Pursuant to Internal Revenue Code Sections 6331(f) and 6331(j)(2)(c), the IRS cannot seize property or levy unless doing so will result in money for it.
I recently represented a client who had some equity in a vacation home. The IRS Revenue Officer wanted the home but the quick sale equity in the home wasn’t sufficient to guarantee that once realtors and costs of closing were paid, there would be anything left for the IRS. The client was also unable to obtain a home equity loan. Once the situation was made clear to the revenue officer, she backed down and accepted our payment arrangement proposal.
Many people with tax debt lay awake at night worrying about whether the car will be there in the morning, or whether the little bit of money in the bank account will be there to buy groceries.
If you have assets, bank accounts, etc. and the IRS is actively searching for a way to get paid, look closely at what those assets and accounts are really worth, how much you owe on them, and how much they would be worth if you had to sell them immediately.
Then use this rule, contact the IRS and tell IRS collections about the value or non-value of your assets, money in your bank account etc. and prove to them what you are saying.
If you show the IRS that it will get nothing, and even cite the rules above, the collections employee or revenue officer should agree and leave the assets alone, even if it is a car or a home.
It’s easy to file a tax filing extension with the IRS. A simple form is filled out, the amount you think you owe is included, and in theory… that amount and the form are sent into the IRS before the April 15th deadline.
This allows you to put off filing the return until much later in the year.
I often see two problems associated with filing the extension.
The first is that many people don’t have the amount owed available to send with the extension request.
The second is that many people already owe the IRS from previous years.
The first problem results in a penalty for failure to pay on time. The second does this and more.
If you already owe the IRS, the lack of withholding just adds to the debt. This can make it more difficult to convince the IRS to settle your debt or to place you into an IRS payment plan. There is also a penalty for failure pay what’s owed when due.
If you are a bankruptcy candidate, it can make your bankruptcy more complicated, especially if the case is a chapter 13 bankruptcy.
I suggest that you do your 2015 return as soon as you possibly can when 2016 rolls around. Use it to figure out, as close as possible, how much you should be withholding each paycheck or each quarter, and adjust your situation so that you can start paying it.
This works the other way as well. If you are getting a refund, you have provided the Government an interest free loan. You need to reduce the withholding so that your net monthly income is increased and you get zero refund or as close to zero as possible.
Divert the money you get each month to a retirement plan or pay down other debt with it.
The Huffington Post Author covering the development sounds worried. I mean really, most people who owe the IRS are broke and private dead collectors abuse broke people, right?
Now…I don’t necessarily disagree that most people who owe the IRS are living paycheck to paycheck, and I don’t disagree that private debt collectors have a reputation for being meanies and using meanie words.
But the Author may want to consider a few things about the IRS:
First, thanks largely to a progressive tax system that punishes hard work and ingenuity and that the IRS enforces, the American economy has no edge. Poverty is growing.
Second, debt collectors are meanies sometimes, but the idea that the IRS collection system is any less “abusive” than private debt collection is absurd. IRS collection is abusive by definition and it’s abusive in reality every single day.
Making the second point is easy.
The IRS needs nothing more than 30 days of time after the issuance of a final notice letter to seize most of a paycheck. No lawsuit needs to be filed, and the burden of proof is on the taxpayer to get out of a jam.
I spoke earlier this week, to a young mother of 4 whose husband earns $45,000.00 per year. His paycheck is being levied and much of the check is taken. He has tried to stop the levy by speaking with IRS collection, but the IRS won’t stop it until he provides a financial statement disclosing all of the families private financial information, and two missing tax returns that re-disclose private financial information.
Of course, the Husband isn’t aware of the short term hardship provisions that exist, but the IRS collection department didn’t explain that option to him, and has forced him to seek help, while trying to keep his job and feed his family.
I can’t count how many clients have complained to me about the attitude an IRS Officer used during a discussion. If the Author doesn’t think IRS collection personnel don’t “dress down” taxpayers, he needs to ask around a bit. Throwing some private debt collection into the mix will be nothing new. The Huffington Post Author shouldn’t kid himself.
