What is the IRS Fresh Start Program?

download (4)The IRS Fresh Start program was created a few years ago.  It’s claim at the time was that “struggling” taxpayers needed some help so it changed some of the ways it did business with taxpayers.  The changes were done in three areas.  IRS Liens, IRS Installment Agreements and IRS Offers in Compromise.

It is debatable whether or not these changes have actually made the process of dealing with the IRS much easier, but if you owe the IRS money or have an IRS Lien, you should be aware of them.

IRS Lien and the Fresh Start Program

The IRS increased the threshold for filing a tax lien notice from $5000.00 to $10,000.00.

This wasn’t a large jump in amount.  In my opinion, it should have been at least a $25,000.00 limit.  I think that the IRS debated this issue as it did change it’s policy regarding the withdrawal of liens and used $50,000.00 as the thresh-hold amount.

Withdrawal of Notice of Tax Lien

Individuals

As mentioned, the IRS also changed it’s policy toward the withdrawal of a notice of lien when it added the ability for individuals, businesses with income tax debt, or entities that have gone out of business to request the withdrawal of a lien notice under circumstances.

The requirements for individuals to get the lien notice withdrawn are:

1.  The assessed balance must be $25000.00 or less;

2.  There must be full compliance, meaning un-filed returns;

3.  3 consecutive direct debit payments have to have been made and all the payments must be made by direct debit.

4.  You can’t have had a previously lien withdrawal for the same tax (unless lien was improperly filed);

5.  You can’t have defaulted on your current or any previous direct installment agreement.

6.  And the debt must be paid in full within 60 months or before the CSED Expires, whichever time is shorter.

Small Business

Small Businesses can qualify in much the same way, but only have 24 months to pay.

IRS Installment Agreement and the Fresh Start Program

If the assessed debt is $50,000 or less, the IRS now allows you to set an installment agreement without providing full financial information.  The debt is spread out of 6 years (used to be 5) or the length of time left in the CSED.  (Collection Statute Expiration Date)

In theory, this is a big deal.  People with higher incomes that are going to have large installment payments if the financial information is provided, can now avoid the large payments by paying the assessed balance down to the $50,000 threshold and setting one of these up.  They are relatively easy to set up and I have posted elsewhere instructions about how to do it.

The IRS’ generally won’t record an IRS notice of lien if one of these types of arrangements are set if it hasn’t filed one already.

If the assessed balance is less than $25,000.00 no financial information is necessary to set the payment plan up, and as mentioned above, if you are able to meet those lien notice withdrawal criteria that is an added bonus.

If a business is operating and it owes payroll taxes, the business may be able to take advantage of the “fresh start” program in relation to installment agreement if:

1.  The debt is $25,000 or less at the time of the agreement

2.  The payment plan is 24 months or less

3.  The payment is made by direct debit if the amount is between $10,000 and $25,000

4.  The taxpayer/business must be in compliance in all filing and payment requirements

Two benefits to this are:

1.  No financial statement is required.  This is great because it can be a real burden on a small business to put this together.

2.  No trust fund penalty is assessed against the owner for the trust fund portion of the payroll tax.  At least it isn’t supposed to be.

IRS Offer in Compromise and the Fresh Start Program

The OIC program allows qualified taxpayers to negotiate a settlement for an amount that is less than the tax owed. An OIC agreement won’t be accepted by the IRS if it believes that the outstanding liability can be paid in full in a lump sum or via a payment arrangement. The IRS reviews the taxpayers’ income, potential income, past income, expenses, assets, past assets and liabilities very closely to make a determination about the ability to pay.

Most people fail the above part of the test because they rely on the IRS’ pre-qualifier, or some bad advice and don’t fully understand as a result that the IRS won’t agree to settle if  it believes that the debt can be paid in full before the CSED ends.

But the IRS did make a big change for people who can’t pay the tax debt in full before the CSED ends, when it altered the way it multiplied excess income under the Fresh Start program.

Previously the IRS would multiply excess income when it was calculating how much you could afford to pay by 60 and 48.  60 if the offer amount was to paid over time, and 48 if the offer was a cash offer.

