IRS Offer in Compromise – Another Boring Explanation About How It Works

I am asked so often whether it’s true that the IRS will actually settle tax debt…I find myself thinking about it even when I don’t want to be.  It’s like a song that you can’t get out of your head.  Don’t Stop Believing.
So in another effort to answer this question yet again…and to help clear my head for the weekend, here is a quick review:

YES!  THE IRS WILL SETTLE TAX DEBT FOR LESS THAN WHAT IS OWED

The IRS settles tax debt formally and they do it all the time.  The “program” that is used to tell the IRS whether it should settle, is call the “Offer in Compromise” program (“OIC”).

AGAIN, IT’S FORMAL

The OIC program process isn’t one that is based on some phone calls and some wheeling and dealing.  It is formal.  The Taxpayer has to prove that the facts and circumstances qualify him or her for settlement.

“Hey – do you think you’d take 10%”, doesn’t work.

FIRST REQUIREMENT TO SETTLE

The first “hoop” of several that need to be jumped through, is proving to the IRS that the taxpayer can’t afford to pay all of the tax debt before the 10 year date on the IRS’ ability to collect runs out.  This date is commonly known as the Collection Statute Expiration Date or CSED.

In my opinion…this is not only the first hoop to jump through, but for most people the most difficult part of the OIC process.

WHY IS THE FIRST REQUIREMENT SO DIFFICULT TO SATISFY

Three Reasons:

Reason One – CSED Length

The CSED is 10 years long plus anytime the taxpayer did anything to stop it like file an appeal, request a payment plan, file a bankruptcy, or leave the country.

Reason Two – Most Recent Date Used

The most recent tax year is the year used to calculate the CSED.  If the taxpayer owes for five years from 2013 to 2017…the 2017 CSED is used to determine the 10 year + CSED.

Reason Three – Budget set by the IRS

The IRS looks very closely at three things when you request a settlement.  Your income, assets, and budget.  It will try to use the largest income amount it can prove.  It will give a discounted value on assets, but…it will count their remaining value.

But the most common problem is that it limits the budget to one that is based on what it thinks the average household spends – not necessarily what the taxpayer spends. (IRS Collection Standards)

An Example:

Tax debt                          $50,000.00

Asset Value                     $8,000.00

Avg. Income                   $4,500.00 per month

Avg. Budget                    $4,500.00 per month

CSED                                80 remaining months

Given the above…you’d think the IRS Settlement should be $8000.00.

But look at what happens when the IRS uses it’s budget.

Assuming that budget includes $250.00 more per month than what the IRS thinks the average car payment is, and $300.00 in minimum credit card payments above their standard amount for miscellaneous expenses…it will see an ability to pay $550.00 per month toward the debt.

Given 80 months remaining on the CSED, the amount the IRS believes the taxpayer could afford toward the debt will be:

$8,000.00 plus $44,000.00 or $52,000.00.  Rejection.

Yes, the IRS will actually reject the offer if the numbers show an ability to pay before the CSED.

WHAT IF THE FIRST “HOOP” IS SATISFIED – WILL THE IRS SETTLE?

Probably.

If the first rule is met, the IRS is supposed to multiply the excess number by 12 and add the asset value to it and allow the taxpayer to pay that amount over several payments and settle the debt.

In the example above – assuming that excess car payment amount were $150.00 and not $250.00, the excess income would be $450.00, not $550.00.

$450.00 x 80 is $36,000.00 plus $8,000.00 = $42,000.00  – LESS than the debt so:

$450.00 x 12 + $8,000.00 is $13,400.00.

$13,400.00 should be the settlement amount.

BUT HOW DOES THE SETTLEMENT AMOUNT GET PAID?

Using the 12 month multiplier example above…the taxpayer would have had to pay 20% with the OIC filing and the rest in 5 installments after acceptance.

There is another way to skin the “payment cat” that has to do with using a larger multiplier and  longer pay-back period.  You can ask me later.

THE SECOND BIG HOOP – NOT ABLE TO PAY THE SETTLEMENT

The second big problem that we see is that even when a taxpayer makes the numbers work, they have no way to pay the settlement amount.  This happens because the asset value is usually tied up in a home or other difficult to sell asset and/or the excess income number was created using a fictional budget…the taxpayer doesn’t actually have the excess and hasn’t been able to save it.

HOW TO JUMP THROUGH THIS SECOND HOOP

If the taxpayer plans ahead and creates a “tight” situation with this potential problem in mind, he or she might be able to pay the settlement amount.  Even then…a third party often has to get involved to help the taxpayer come up with the money.

WHAT DO I DO

If you have a large IRS debt, start the process of determining whether an OIC might work by doing the following:

  • Become an expert on the issue of your average income and budget
  • Become an expert on the value of your assets
  • Provide your expert analysis to me
  • Allow me to review your analysis and the IRS’ history re: your IRS debt and apply the facts to the rules

If you’ll provide the numbers and other valuable information about yourself,  I do the evaluation for free.  Once we know what’s going on, we can discuss whether you can make an offer work, either now or in the future.  We’ll also discuss your other options.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRS Debt? 7 reasons bankruptcy is often used to deal with it

idea_lightbulb_cartoon2-thumb-375x491-53213IRS Debt and Bankruptcy

No one likes bankruptcy, except bankruptcy attorneys.  For most Americans, it remains a very negative process.  In fact…many of our clients refuse to even consider bankruptcy during a first meeting.  I don’t blame them.  It is interesting however, how many of those who are initially so opposed, change their minds once they see the potential benefits.

