lien.
If the taxpayer can’t afford to pay the debt over 72 months or if the debt is greater than 50000.00, than the solution becomes a bit more complex and the factors mentioned above become very important in determining how much a payment plan will be.
In some situations it is possible to convince the IRS to take very small amounts each month or even nothing each month even if the debt is very high.
Will the IRS place a lien on my property if I am in a payment plan?
If the debt is less than 25000.00 and you enter into a certain type of payment plan, the IRS won’t record a lien notice. If they already have they will release it and even withdraw it from your credit report if you follow certain steps.
If the debt is less than 50000.00 and no lien notice has been recorded AND you enter into a streamlined payment plan that allows the IRS to take the payment from your bank or pay, the IRS won’t (or shouldn’t) file the notice of lien.
If the debt is above 50000.00 or one of the above two situations don’t apply, bets are off. You can expect the lien and will have to formally request that the lien notice not be filed and have a very good reason why it shouldn’t be.
A successful Offer in Compromise will result in a lien release as will an eventual bankruptcy where the debt is paid or discharged and there are few assets for the lien to remain attached to.
Life after an IRS audit involves dealing with the IRS Collection Division. In audits that result in money owed, it is recommended to be pro-active and to understand the next step that awaits you – IRS collections. There is no substitute for preparation.
Can I use bankruptcy to get rid of the tax debt?
A very strong…”it depends” applies here. Bankruptcy will discharge an obligation to pay income tax debt, penalty on income tax debt and interest on penalty and income tax debt. It will also discharge the obligation on certain other types of tax debt…but two things have to be true:
1. The tax debt has to meet the criteria for discharge both date criteria and other criteria. (Learn More)
2. You need to be a good candidate for bankruptcy.
If you have new debt which is the result of an audit, the debt won’t be dischargeable in bankruptcy from a date standpoint for at least 3/4 of a year depending on how old the tax year is. It may be 3+ years before it is dischargeable in bankruptcy from a debt standpoint.
We have many clients who use bankruptcy to deal with tax debt but these types of cases require real analysis, comparison to other options and usually some time spent in a payment plan before bankruptcy ends up making sense.
If you have been audited recently and you now owe money to the IRS, get your situation reviewed by someone who understands your options. Don’t just settle for what the IRS tells you to do, you may be able to reduce or eliminate the debt at some point.