Under the Fresh Start program, these multipliers are 24 and 12.

Now a person with no assets and $1000.00 in excess income will pay $12000 instead of $48,000 toward the debt and $24,000 instead of $60,000 if the settlement is going to be paid over time.

This is probably the most important overall change made to tax collection by the Fresh Start program but specifically in the offer compromise area.  It roughly doubled the numbers of offers that are being accepted from about 20% to about 40%.

The offer in compromise program was affected in other ways as well.  The second best thing it did was to change the allowable expenses category to include more things like:

  • 200.00 per month for car allowance on older cars
  • Student loan payments
  • Some credit card payments
  • A portion of payments made to state and local tax authorities

IRS Penalty Abatement and the Fresh Start Program

If an offer is accepted it settles the debt and the penalty entirely, so in that sense I suppose you could argue that the penalty abatement under the fresh start program exists… but in reality this isn’t a “fresh start” program for IRS penalties.  Don’t let the salespeople fool you.

When looking for penalty relief, you have to go through the same process that has already been in place for a long time.

 

IRS Collection Statute Expiration Date – Why do we talk about it so much?

wallpaper-clock-detail-in-london-streetThe very first thing I do when a person with a large tax debt balance hires me, is to calculate the IRS Collection Statute Expiration Date or CSED for short.

I calculate the clock.

Why do I care so much about this bit of information and write about it all the time?  I mean come – on….blah blah blah – clocks are boring.

If you read this blog, I understand what you are feeling.  Lots of talk about clocks and time.  REALLY BOOORING.

BUT…If you have a tax debt that has been lurking around awhile – these articles about the CSED should be interesting and for some of you, actually exciting…old clocks and all.

Let me explain by category…once again.

CSED and Offer in Compromise

An IRS offer in compromise is as it sounds.  It’s a formal process that allows you to try to make a deal with the IRS and settle the tax debt.  There are two primary reasons why the CSED makes a difference in relation to the IRS offer in compromise.

Number 1 – The CSED Determines Whether You Will Qualify

Can you read that aloud again so that all can hear.

I mean really…what’s more important than “whether you will qualify”.

So…it goes like this; The IRS gets to determine how much money you need each month to survive.  It starts with these things called IRS Standards or IRS National Standards and works it’s way up from there, deciding whether to add to the budget with your claims about child support, and tuition and 401k loans and credit card payments etc. etc.

It then looks at your income.  What it has been, what it is, what it will be, and makes a decision about what it thinks you income will be.

It then subtracts one from the other and comes up with a number.

It takes that number and MULTIPLIES IT BY THE CSED.   Example:  Number = $500.00 and CSED = 100.  or $50000.00

The IRS then calculates your asset value.  Example:  $50000.00.

The two are added and called the “reasonable collection potential” or RCP.  The RCP is compared to the debt amount. Example: Debt Amount –  $75000.00

RCP – $100,000.00

DEBT – $75,000.00

The offer in Compromise fails because the RCP is greater than the Debt.  BUT what if the CSED were only 20 months.  Would the RCP have been less than the debt?  Yes.

Number 2 – The CSED Tells you whether you should bother with the OIC

Once you understand how offers in compromise are calculated and what the CSED is and WHY IT’S SO IMPORTANT…you begin to see that sometimes you can just be wasting your time.  Pun intended.

Example – Waiting out the clock

Mr. Wonderful owes the IRS a big bucket of money.  He owns a home that has $150,000.00 in “quick-sale” equity, but he can’t borrow against it because he has bad credit, primarily due to the IRS’ lien but also because he buys too many suits and steak dinners on credit.  

The IRS wants to get paid, but realizes he can’t borrow against the home.  So, it agrees to put him in a partial pay payment plan, or a plan that doesn’t pay the entire debt off before the CSED is over.  It does this because it agrees he can’t afford to pay more than that every month.  

There are 4 years left on the CSED and he is paying the IRS $100.00 per month.  If everything stays the same, he will have paid the IRS $4800.00 over the next 4 years and his home will have increased in value. IF he files an offer in compromise, the offer amount will have to include the quick-sale value of his home and the CSED will stop running while he is in the offer.  