Why is bankruptcy such a mind changer?  Some quick background:

The Bankruptcy Code, which is updated occasionally by Congress, reflects our Nation’s desire to provide a fresh start for debtors. The Code attempts to create a system that forces those that can afford to pay their debt out, and allows those that can’t…in.

This balancing process between “who should and who shouldn’t” is applied to tax as well. Certain types of tax are considered so important by society that the bankruptcy code doesn’t allow for them to be wiped away (discharged). “Trust fund” taxes like taxes that are withheld from an employee paycheck to be forwarded to the government by the employer, are a common example.

Income taxes don’t warrant the same concern, and therefore the bankruptcy code provides for their discharge in specific circumstances. Those circumstances are as follows:

  • The tax return had to be filed more than two years before the bankruptcy filing.
  • The tax return had to be due for filing more than three years before the bankruptcy filing.
  • The tax debt had to have been “assessed” or entered into the IRS record as a debt, more than 240 days before the bankruptcy filing
  • The taxpayer didn’t file a fraudulent return.
  • The taxpayer didn’t engage in tax fraud more generally or engage in tax evasion.

These dates are found in the Bankruptcy Code sections 507(a)(8)(A)(i), 523 (a)(1)(B) and 507(a)(8)(A)(ii).Of course you realized while reading this list that nothing is ever that simple, and for a number of reasons you are right.

  • The first reason is that in an effort to be fair to the debt collectors at the IRS, the Bankruptcy Code requires that the clock stop ticking in certain circumstances. Circumstances like time spent in a previous bankruptcy, collection due process appeal, or offer in compromise.  It is not always easy to calculate these time periods as a result. Also, the taxpayer has to wait for these time periods to pass. In the meantime, the IRS is aggressively looking for money.

So if the date calculations are complex, and the tax lien can negate many benefits of the discharge…why such a mind changer?The primary reasons:

1.  The Bankruptcy Code controls the Tax Code

If the taxpayer meets the various bankruptcy qualification criteria and the tax debt meets the requirements for discharge, the IRS has little say in the matter. This isn’t a subjective decision on it’s part. It has to do what is told. If it doesn’t i.e. it tries to collect the debt when it wasn’t supposed to, the taxpayer can sue. This is as opposed to trying to deal with the IRS directly in an offer/installment/other situation where the IRS is the decider of facts and the applier of the law.

2.  Bankruptcy can be a “one-stop” shop

Many people with serious tax debt have other serious debt as well. If planned well, bankruptcy can deal with all of the problems at one time and some that many don’t realize were “fixable”. Not only can income tax and consumer debt be dealt with, but cars can be “crammed down” to market value, homes saved, and assets protected. All legal options provided by the tax code, deal with the tax debt only.

3.  The lowest debt settlement program is the no asset chapter 7 bankruptcy

Where the bankruptcy trustee in a chapter 7 bankruptcy is unable to collect any assets for liquidation and distribution to creditors, which is a common occurrence, the IRS will get nothing as well. This amount is always less than the settlement amount in an offer in compromise.

4.  Offers in Compromise don’t work for many

The vast majority of offers in compromise filed in the U.S. fail. There are a number of reasons. Some of them are:

a.  Legal standards do exist that govern how the IRS should view the offer to compromise the debt, but they are…a bit loose. Loose enough that the IRS is able to inject a great amount of subjectivity into the process. Bankruptcy on the other hand, creates quantifiable results based on objective criteria. Offer in compromise results are all over the place.

b.  These legal standards have a lot to do with what the IRS thinks you can afford to pay toward the debt over time. The starting point for household budgets is very low and is usually much lower than the taxpayer’s actual budget. The IRS doesn’t have to consider certain budget items at all, like consumer debt payments and savings plans. This usually results in a large discrepancy between what the IRS thinks the taxpayer can afford and what the taxpayer thinks he can afford.

c.  Failure is costly. Most need legal representation and that costs money. Most/all of which doesn’t get refunded when the offer fails. Most have to pay some large amount to file the offer (20% of cash offer amount, or monthly payments based on the offer amount) which isn’t refundable when the offer fails. The debt continues to grow in the background thanks to interest, and when the offer fails all the new debt is waiting with hat in hand and even a smile.

5.  High income taxpayers don’t always have to “qualify” for a chapter 7 bankruptcy

There is an exception in the bankruptcy code to the requirement that all who file chapter 7 bankruptcy must pass a test of ability to pay debt. Where the majority of the debt is tax debt, this rule doesn’t always apply. As a result, many who wouldn’t be able to even hope for an offer in compromise, are able to use bankruptcy to discharge the debt.

6.  Many with serious tax debt don’t have large assets

Most taxpayers with serious tax debt, will see the IRS record a Notice of Federal Tax Lien. As mentioned above, that lien attaches to all assets. When the bankruptcy is filed and the underlying debt is discharged, the tax lien remains and is in essence a secured debt. It’s value is based on the value of the assets on the date of the bankruptcy filing. If the taxpayer owned a home that was “underwater”, a car with $5000.00 in equity and some furniture, the lien is almost worthless and the IRS will often remove it.

7.  Chapter 13 bankruptcy is often a “cheaper” solution then an installment agreement.

The taxpayer may not be a good offer in compromise candidate, and may not be a good chapter 7 candidate because the tax debt is not the greatest part of the overall debt or for another reason. The taxpayer is left with two options: An installment agreement to pay the tax over time and wait out the statute of limitations period, or a chapter 13 bankruptcy.