IRS problems don’t just go away. The cartoon is a clumsy way of making the point.
The point is that you have to do something. You can’t ignore the problem and just go about your business. Your house is on fire and you may not realize it.
The most common “house-fire” we see is that of a self-employed person who hasn’t filed tax returns in several years.
When this person comes into the office, the house is already burning as one or more of the following problems exist:
The IRS has completed certain substitute tax returns that overstate the debt, because several years’ returns haven’t been filed
The IRS is using these returns to levy the bank account and to file IRS liens.
The IRS has issued levies on vendors and others that may owe the owner money.
The business is weakened or worse, because the owner has lost access to funds in the bank account and lost valuable goodwill with vendors and others
Because the owner waited so long, legal options available are fewer or require making more painful trade-offs
Much of the work needed to try and put the fire out has to be done quickly and without the benefit of necessary information.
These problems all started years before when the owner either didn’t withhold enough tax or withheld employee tax and didn’t pay it. Instead of making the hard choice to change the business or dump it, he or she sat still and didn’t file returns out of fear.
If you haven’t filed returns and are fearful of what comes next so you aren’t moving on it, you need to do something now. I suggest you do the following:
Gather your tax records for years you think are un-filed – bank statements, expense documents, etc.
If you have lost your documents – contact your CPA or my office about making a good faith re-creation of the numbers
Gather your current income, budget and asset information
Look closely at your income and budget – become very familiar with both.
Figure out how much tax you should be withholding on a monthly or quarterly basis and start doing it
Some good new about the fire:
It is often the case that if the IRS hasn’t already filed returns for you, the returns required are limited to the last six year period.
If the IRS has done returns, they are probably incorrect as they don’t contain business expenses, deductions etc. and you should be able to create the correct returns and replace the IRS returns. This usually reduces the debt.
Once the required returns are done, the fire can be stopped, as most people qualify for one or more of the following options:
Non-collectible status – which means nothing is paid on the debt while the 10 year clock on collection runs
Settlement of the debt once and for all for less than what is owe
Discharge the debt in bankruptcy
Full pay payment plan
Payment plan that is “partial pay” meaning that the payment isn’t large enough to pay the debt off before the statute of limitations clock runs out
The IRS Final Notice of Intent to Levy or why you should always open your mail
I’m surprised at how often my clients bring me a box filled with un-opened mail from the IRS. To tell you the truth, most of it is junk.
Reminders to pay, debt breakdowns, letters requesting missing tax returns, etc. But hidden within each stack of stuff is almost always a letter I wish the client had opened when it arrived by certified mail.
Now normally…the IRS will send you several letters telling you it is going to levy before it sends this one. To most people they all look the same. This final notice of intent to levy letter isn’t a common letter though, and if you don’t open it on time, you will lose some rights that could have helped you to solve your IRS debt problem.
Why it is so potentially helpful to you?
First, you have to understand that the IRS is required by law to send this letter in order to give you some “due process”. Not much due process, but just enough to help you figure things out. You are entitled to an appeals hearing with a supposedly impartial settlement officer on the issue of whether the IRS should be able to levy your bank accounts and garnish your wage or whether there is a alternative that suits the need of you and the IRS more sufficiently.
While waiting for that hearing, the IRS isn’t allowed do any of these nasty things.
In order to get this appeal hearing and exercise your due process rights, you should file the appeal request within 30 days of the date of the letter. Of course you can’t do that if you haven’t opened your mail.
So when you do open your mail, look closely at it. If you see an LT 1058 or LT 11 somewhere on the letter, it should be this final notice letter we are talking about. Read it closely. The appeal documentation and some instructions should be with the letter.
If you feel like you need help filing the appeal call someone who knows how they work.
After you file the appeal, start putting together your financials in detail. You will need them along with some other IRS forms at some point during the appeals process. If you don’t take the appeals hearing seriously and fail to supply the correct info and make the right argument, you will lose the appeal and head back to IRS collections for some smacking around in the way of Levy or Garnishment.