When he comes out the other end and is unsuccessful…the CSED will be waiting where it was left.  Mr. Wonderful chooses to stay in the payment plan.  Not Dumb. 

CSED and BANKRUPTCY

Much of what was written above applies here as well.  I won’t simply repeat it…thank goodness right?

But…be aware that the CSED matters in other ways as well when it comes to bankruptcy. The most important way it matters is in it’s calculation.  No…not in calculating the bankruptcy, but in calculating the CSED.  Why?  Because the CSED stops running when you are in bankruptcy.  Sometimes over a 10 year period people file for bankruptcy more than once.

So…sometimes people call me and say…”hey mike, I have this really old income tax debt and the IRS just levied my account.  I read about this CSED thing and I don’t understand why they are still collecting on me”.  My response…”have you ever filed for bankruptcy?”

The bankruptcy is the stickler.  What if a chapter 7 bankruptcy was open for 2 years?  Understanding the CSED is important.

CSED and PAYMENT PLANS

There are several areas where the CSED and the calculation of an IRS payment plan intersect, but the most common way is when a person owes the IRS less than $50,000.00 and wants to avoid filing a 433 financial statement.  IF the CSED has 72 months or more left on it, the IRS will usually agree to simply divide the debt by 72 months and put that person into a “streamlined” payment and IF no lien notices have yet been filed it won’t file them.

Great huh?

But what if the CSED only has 40 months remaining.  Will the IRS still allow the payment over 72 months?  No.  It should allow it over 40 months.

What if the debt is $50,000.00 even.  Over 40 months that’s $1250.00 per month.  Over 72 months – 695.00.  Which would you prefer?

In a strange way, higher income earners with less than $50,000.00 in tax debt want the CSED to be longer…usually.

We hinted at another example above.  The Partial Pay scenario and Mr. Wonderful.

To re-state it a bit.

In certain circumstances – the CSED can really hurt.  Even if the payment plan you negotiate with the IRS is “small”.  If the CSED is large, you run a much greater risk of problems. TIME isn’t your friend.

Example – Partial Pay vs. Chapter 7 Bankruptcy

Ms. Nositall owes the IRS $30,000.00 as a result of some unpaid taxes on a cashed out retirement plan.  She has long since spent the money and has taken a job making $25.00 per hour.  She isn’t a good offer candidate based on the RCP, but she has been able to convince the IRS to put her into a monthly payment of $395.00 per month.  It’ painful, but better than a wage garnishment.  THE PROBLEM is that she has 6 years remaining on the CSED and she plans on making more money at this job in the coming year and beyond. She is also struggling to pay some credit card debt.  She speaks to her attorney and learns that when the IRS sees the higher income (new w-2 or tax return) it will want to re-negotiate the payment plan and bump it up quite a bit.  She qualifies now to file a bankruptcy, and the entire tax debt qualifies to be discharged along with her credit card debt.  Her choice: Bankruptcy.  

Clocks are important and sometimes interesting.  They keep track of time… and if you have a large tax debt, time is of the essence.

Large IRS Payment Plan vs Chapter 13 Bankruptcy – Which is Better?

n4-owr-xLarge IRS Payment Plan vs Chapter 13 Bankruptcy – Which is Better?

Combine a large IRS debt, a lengthy IRS statute of limitations period (CSED), and a “good” income, and you may have a recipe for a large monthly IRS payment plan.  Many people are living this “recipe” and as a result are paying thousands of dollars each month to the IRS and will continue to do so until the CSED ends, or their situation changes.

On the bright side, the payment plan keeps the IRS collection machine at arm’s length while the CSED continues to run, but on the dark side, the debt remains and continues to grow tremendously as a result of penalty and interest.  The debt can double every 5 years.

Meanwhile, the person in the large payment plan keeps his or her head down and struggles to pay the bill each month while feeding a family.

It feels hopeless for many people in this situation of course.  They usually aren’t good Offer in Compromise candidates,  they may not be good chapter 7 bankruptcy candidates, and in the long run they feel like there isn’t anywhere to turn.

But…there may be.  Chapter 13 Bankruptcy.