The installment agreement amount is often much higher than the taxpayer would like. The chapter 13 bankruptcy payment on the other hand, can be based on friendlier budget criteria. In many cases the taxpayer can deal with all of his debt with a smaller monthly payment than the IRS was requiring to deal with the tax debt alone.

5 Commonly Used Ways To Deal With IRS Debt

Faced with large tax debt and feeling hopeless? Take heart…if you are willing to create a “strategy” and combine it with some hard work and patience, there may be a real solution. The following are the most 5 common methods people use to deal with tax debt.

1. Use the IRS Statute of Limitations to Your Advantage

Congress limited the time the IRS has to figure out how to get paid.  26 U.S.C Section 6502 provides this limit and as a result, the IRS has ten years to get the debt collected. Many people with IRS debt buy the time necessary to get to the 10-year period by negotiating an installment agreement or non-collectible status placement.

An example:

Imagine a tax debt of $120,000.00 and that the IRS has let 7 years pass without fully attempting to collect the debt, but they are now at the doorstep. The debt has grown to $200,000.00 with penalty and interest over time, but the taxpayer can only afford to pay $100.00 per month toward the balance. If the taxpayer were able to negotiate such a payment, only $3600.00 of the $200,000.00 would be paid before the debt disappeared.

The above scenario happens more often than you would think. However, there are things people do that stop the ten-year clock from running. Filing an offer in compromise, a bankruptcy, a collection due process appeal, or anything else that stops the IRS’ ability to collect also stops the statute of limitations clock from ticking. It isn’t always advisable to do anything other than to negotiate the payment plan or non-collectible status as a result.

2. Challenge the Tax Debt

What about a situation where the IRS assessed a debt against you that you know isn’t correct.

Usually, this is the result of an audit “gone bad” or the creation of a tax return by the IRS, because you didn’t file it yourself.

Audit Appeal

IRS Audits that go badly can be appealed. If done right, they can be appealed to the US tax court. If your audit result is wrong, you have a limited amount of time to bring the appeal, so call someone now.

Substitute Tax Return Appeal

Tax returns filed by the IRS come with appeal rights as well. Most people don’t respond in time and lose them, however. Thankfully, the assessment of the tax from the incorrect return can be challenged using the IRS audit reconsideration process.

Challenge Trust Fund Recovery Assessment

There are other things the IRS does to assess tax debt that can result in an incorrect debt amount, like the assessment of the trust fund recovery penalty against a responsible party.

Where the business has withheld the employee portion of the payroll tax but didn’t send it in, the IRS stick the amount on you personally as a penalty if you are the “responsible” party.

There are defenses to this, however, and the assessment of the debt can be challenged as a result.

Innocent Spouse Relief

Sometimes the tax is correct but it just isn’t fair that the spouse should be stuck with it. The law provides the ability to challenge the debt based on some theories about innocent spouses.

3. File an IRS Offer in Compromise

26 U.S.C Section 7122 provides the basis for the settlement or one-time reduction of the tax debt. In essence, you would be making an offer to compromise and settle the back tax liability. But this isn’t horse-trading.  The amount that the law requires the IRS to settle for is based on objective criteria. The criteria is called the IRS reasonable collection potential or the RCP.

In theory, the RCP is the amount that the IRS could collect from you before the statute of limitations period on collection runs out.

The vast majority of offers filed in the last several years fail primarily because the RCP calculation is rigged a bit in the IRS’ favor. The IRS is allowed to use as a starting point for calculation purposes, a budget that is based on averages they have created.

For instance, they may have pre-determined that a family of four only needs $1650.00 per month to pay for all housing and utilities expenses. That family may be actually spending $2100.00 per month. If in the end, the IRS were able to use the $1650.00 figure to determine the RCP, then the amount of extra income per their calculation would be at least $450.00 per month.

If the statute of limitations period remaining on collections is 8 years than the RCP, just based on this number could be as high as $43,200.00

Typically, the IRS must use a smaller multiplier than the statute period, but even then, you can see how quickly the RCP can grow.

Successful Offers in Compromise, require much thought and planning as a result. They shouldn’t be entered into lightly.

4. Bankruptcy

Bankruptcy and its relation to tax debt are misunderstood. Many people including many attorneys believe that bankruptcy can’t resolve income tax debt. Nothing could be further from the truth.

In fact, the treatment of the tax debt is not up to the IRS. The Bankruptcy Code governs the treatment of the debt. The Bankruptcy Code says that income tax and certain other tax debts can be wiped away in bankruptcy, if it meets certain date requirements and the taxpayer didn’t cheat.

Sometimes the date requirements haven’t been met yet and we guide our clients in negotiating a payment plan or non-collectible status to help them avoid collection activity while they wait for those dates to arrive.

5. Penalty Abatement

As a taxpayer, you have the right to request the cancellation of any IRS penalty. There are more than 140 penalty provisions and they all have a good faith exception.

If you have been penalized for something like a failure to pay the tax on time, but you acted in good faith and there exists some reasonable basis for the failure, then the penalty can be removed along with interest on it. This removal often makes it easier for you to deal with the underlying debt.

 

Written By:

Michael S. Anderson, Attorney
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]
Website: www.taxlawyeraz.com

IRS Revenue Officer Contact? 8 Things To Know

According to the IRS, it had about 77,000 employees in 2017.  (See IRS Budget and Workforce Online Report)  But for the vast majority of taxpayers with large tax debt problems, the only IRS employee they may ever meet in person is the IRS Revenue Officer.