What if you opened the letter but didn’t file the appeal on time?
Don’t panic, you can still file the appeal, and the IRS should…give you an appeal hearing anyway. It’s called an “equivalent” hearing. (Equivalent to the Collection Due Process Hearing, get it?)
The main difference between the equivalent hearing and the collection due process hearing is that one comes with further appeal rights to tax court and the other doesn’t.
Other more subtle differences exist like, the IRS doesn’t have to grant the equivalent hearing and in some cases it won’t, and you have to file the request for the equivalent hearing within a year of the date of the final notice letter. A hint..don’t wait a year.
So open your IRS mail, or bring the box to me. We have a sharp letter opener.
The IRS Offer in Compromise isn’t over when you get the letter approving settlement with the IRS. Don’t get me wrong, the Offer in Compromise (OIC) can be a great solution for some people with IRS debt. But unlike a chapter 7 or chapter 13 bankruptcy case, an offer in compromise isn’t over when you may think it is, it isn’t even over when have paid the agreed upon amount.
What?!!! It isn’t over when it’s over? No, it isn’t. Or as Yogi Berra once said, “The future ain’t what it used to be.”
Unfortunately, IRS rules require that you do a few things to ensure the settlement remains in place.
You have to file your tax returns every year for 5 years and you have to file them on time. Now…if you don’t file them on time, the IRS won’t just pull the rug out from under you. It will send you a warning letter before it does because it doesn’t want to waste the time and effort it put into the offer either. But in any event, if your offer in compromise has been paid, you should triple check the calendar each year to make sure you have filed your return.
The corollary to the Tax Filing Requirement is the Tax Payment Requirement. No longer can you wait until after tax day to figure out how you are going to pay the tax debt for the year. You must make sure that you are withholding or saving enough throughout the year to guarantee that you won’t have tax bill that you can’t pay when the return is filed. Again, the IRS won’t just kick you out…it will or should send a letter. But don’t risk this. Keep withholding correctly and make sure that you have stored enough money away to pay the difference.
The relief you felt when the offer was accepted will be lessened when the IRS keeps that next tax refund and applies it to the debt. What? Yes, even though the amount has been accepted the IRS will and can keep the net tax refund for the year in which the offer was accepted. Example: On September 15, 2015 the IRS send you the acceptance letter, in October you file your 2014 return that was on extension and your refund is $3500.00 because you have done such a great job of withholding during the 2014 year.
A bit of advice: Check to see if you are over-with-holding.
The IRS won’t release that lien until the offer amount is paid in full. Some people are on payment plans that can last as long as 24 months and under the mistaken impression that the Offer settlement letter will be the IRS’ starting gun for release of that or those liens. They won’t do it. You have to pay the offer amount in full.
Sometimes the IRS makes mistakes and doesn’t change the books to show a zero balance and it doesn’t release the lien(s). You will have to follow up after you have made the last payment to ensure these two things have happened. A good place to start is by looking at the IRS’ account transcript for each year in question and than contact the IRS to follow up on ensuring all is correct.
IRS form 433 is the primary piece of equipment that the IRS collection unit and IRS revenue officers use to get your information. If you are an individual that owes almost any type of tax and you don’t qualify for a streamlined agreement, you will probably have to supply the 433a or at least the information it requests. If you own a business, that business would need to supply a form 433b.
It’s important to understand that this form is more complex than it appears. On it’s face, the 433 appears to be simpler and even shorter than the intake form at a Lawyer’s office. It’s only a few pages long and the questions appear straightforward.
The reason it is complex isn’t easily detected on it’s surface, the reason lurks in the dark like a shark staring up at the bottom of your surfboard and contemplating whether you might taste good.
The following is a list of “sharks” or the most common things that matter and that linger below the surface of a 433a form… that can really change the outcome of the case.
When you understand how the IRS is allowed to view your financial information when determining whether you are a candidate for an offer in compromise or what type of payment plan you qualify for, you begin to understand why a mistake when supplying these numbers can mean so much.