What follows is a list of the most common reasons someone stuck in a high monthly IRS payment plan may want to look more closely at a chapter 13 bankruptcy.

1.  The budget used to determine monthly payment is typically higher in a chapter 13 bankruptcy than in an IRS payment plan

This is a good thing and important to understand.  Specifically, when the IRS is negotiating with you about how much you can afford to pay each month on the debt,  it is allowed to use a standardized budget as a starting point.  You can find it here.  For most higher income earners, that budget is nothing like their actual budget.

The Chapter 13 Bankruptcy Judge is going to use a similar budget in determining how much you can pay overall, but there are certain things about how that budget is calculated vs. the IRS’ standard budget that make it more friendly.  Here are a few.

a.  Priority tax debt is considered a “budget item”

The tax debt you owe may be relatively new.  If it is it may fit into what is called the “priority” debt category.  This means that when the Chapter 13 Judge is determining how much you can afford to pay each month, he or she will use 1/60th of that priority debt as a monthly budget item.

b.   401k Loan is considered a “budget item”

The IRS isn’t going to consider your 401k or your 401k loan as monthly budget items.  The Bankruptcy Judge in a Chapter 13 will consider the 401k loan payment a budget item in determining how much you can afford to pay.

c.   Children’s School Activities

The IRS doesn’t have to consider these costs in your monthly budget.  They Judge typically will.

d.  Baby Supplies

Babies are expensive.  The IRS doesn’t typically care.  The chapter 13 Judge should consider diapers and other out of the ordinary expenses related to your baby as a monthly budget item in determining how much you can pay.

e.   Social Security Income

Social Security is income to the IRS.  In a chapter 13 bankruptcy it isn’t counted as income.

2.  Penalty and Interest Stop Accruing

Chapter 13 bankruptcy stops the IRS’ penalty and interest accrual on most tax debts.  In an IRS payment plan the penalty and interest continue to accrue to their fullest extent and add lots of debt to your overall debt load.

3.  Penalty, Interest, and the Underlying Debt can be Reduced or Eliminated

In a chapter 13 bankruptcy, tax penalties that exist on the date of filing are treated as “dischargeable” debt like credit cards and medical bills.  Depending on how the payment plan ends up being structured the IRS may end up receiving little or nothing on that penalty by the end of the plan.

Certain tax debts are treated the same way.  Read more about that here.  If the tax debt is non-trust fund and certain other factors exist, bankruptcy law will treat it as “dischargeable” again like a credit card or medical bill.  Depending on how the plan is structured, the IRS may receive little or nothing on the debt by the time the plan ends.

In an IRS payment plan you are going to continue to pay the debt off, until the 10 year period (CSED) runs out.

4.  Property is Safe in a Chapter 13 Bankruptcy

A chapter 13 bankruptcy isn’t a liquidation bankruptcy like a chapter 7 bankruptcy.  No one seizes your assets, income, or bank accounts…including the IRS.  Bankruptcy law places an automatic stay in front of the IRS and while the case is opened the IRS’ hands are tied.

5.  Entire Debt Situation is solved

The IRS payment plan only solves the IRS debt collection situation.  It doesn’t deal with other debts, and it’s budget doesn’t treat most other debt payments as budget items.

Depending on your circumstances however, a chapter 13 bankruptcy can do the following:

a.  Treat your credit card debt medical bill debt,  business debt, 2nd mortgage debt, and even possibly your student loan debt as dischargeable and eliminate it or reduce it.

b.  Catch up any arrears on a home.

c.  Save a car from repossession.

d.  Cram the car loan down to the value of the car.

e.  Cram the interest rate on the car loan down.

f.   Provide an avenue for re-paying past due child support

g.  Stop collection activity from other creditors

 

In many cases, a Chapter 13 bankruptcy will be a far better situation from a debt and monthly payment situation, than a high IRS payment plan.  It must at least be considered as a long term option.

Releasing an IRS levy when tax returns aren’t filed

Releasing an IRS levy when tax returns aren’t filed

The IRS likes to get attention.  It doesn’t take “selfies” to get it, but once it issues a wage garnishment or a bank levy on your account, you will wish that it just used a camera instead.

enhanced-buzz-wide-7774-1388165363-27

It doesn’t use a camera because it wants something from you that sometimes it can only get by inflicting pain.  It wants missing returns, a disclosure of your finances or some missing estimated tax payments typically.