The IRS Revenue officer is the best-trained and most experienced employee in the IRS’ collection unit.  They usually work on situations where the debt is high (more than $100,000.00) and/or the taxpayer hasn’t been filing, withholding employment tax, or is a business.

The reason the Revenue Officer is the only person the average taxpayer with large tax debt meets is because the revenue officer is local and if you haven’t taken care of business…the officer will just come to you.

Yes…there are officers right here in Arizona and they’re required to work the “field” by getting out of the office and to your home or business.

They will often introduce themselves by coming to your home or business unannounced and if you aren’t there, they’ll leave a card stuck in the door asking for a call back.

If you ignore the officer, a summons demanding your appearance might arrive and a lack of cooperation will result in bank levy, wage garnishment, and possibly the seizure of retirement funds, accounts receivable, equity in cars, business equipment, and even homes.

They don’t carry a gun or a badge (different IRS employees do that) but they do carry a large proverbial “punch”.

We’ve worked with Revenue Officers for many years and find that they usually just want the case resolved….missing returns filed, and a payment plan or non-collectible status arranged.  They don’t mind if you file an offer in compromise or collection due process appeal request either… and will stop collection and forward the offer to the unit that reviews those and the appeal to the appeals office.

So, if you have a large tax debt and Revenue Officer is involved or will be, it may help to review these additional 8 items to better prepare yourself for the experience:

YOU CAN’T IGNORE THE REVENUE OFFICER

As mentioned above…if you just ignore the officer, things can go bad.  An ignored Officer will make sure any missing returns are done using income histories, and use the debt already in existence to levy, garnish, seize, and lien.

THE OFFICER IS FOLLOWING A SET OF RULES

The officer is trying to follow a set of rules that require you to file your returns and that determine how you deal with the debt.

These rules…especially in regard to how the debt is dealt with, aren’t necessarily friendly…but it’s not as if the Officer is just making the stuff up.

He or she has to answer to someone who is trying to make sure the rules are being followed.

UNDERSTANDING THE RULES IS KEY TO GETTING THE BEST RESULT FOR YOUR SITUATION

You don’t get to pay or settle the IRS debt based on what you would like to pay.  There are rules that determine how much you can pay.  There are rules that determine whether you can discuss your case with appeals and not the Revenue Officer.  There are rules that determine whether bankruptcy can be used to remove the case from the IRS entirely.   Dealing with the Revenue Officer isn’t a random, informal process, and getting the best result isn’t either.

BEING ABLE TO USE THE RULES TO YOUR ADVANTAGE DEPENDS ON KNOWING ALL OF THE FACTS

The biggest issue we have in our office is obtaining facts from clients.  We need facts in order to complete tax returns correctly, complete financial statements correctly, and to know what is going to be happening in the client’s life financially.

The less information we have, the weaker our ability is to determine how to use the rules in our client’s favor.  The less information we have, the harder it is to deal with the Revenue Officer and to make sure the Officer is following the rules as well.

Sometimes the rules can really play to your advantage, at least in the long term.

But rules are almost worthless without facts…and most facts, especially facts about your budget and assets are with you.  They need to be shared with your attorney.

THERE ARE 3 COMMON WAYS TO REMOVE THE REVENUE OFFICER FROM THE SITUATION

Perhaps the Revenue Officer is being unreasonable and difficult to work with….it happens.

An Offer in Compromise that has a chance of real success, a properly planned and filed bankruptcy case, and an IRS Collection Due Process Appeal if available and sensible..will remove the case from the Revenue Officer.

Whether it makes sense to use any of the three…depend on the facts surrounding your situation.

IT MAKES SENSE TO REMAIN PROFESSIONAL

If you are going to be dealing with the Revenue Officer, don’t allow emotions to control the relationship.  Provide documents by the deadline, stay in contact if you can’t, cross all the T’s and dot all the I’s.  When providing financial statements, don’t leave anything out.

Be as polite as possible, getting angry will make the situation worse.

MAKE SURE YOUR DUCKS ARE IN A ROW

Doing some or all of the following will make your life easier when the time comes for the Revenue Officer to arrive.  (If you have high tax debt…the officer will arrive eventually)

Get some advice about which missing returns need to be done and get them done…right now.

Keep copies of all your bills, statements, bank accounts, pay-stubs, profit and loss statements etc.

Create a detailed list of your business and household average budgets.

If you don’t have health insurance or term life insurance get coverage.

If you have other debt problems and IRS Debt, talk to someone about bankruptcy and how it works.

Determine whether the IRS has ever filed a “final notice of intent to levy”

Create a first draft 433-A financial statement for yourself and a first draft 433-B financial statement for your business.

If in business, make sure you are withholding enough monthly or quarterly to ensure no debt at the end of the current year.

If in business, quit using your business bank accounts to pay your personal expenses.  Figure out how you should be paying yourself from the business and move money into your personal account before spending on personal bills and personal items.

Make sure the business has filed all 941 and 940 returns that are required to be filed… and that the business has paid all of it’s employment taxes.

GET ADVICE

You don’t know what you don’t know.

You can read all you want on the internet about your “rights” and how everything works.  But there isn’t a substitute for speaking with someone who has lots of experience applying facts to law and rules.  That experience provides needed perspective.

 

 

 

An IRS Offer In Compromise May Be Overkill – Even If You Qualify

The IRS Offer in Compromise isn’t always necessary or available.  Most people with tax debt just don’t make good candidates for the IRS’ formal “settlement” program.