Incorrect Numbers Example 1:
Mr. and Mrs. Smith are self-employed. In 2013 their business’ net income (income after all actual expenses) averaged $13,000.00 per month. They had a tax debt and filled out a form 433-A on their own. When doing this they estimated how much they believed their 2014 income would be and estimated lower than the 2013 total. They also included in their business expenses the depreciation related to a piece of equipment and the mileage deduction related to a vehicle. They filed the 433-A along with a 656 form for an offer in compromise. When the live body at the IRS got around to reviewing the 433-A, she immediately noticed the discrepancy between the 2013 actual income, the last 3 months income and the estimated income in the 433-A. She also noticed that the business expenses in the 433-A didn’t match the income and business documentation supplied to the IRS. She disallowed the numbers. They didn’t jive with the facts and this added $1700.00 per month to the amount the Smith’s had calculated as the net income. With this additional $1700.00, the IRS believed that the Smiths could afford to pay the entire tax debt over the remaining CSED and rejected the Offer. The IRS kept the 20% down on the offer that was paid with the financial documents and then used the 433a as a roadmap to get to the Smith’s accounts and assets.
Incorrect Numbers Example 2:
Mrs. Henry received $1500.00 per month from social security and still worked. Her job netted her another $1500.00 per month. She had some old tax debt and attempted to provide the IRS with a financial statement. When she filled it out she told the truth about the fact that she had been paying $350.00 per month toward her credit card debt. The IRS doesn’t consider credit card payment as a budget item in an offer in compromise and considered the $350.00 as excess income. It multiplied the $350.00 by the amount of months remaining in the statute period and determined that Mrs. Henry could afford to pay the debt in full before the Statute ran out. Her offer was rejected. The IRS kept her monthly payments and used her 433a information to levy her bank account when she didn’t respond to the rejection notice.
In both of these examples, some thought and pre-planning may have prevented the outcome. Sometimes an offer or a payment plan request can be made at a different time, and sometimes good-faith budget planning and asset planning can be done to make the outcome better.
If you don’t understand the rules for the calculation of offers in compromise, payments plans, and bankruptcy, you don’t know how many sharks are watching you.
Sometimes people get in trouble for providing incorrect information on the form 433A. They lie outright, or the IRS takes the position that the information provided was incorrect and purposely so… even though the incorrect information was inadvertently provided.
This document is a “serious” document. It’s signed under the penalty of perjury and if it can be shown that some intent was involved in skewing the information, fines and jail time are theoretically possible.
There are a few areas in the 433a form where information about assets are requested. The IRS is asking for this information primarily to calculate the value of available assets and determine whether it wants that value included in an offer in compromise or whether it wants to demand liquidation of the assets before setting up a payment plan.
Simple enough I suppose, as long is you understand how asset valuation is done. If you do, you can use the numbers when calculating the offer in compromise amount. If you don’t…well you may get bitten.
Asset Matter Example – Know the Rules
Mr. Franklin owned a business. He was self-employed. The business had a few pieces of machinery that weren’t used to run the business. Mr. Franklin had read somewhere that business assets weren’t countable in calculating asset value in an offer in compromise. He missed the part about assets that are being used to create the income aren’t countable but the income is.
He submitted a form 433a and although he disclosed the assets, he valued them at zero. The IRS was unaware of these assets previously and when it learned of them it conducted a valuation, rejected the offer and then moved to seize the assets forcing Mr. Franklin into a chapter 13 bankruptcy.
Another area where assets matter is in the area of transfers. The IRS is lurking and watching this one closely. The form 433a asks whether you have transferred anything in the last 10 years for less than market value.