The IRS can condition the release of the wage garnishment or bank account levy on receipt of what it wants.  So if you have one or several years of missing returns… it can literally say “too bad, that wage levy will remain in place until those returns are filed”.

This is true with a few exceptions.  One  exception is the filing of a bankruptcy which will stop the levy by operation of law.  The other exception is based on a U.S. Tax Court Case from 2009 called Vinatieri v. Commissioner (See Office of Chief Counsel Notice re: Vinatieri here cc-2011-005).

In Vinatieri v. Commissioner, the Tax Court found that the appeals office had abused it’s discretion when it upheld a levy after the officer decided that the levy would be an economic hardship for the taxpayer but left the levy in place anyway because of missing returns.  The Tax Court based it’s decision on section 6343(1) of the IRC which requires that the IRS release a levy if it will cause the taxpayer economic hardship.   The Court reminded everyone that the statute contained no wording conditioning the release on the filing of any missing tax returns.

After the Vinatieri decision the IRS issued a Chief Counsel Notice cc-2011-005 in order to try and ensure that appeals officer would follow the Tax Court Decision.

There are a few issues to be aware of if you think you are in a hardship, the IRS has levied or garnished and you have un-filed returns:

1.  You will probably need to point out the Vinatieri decision and the Chief Counsel notice to the collection personnel you are dealing with.  They won’t want to follow it and may not be aware of it even several years after the fact.

2.  “Economic Hardship” isn’t going to be defined by you.  The IRS has a set of budget standards that help it determine whether you are truly a hardship case and it will try and apply those standards to your situation.  If after it applies those standards, it sees “excess” income, Vinatieri won’t apply.

3.    In order to finalize the case and be placed on “non-collectible status” , you will need to prepare and file the missing returns.  Vinatieri says that levy can’t take place if you are in a hardship but the case file can’t be closed and a determination made without those missing returns.  The IRS will set a deadline for the missing returns and if you don’t meet it – it will try to collect again based on your non-cooperation.

Conclusion

If you are being levied or garnished and think that you qualify for hardship status but have missing returns, review the links in this article before proceeding.  Make sure you qualify for hardship status, find out which returns need to be filed, and start working on those asap.

 

 

 

 

I haven’t filed a tax return in a long time – what should I know?

Old Blue MailboxI haven’t filed a tax return in a long time – what should I know?

If you haven’t filed a tax return for a while – you’re not alone.  There are literally thousands of people and small business owners who haven’t filed a tax return in several years.  The IRS is actively searching for millions of missing tax returns at any given time.  The following are eight things you should know if you fall into this category:

First – Don’t Lose Sleep About Jail Time

Willfully failing to file a tax return is a federal crime BUT there are only 3000 or so IRS indictments filed each year.  Most people charged with failure to file a tax return have been charged with other criminal offenses and the un-filed return issue just gets dragged into the mix.  The IRS just doesn’t prosecute these cases very often.  It takes the position as well… that if you file your returns before it begins the criminal process, they won’t proceed.

Second – Beware the Automated Substitute Return Program

For most late filers, the real issue is the Automated Substitute Return Program (ASFR).  The IRS “system” gathers information that has been reported about you from 1099s, w-2s, k-1s and create a rough return. The return contains just the reported income and a standard deduction for a single person. That rough return is sent to you with a warning.  The warning essentially says that if you don’t file the correct return within a certain period of time, the IRS will use the rough return as a determination of how much you owe and then start collection proceedings.  Many late filers get these bills in the mail but don’t open them out of fear, and then they wake up one day and a bank account has been frozen.

Third – The ASFR Will Almost Always Result in More Debt Than You Owe

You read above about how they do these returns and for most people, especially the self-employed, this process results in debts that are much larger than you actually owe.  Sometimes it matches the correct amount but this is usually only when you are a w-2 wage earner with no itemized deductions, or family members.  As a result of these very high and very fictitious numbers, many people can’t even open the envelopes from the IRS – they get physically sick, can’t sleep and lose the ability to move forward with the problem.