So the question for those people who do qualify for the Offer in Compromise is whether it’s really necessary to try?

There are ways to keep the IRS at bay that may be less “difficult” and that will allow you to end up with the same result in the end.

An example:

Tom owed the IRS $200,000.00 plus interest and penalty that he incurred as a result of trying to keep a venue booking business afloat.  Instead of paying the IRS he paid his employees and vendors.

The business went under and he filed for bankruptcy before the IRS debt met date criteria for discharge.  He then floundered for a while licking his wounds and trying to get back on his feet.

He worked regular jobs but none paid well.  The IRS would contact him every few years and every few years he’d supply a list of his assets, basically a car and some old furniture, his income and his budget.

The IRS would agree to a small payment plan and Tom and the IRS would go back to co-existing.

Finally Tom found a job he enjoyed and began making much better money…bought some stuff, saved some money, and he met the love of his life and wanted to get married.

The IRS spotted the change in income, not the change in the romance department… and asked for some updated income information.  His small payment plan with the IRS became a bigger one.  So he visited an attorney and they decided that he had two choices:

1.  He qualified to file an offer in compromise and given his new income he might have been able to settle the debt for $45,000.00

2.  He could stay on the payment plan negotiated with the IRS previously and end up paying $24,000.00 on the debt.

Which do you think Tom chose?

Tom really wanted to just get this tax debt mess over-with.  He was afraid that his fiance wouldn’t stick around if he didn’t.  But what she didn’t understand was that Tom only had 24 months remaining on his 10 year statute for collection and the amount the IRS agreed that Tom could afford to pay each month was $1000.00.  24 x 1000 = 24000.  The IRS had agreed to leave his 401k savings alone.

The alternative Offer in Compromise was the quick sale value of the money in the 401k plus the $1000.00 x 12 for the total mentioned of $45,000.00 above.  The Offer in Compromise would stop the 10 year clock from running while it was being reviewed for up to one year.

Tom stayed in the payment plan.

Other reasons to rely on the Collection Expiration Statute and not an Offer in Compromise

What if you’ve reached a point in life where your income is fixed and relatively low.  The IRS might agree to place you on Non-Collectible Status or a small payment plan and simply leave you alone while the clock runs on collection.

What if you don’t care about a tax lien release?  The offer would give you the release if successful…but, you may not need to get a better credit score (and liens may not affect credit scores much longer anyway) or buy property.  If you don’t own a lot of stuff, the lien isn’t really worth much as a result anyway.  What if the 10 year statute period were near and the liens would expire anyway on that date?

What if your income is steady? An IRS Payment Plan may make sense given the fact that the 10 year clock continues to run while on a payment plan.  If it’s not far away – this may make more sense than an offer in compromise.  See Tom’s example above.

The key is to compare all your options

Facts make the case.  A close review of the facts surrounding your present and future situation both financially and with the IRS.. will tell you what the best route is.  Sometimes it’s a close call.  But time…is your friend.  You can always come back to the Offer in Compromise down the road if the facts change.

IRS Letter CP504 And IRS Letter LT11 – What’s The Difference?

The law under Internal Revenue Code Section 6330 requires that the IRS send out a “Final Notice of Intent to Levy” before it can actually levy an account or garnish a wage.

It usually follows the law in this regard, and sends a specific letter out by certified mail typically designated as an LT11 Letter in the upper right hand corner.  (Sometimes this letter is designated as an L1058 letter instead).

This letter provides you some due process by allowing you to ask for a hearing within 30 days…so that you can propose an alternative to collection.  Until that hearing is finished, the IRS can’t move ahead with garnishment or levy.

The IRS doesn’t like this roadblock.   It will almost always send out a different letter before the LT11 letter that looks almost exactly like the LT11 letter but with a different code in the corner.

That code is usually “CP504”.  The CP504 letter looks very similar to the LT11 letter in that it:

1.  Contains language that says “Notice of Intent to Levy”.

2.  States the amount of tax debt that is due immediately.

3.  Tells you that it’s going to seize or levy your state tax refund or other property.

4.  Threatens to do it if you don’t call immediately or pay the amount due.

But…this CP504 letter doesn’t contain any language telling you that you have the right to appeal.

Why does it do this?  Perhaps a bit of trickery.

The IRS knows most people with tax debt aren’t aware of their due process rights when it comes to tax collection.  It hopes that by sending the CP504 letter first…you will respond out of fear and work out a deal that put’s it at an advantage and then…ignore the LT11 letter when it comes removing your ability to discuss your situation with IRS appeals.

Don’t misunderstand me…the CP504 letter is serious and it means that the IRS is actively searching for you and it’s on the way.  But it doesn’t mean that you are in imminent danger of having your stuff taken.

If you’ve received a CP504 letter you should use it as a signal to get your return filing in order, your with-holdings current, and to discuss your options with experienced help… so that when the LT11 letter arrives… you can appeal if necessary and be ready to propose an alternative that most benefits your unique situation.

Credit Card and Tax Debt? Bankruptcy Might Be The Solution

Large credit card debt is bad enough with it’s high interest rates and payments that never end, but mix in some serious tax debt and you’ve really created a serious problem.

The primary reason the two debts together can be such a problem is that the IRS won’t usually agree to include the full amount of the minimum credit card payments into the calculation of a monthly budget.