Transfer of Asset Example – The Shark sees you moving
Mr. Azzari owned a business that had a serious tax debt. That business had alot of accounts receivable and those accounts receivable had a good value to them. Mr. Azzari transferred the accounts receivable to another “sister” entity he set up and then a few years later had the business submit an offer in compromise. The IRS rejected the offer and the Tax Court confirmed that the offer rejection was fine because the transferred assets weren’t disclosed and included in the value of the offer. The sister company obtained the accounts receivable without paying fair market value for them so the Court considered the transfer to be fraudulent as well.
We see people who have transferred assets well before the tax debt became an issue. This isn’t fraud in the same sense as in the Azzari example, but it’s possible that those assets could be considered part of the offer amount as well. Or at least failure to disclose the transfer… could result in rejection.
This stuff can require some guidance. There are sharks lurking in places you wouldn’t think. Get some help if you are trying to complete a 433 financial statement.
Almost every person who contacts me asks about getting rid of IRS penalties. There are two reasons I think this happens:
1. Many Americans believe in paying debt and see tax as a debt. But they regard penalties as just unwarranted punishment.
2. Many people have been falsely led to believe the IRS’s Fresh Start Program allows for some new, magical way to reduce or eliminate IRS penalties.
As for the second reason, I blame the tax resolution “experts” who use the veiled promise of penalty relief to take advantage of people who aren’t sleeping well and are desperate to hear good news. These “experts” will use a subtle tongue slip to take money. There is no such thing as IRS penalty relief under the IRS Fresh Start Program.
Unfortunately, penalty abatement almost never happens the way that it is portrayed. You must still qualify for penalty relief using one of the legal remedies that existed before the Fresh Start program existed as follows:
Even though I have helped hundreds of people with tax debt problems use the bankruptcy code to find relief, I consider it to be a last resort. For certain people with IRS penalties bankruptcy can provide penalty relief. Most penalties that meet the date requirements for tax debt discharge will be discharged in a chapter 7 bankruptcy. In a chapter 13 bankruptcy almost all penalties are treated as dischargeable no matter the age.
Don’t run out and file a bankruptcy though. Alot of thought and planning has to go into a decision to file a bankruptcy case.
First Time Penalty Abatement
The IRS will usually give a first time offender a free pass and waive a late filing or late payment penalty. In order to get this abatement though, you have to be in current compliance with tax return filings, making any estimated tax payments, have no penalties assessed during the previous 3 year period, meaning paid and filed on time.
First time penalty abatement doesn’t apply to the failure to pay taxes through the Electronic Federal Tax Payment System, or to one-time filing for gift or state tax returns.
Reasonable Cause. You will hear this phrase being thrown around alot by tax professionals but if you think about it…the phrase is reasonably meaningless. The IRS determines what is reasonable or not and even though it tries to treat these requests uniformly, it doesn’t.
Generally, the IRS considers reasonable cause to be when you have done everything else right but despite those efforts you weren’t able to comply. Most people have failure to file and failure to pay penalties so the argument usually revolves around why you were late and/or broke.
Serious illnesses, death in the family, caught in a hurricane, and things like this are often the best arguments to make but really just about any argument can be posed if it is based on reality and and the situation was really beyond your control.
The IRS will also look at and should grant penalty abatement requests based on the law. If for instance you can prove you mailed your return on time, or if there was a government slowdown etc. than the law sometimes orders the IRS to remove the penalty.
Administration Based Abatement
The IRS will often change the way it is doing something and it will realize that changing the process may confuse some people. When this happens there is usually some kind of administrative waiver that it put in place to forgive penalties out the outset for a certain period of time.
IRS Makes an Error
The IRS messes up all the time. They apply penalties when they shouldn’t, lose returns, misplace payments, fail to make notes etc. etc. etc.
They will remove penalties or they should…if the penalty was based on the IRS’ error and you can prove it.
IRS Offer in Compromise
Much like a bankruptcy a successful offer in compromise will reduce IRS debt. This includes the debt that has accrued as a result of penalty.
NO FRESH START BUT…..
There isn’t such a thing as IRS Fresh Start Penalty Relief…sorry. Don’t believe people who try and tell you there is. But there are ways to eliminate penalties in certain circumstances and sometimes with the right help.