Fourth – You Can Challenge and Reduce the Amount Owed by Completing Correct Returns and Taking Some Other Steps

We have helped literally hundreds of individuals and self-employed complete corrected returns for years the IRS has already assessed ASFRs and convince the IRS to replace the ASFR with the correct return(s).  This has resulted in millions of dollars in savings.

The IRS will almost always agree to replace the ASFR with the corrected return and in most cases it makes sense to do this.

Fifth – Sometimes it Makes No Sense to Challenge the ASFR

What?  It may make no sense to try and reduce the debt?  Follow me on this:

a.   Statute of Limitations

It is possible that on a particular tax year the 10 year statute of limitations is going to be applied by the IRS.  If the IRS assessed an incorrect debt based on it’s ASFR in January of 2006 and it is going to apply the 10 year statute of limitations on collection to the debt in January of 2016 – it may not make any sense to spend your time, energy and money on the creation of corrected returns even if those returns would reduce the debt substantially.

b.  Offer in Compromise

An IRS Offer in Compromise is a formal process that allows certain qualifying individuals and businesses to settle the debt for less than is “owed”.  One of the factors in the IRS formula is the amount of the debt and strangely, the higher the debt…the better in most cases.

Sixth – The ASFR Once Assessed, Can Ruin Your Ability to Discharge the Debt in Bankruptcy

Right now the IRS treats debt from a return filed AFTER the IRS has filed and “assessed” one of these ASFRs as non-dischargeable in bankruptcy – ever, and right now the 9th Circuit Court of Appeals doesn’t disagree.  So imagine a realtor or other self employed person who had a string of good years and didn’t file their returns.  Imagine the ASFRs were created and assessed for those years and the debt with interest an penalty totaled the nice, round, large, sum of $400,000.  Now suppose the person created correct returns that reduced the overall debt to $200,000.00.

Imagine that this person made too much money to qualify for an IRS offer in compromise BUT that the tax debt was the largest portion of his or her overall debt and as a result, they could use chapter 7 bankruptcy to discharge it after certain time periods and other factors were taken into account. (Grammar Police needed?)

Good scenario for them.  Right?  Not so fast.

ASFR assessed before he or she filed returns – the principal tax debt balance won’t ever be discharged in bankruptcy at least in the 9th circuit.  (Assuming the law doesn’t change)

Seventh – If You Haven’t Filed for More Than Six Years – It’s Possible That You Won’t Need to File More than Six Years

The IRS isn’t going to deal with you if you have missing returns.  It won’t negotiate a payment plan or an offer in compromise and in bankruptcy certain years must be filed as well.  The mistake people make is that they assume that if they haven’t filed for 10 years, all 10 have to be filed.  This isn’t typically the case because in most cases the IRS only requires 6 years of missing returns if they haven’t already done them for you.

On rare occasion it makes sense to file beyond the 6 year mark other than to challenge an ASFR.  If you never file a tax return for a particular year, no statute of limitations period begins to run.  The IRS can file that return for you forever, or charge you with a crime for failure to file…forever.  Also, if you don’t file it, you can’t ever get the clock running for bankruptcy purposes.

I can’t tell you how many times someone calls me who just filed 10+ years of missing tax returns creating thousands of dollars of unnecessary debt.  If you are about to do this – talk to me first…please.

Eighth – Self Employed During Those Years and Don’t Have Good Documentation?  The Returns Can Be “Pieced” Together

The IRS has income histories for you several years back.  The document that needs to be ordered is called a “Wage and Income Transcript” and it will show you everything reported income wise, mortgage interest wise and a few other items.  You can use that and your old bank statements to re-create income.

Figuring out the missing information about expenses, especially small business expenses ,is often the more difficult problem.  But if we know your income, we can often piece together your business budget from old bank statements and comparable expenses from similar businesses.  The law requires a best guess based on a reasonable foundation.  That can be built.

 

More Questions?

Search around our blog for more information, or simply call and ask for me directly.  I will speak with you for about 15 minutes for free and answer your questions.