When this happens…it creates what we call phantom income. An example:

David owned a small business. The industry he chose wasn’t profitable, and over a period of time he created a large amount of credit card debt to keep the business going. The payments were so big at $1700.00 per month, that he stopped withholding taxes and filing returns. Eventually the IRS caught up to the situation and forced him to file the returns. The debt was large enough with penalty and interest, that a revenue officer was assigned to his case. The revenue officer reviewed all of his finances to determine what he could afford to pay per month. (read more about IRS partial payment plans) The IRS rules allowed the revenue officer to ignore most of the credit card payments as a budget item. The payment plan was imposed and David began making the payments. Within a few months he realized that something had to give and he was forced to choose which type of debt to continue paying.

This situation is common, and this phantom income  forces a person like David to make a difficult choice.

If he can’t settle the IRS Debt in an Offer in Compromise or if the tax debt is so large he can’t use a “time based” payment plan…he is going to have to either stop making the IRS payment risking levy, or stop making the credit card payments…or win the lottery.

Sometimes the solution to this problem is bankruptcy and for a few reasons.

If David qualifies for a chapter 7 bankruptcy, the bankruptcy would discharge his obligation on the credit card debt, removing this phantom income from the equation and providing him the money to actually make the IRS payment.

If he doesn’t qualify for a chapter 7 bankruptcy, a chapter 13 bankruptcy may still help. The chapter 13 bankruptcy may allow him to use a friendlier budget than the IRS allowed him. It would also treat the large tax penalties, the interest on the penalties, and the credit card debt as dischargeable debt. This might result in a payment in the chapter 13 that would be substantially less than the IRS payment plan and the credit card minimums were prior to bankruptcy.

What if some time had passed between the date David entered the IRS payment plan and the date he filed the bankruptcy… making some or all of the tax debt dischargeable debt like the credit card debt.

It’s possible that David would be debt free.

But even if the bankruptcy only got rid of a portion of the tax debt…the reduction in the tax debt amount might allow David the ability to pay the remainder tax debt after the bankruptcy was over using a payment plan based on time rather than his actual finances. With the credit card debt wiped away and the much lower tax debt payment, David would be free to move on with his life.

There are lots of people in David’s situation or at least something similar.

You might be one of them.

If you are, it’s important to have your situation looked at…or analyzed, to see whether bankruptcy might make sense. If it doesn’t…it may in the future.

You’ll want to know that ahead of time so that you can plan accordingly and avoid the phantom income problem.

Written By:

Michael S. Anderson, Attorney
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]
Website: www.taxlawyeraz.com

Struggling in IRS Payment Plan? Chapter 13 Bankruptcy May Be the Solution

Many of our clients have large IRS debt and some don’t qualify well to settle their debt in an IRS offer in compromise.  The truth is…most people with tax debt don’t. (Read more about IRS Offers in Compromise and how they work)

If the debt is correct and they don’t qualify to settle the debt in an IRS Offer in Compromise, where does that leave them?

They usually end up in a payment plan either based on time, or in one that uses their actual income, but an un-friendly budget that is partially created by the IRS itself.

The common problem with both of these outcomes is that the client is in a payment plan that is just too big.

The payment doesn’t take into account their other consumer debt, the actual cost of their home, cars, and a great many other expenses.

The client is forced to downsize their budget dramatically and often unrealistically…. causing lots of stress and other significant issues.

For that client, the one stuck in a payment plan with the IRS that doesn’t take into account all of their budget items including other debt…a chapter 13 bankruptcy will often make sense.

In a chapter 13 bankruptcy, the law allows a few things that can make the situation easier and more realistic than a payment plan based on the IRS’ budget.

A chapter 13 bankruptcy, can also allow you the following:

  • Use your actual, reasonable mortgage payment and home related expenses as a budget item
  • Use your actual, reasonable car loan payment as a budget item
  • Use some expenses related to entertainment and miscellaneous items as budget items
  • Ignore your social security related income..as income
  • Treat some or all of your tax debt as dischargeable
  • Treat all of your IRS penalty as dis-chargeable
  • Treat your other consumer and budget related debt as dis-chargeable
  • Cram down the interest rate you are paying on your car
  • Cram down the principal debt on your car where the loan is 2.5 years old and the car is upside down
  • Sometimes pay just a fraction of the debt that is owed on taxes, consumer, and business debt
  • Stop foreclosure and repossession
  • Force all collection activity to stop
  • Force the IRS into a payment plan on new tax debt that takes into account all of the above
  • Protect your assets
  • Resolve all debts either by discharge or payment within 60 months except non-dischargeable/non-priority tax debt.

If you are in a payment plan with the IRS and are finding it difficult….this list may sound pretty good.

But…before you meet with me about it, you need to understand that there are things that make a chapter 13 difficult and sometimes impossible as well.

PAYING WHAT’S REQUIRED TO BE PAID

In a Chapter 13 Bankruptcy, you must be able to make a payment that’s large enough to pay certain items like:

  • Priority Tax Debts – tax debts that are too new to be treated as dischargeable
  • Priority Child Support and Spousal Maintenance arrears – if you are behind on either the arrearage is paid through the plan
  • Car Loans with Interest
  • Attorney Fee and Chapter 13 Trustee Fee
  • An amount to general unsecured debt that equals the value of your non-exempt assets
  • Home Mortgage and HOA Arrears
  • An amount to general unsecured debt that satisfies the means test results

For most people with large tax debt and an inability to use an offer in compromise, this list though difficult at first glance, is typically doable and it will leave them with much more money in their living expense budget than the IRS payment plan did.  (We wouldn’t let you file a Chapter 13 Bankruptcy unless that were true)

LACK OF A STEADY INCOME

A lack of a steady income is a chapter 13 killer.  It doesn’t matter where that income comes from…it it’s going to be regular and steady, the odds of a successful chapter 13 bankruptcy go up.  If income is going to drop dramatically during the plan….or go up dramatically during the plan…the plan may not make sense and if filed will probably fail.

LATE TAX RETURN FILINGS

The last 4 years returns have to be filed in a Chapter 13 Bankruptcy.  If they aren’t, the case will be dismissed.  For our tax debt clients, this is sometimes a problem.  But there are good reasons why filing the returns are helpful besides keeping your plan alive.  We need to know whether you owe the IRS or not before filing and how much.

YOUR DEBTS CAN’T BE TOO HIGH

You can’t use chapter 13 Bankruptcy if your debts are too high.  The vast majority of people don’t have debt that comes anywhere close to these debt limits…but a few do.

Sometimes we use a chapter 7 first to get a client’s debt within the limits… and then we use the Chapter 13 to get those benefits.

IT’S A BUSINESS

A business can’t use a chapter 13 bankruptcy.  The owner of a business can, a sole proprietor can, but not the business itself.

Many business owners file chapter 13 and use it to deal with debts it shares with the business while leaving the business liable for the debt.

A sole proprietor is the business. There isn’t a separate entity that will continue to owe the debt.

A CHAPTER 7 MIGHT MAKE MORE SENSE THAN A CHAPTER 13 BANKRUPTCY AND AN IRS PAYMENT PLAN

What if you qualify to file a chapter 7 bankruptcy instead of a 13.  What if you pass the means test or the greatest portion of all your debt is tax debt (or other non-consumer debt).  A chapter 7 bankruptcy may make more sense.   It may allow you to get rid of other debt and some or all of your tax debt.  Even if not all of your tax debt were wiped away…enough may be wiped away that you could re-negotiate a payment plan with the IRS that is much friendlier to your budget.

Bankruptcy and IRS Debt – A Real Option

Misconceptions.  The one we hear the most is that the bankruptcy code can’t help you deal with IRS Debt.  The truth is:

YOU CAN DISCHARGE IRS TAX AND PENALTY USING BANKRUPTCY… IF YOUR SITUATION IS RIGHT

The law does require that income tax and other non-trust fund type tax debt be discharged as a personal obligation if it meets certain date and other criteria.

The fact is that IRS debt is wiped away by the Bankruptcy Code all the time.  We’ve helped our clients get rid of millions in tax debt via bankruptcy.

However, even if the tax debt meets the criteria for discharge in bankruptcy…it may not make sense for you to use it given your unique circumstances.  It’s important to have experienced counsel analyze your situation before proceeding.

WHAT ARE THE RULES FOR DISCHARGE OF IRS DEBT?

The rules are straightforward:

  • The tax debt must be non-trust fund tax debt. It has to be your tax debt, not trust fund taxes (payroll).
  • It has to meet date requirements. 3 years from the date the return was actually due, 2 years from the filing date, and 240 days from assessment.
  • There can’t be fraud. If the return had fraudulent information in it, or lack of information, the IRS will argue after the fact that the debt wasn’t discharged.
  • There can’t be “willful evasion”. Hiding assets or spending money on a nice lifestyle instead of tax debt..may trigger this argument by the IRS as well.

EXCEPTIONS TO DATE RULES

Certain actions “toll” or suspend these time periods,

As a result, an ill-timed bankruptcy filing may not discharge the tax debt you thought it would.

These tolling events can be tricky to calculate and some of them aren’t “settled” law.  Get help from someone who understands this area of law.

OTHER BANKRUPTCY BENEFITS

BANKRUPTCY STOPS IRS COLLECTION AND FEDERAL TAX LIEN NOTICE FILINGS

If the IRS is trying to grab money or other assets, the bankruptcy filing stops it using the Automatic Stay under 11 U.S.C Sect. 362.  The IRS can’t take your wages, money in your accounts, start new collection actions or file a lien notice once the case is filed.

We like bankruptcy for this reason alone.  It’s a powerful way to put a stop to difficult collection problems and one that takes the decision making ability away from the IRS itself.

If you are filing the bankruptcy primarily for reasons unrelated to tax debt, this pause allows you to work out how you are going to deal with tax debt that will survive the case.  The IRS can’t start collection again until discharged is entered in a chapter 7, which usually occurs about 3-4 months after filing.

In a Chapter 13 bankruptcy, the automatic stay applies as well, but the tax debt is either paid off via your plan payments, treated as dischargeable at the end of the case and wiped away, or the debt survives the case if it is non-priority, unsecured, and non-dischargeable.

REMOVING AN EXISTING IRS LIEN USING BANKRUPTCY

If a chapter 13 bankruptcy is used, the lien filed prior to the bankruptcy is valued on the date of the bankruptcy filing and paid with some interest over the length of the plan.  If the value of the lien is less than the total tax debt and the total tax debt is treated as dischargeable, than you may end up paying just a fraction of the debt in the plan, and getting rid of the remaining tax debt and the lien at the plan’s conclusion.

Chapter 7 bankruptcy doesn’t remove an IRS lien, but it can reduce the value of the lien to the net value of your assets.  Unlike in a chapter 13 bankruptcy however, if the value of the asset increases after the chapter 7 filing and the lien is greater than the value (a good example is your home and it’s equity)…the lien value will increase post filing.

Any assets that you buy or inherit post chapter 7 bankruptcy, won’t be subject to the IRS lien if the underlying tax debt is discharged.

The IRS will often agree to release it’s lien on the discharged debt after a chapter 7 bankruptcy if the assets are minimal or you offer some smaller amount to settle the lien.

IS BANKRUPTCY BETTER THAN DEALING WITH THE IRS DIRECTLY?

It can be.  The answer to the question depends on all sorts of factors.  Income, budget, assets, whether the IRS debt is dischargeable, IRS liens, other debt issues etc.

Most people don’t qualify for an IRS offer in compromise and many have a difficult time in a payment plan because the IRS hasn’t taken into account the full budget and other debt in determining ability to pay.

GET SOME HELP

If you have IRS debt, other debts like credit cards, medical bills, large car payments, or house arrears, it will be worth at least discussing whether bankruptcy might help. We’ve helped several hundred clients over more than 2 decades with serious tax debt use bankruptcy to make their situations better. Make an appointment and we can discuss whether bankruptcy might help you.

17 situations when the IRS won’t collect

taxes-man-being-shakenTax Debt left unattended will result in IRS collection activity…levies, liens and property seizures.

IRS collection activity just doesn’t stop on it’s own. It will happen after the tax debt has been:

a.  Assessed  (entered into the books as a debt)

b.  You have been sent a notice of the debt and demand for payment and you don’t pay. AND:

c.  You received a “final notice of the IRS intent to levy and a right to a hearing” at least 30 days before the levy actually occurs and to your last known address.

But even if you have a tax debt and are concerned about losing most of your paycheck, there are a number of situations in which the IRS collection activity can’t or won’t occur:

1. INSTALLMENT AGREEMENT IN EFFECT

If you have negotiated a formal payment plan (or non collectible status) with the IRS and you have been making timely payments, the IRS cannot collect.

2. 30 DAYS AFTER TERMINATION OF INSTALLMENT AGREEMENT

If the Installment Agreement is terminated for any reason, the IRS cannot collect for a 30 day period after it issues you it’s termination notice.

3. DURING APPEAL FILED WITHIN 30 DAYS OF INSTALLMENT AGREEMENT TERMINATION

If the Installment Agreement is terminated, and the IRS has provided you a 30 day notice AND you file a proper appeal within that 30 day period, the IRS can’t collect until the appeal is heard.

4. OFFER IN COMPROMISE IS PENDING

The IRS won’t collect while an properly filed Offer in Compromise is being considered.

5. DURING APPEAL OF REJECTED OFFER IN COMPROMISE

You have the right to appeal the rejected Offer in Compromise internally with the IRS. The IRS won’t collect during that period and until the hearing is complete.

6. DEBT ASSESSED BUT FINAL NOTICE OF INTENT TO LEVY HASN’T BEEN ISSUED

The IRS can’t collect until 30 days after it sends a “Final Notice of Intent to Levy” to your last known address.

7. DURING COLLECTION DUE PROCESS APPEAL FILED AS A RESULT OF RECEIVING THE FINAL NOTICE OF INTENT TO LEVY

The “Final Notice of Intent to Levy” provides the right to file an appeal. That appeal is called a “Collection Due Process Appeal”. If filed properly and you can prove the IRS received it, the IRS cannot collect until the hearing has been completed.

8. DURING A BANKRUPTCY PROCEEDING

Section 362 of the Bankruptcy Code creates an “automatic stay” that stops all creditors…yes even the IRS from collection activity. (Bankruptcy is helpful in other ways as well. It can even eliminate certain tax debt)

9. AFTER THE STATUTORY DEADLINE ON COLLECTION HAS RUN OUT

The IRS has a certain amount of time to collect a debt. 10 years to be precise, from the date the debt is assessed. Once that happens, the debt doesn’t exist. (Calculating the 10 year period isn’t always as easy as it seems)

10. NOT ENOUGH EQUITY IN AN ASSET

When the IRS is trying to grab an asset it must make sure that the asset has value above what is owed the bank on it. i.e. there must be “sufficient net proceeds” from the sale to apply some money to the debt. If you vacation home is worth $100,000.00 and you owe the bank $120,000.00, there is not equity and therefore no IRS collection.

11. IRS CONSIDERING THE SIEZURE OF YOUR PERSONAL RESIDENCE

The IRS won’t just slap locks on the door of your home. It must first file a case in the US District Court asking for formal approval. This is a relatively rare procedure.

12. IRS CAN’T SIEZE CERTAIN PERSONAL ASSETS

The IRS is barred from taking household goods and furniture worth up to $7900.00. It also can’t take child support, unemployment checks or clothing.

13. BUSINESS ASSETS OF AN INDIVIDUAL

The IRS won’t take your business assets if you have other assets that will pay the debt. Even if you don’t and it tries to take your business assets it must obtain approval from an IRS Area Director.

14. INNOCENT SPOUSE CLAIM

The IRS will stop collection when an Innocent Spouse Claim is properly filed and appealed.

15. DEBT IS INCORRECT

If you can provide some proof to the IRS Collection personnel that the debt is probably incorrect, it is supposed to slow down the collections process until the debt issue can be resolved (IRS Policy Statement 5-16)

16. IRS SUMMONS

If the IRS has issued a Summons, collection activity can’t occur on the date you appear to meet with the collection personnel.

17. HARDSHIP

The IRS will suspend collection activity if you can prove that the collection result will create a real hardship i.e. power will be turned off, kicked out of apartment, inability to eat etc. This suspension is only temporary if you can’t than provide additional required documentation within a certain time-frame.