The Robert Burns poem To a Mouse, written in 1786, is an apology. The story has it that Mr. Burns upended a mouse’s home while plowing a field and felt bad about it. To make amends, he wrote a poem, the most famous portion of which reads:
But little Mouse, you are not alone, In proving foresight may be vain: The best laid schemes of mice and men Go often askew, And leave us nothing but grief and pain,
John Steinbeck, the author of the 1937 Novel….Of Mice and Men, borrowed from Burns’ poem when he titled the book, and this may be the reason we think of “Mice and Men” when our own grand plans go awry.
Every time I meet a self-employed client with tax debt, grand plans are part of the discussion. But the road to success is difficult, and grand plans get sidetracked by things like taxes. Many people who are self-employed don’t withhold enough, and the IRS does it’s best to leave nothing but “grief and pan” when this happens.
It files incorrect tax returns, assesses penalties, and uses these to levy bank accounts and assets.
Everyone who goes into business for themselves has the intention to follow the law and make it work. The plan is to make money, pay business expenses, quarterlies, and live a comfortable life.
But…running a small business is hard thing to do, and even the best laid plans…”go often askew”.
Contract’s are broken, clients don’t pay on time, competition grows like a weed, and the un-foreseen is around every corner.
The IRS makes it worse in it’s never ending quest to enforce the Government’s agenda of re-distribution.
The best solution short of winning the lottery, may be to stop making quarterly payments altogether.
No, don’t become a tax “protestor”, just start paying monthly instead.
It’s too hard and there are too many twists and turns for most small businesses to hold onto the tax funds for an entire quarter.
Paying each month turns the tax bill into a bill just like any other. It saves you from needing a separate account, and it eliminates the desire to use the funds for every emergency that pops up.
You can send the payment to the same address you would have sent your quarterly payments. Write your social security on the check (assuming you are using your social as your ID for the business) and include “estimated 2016 liability” in the memo.
There are dozens of issues that have to be recognized, discussed, and planned for… before a bankruptcy is filed. For people with IRS debt and an IRS lien, the issue of avoiding IRS seizure of a retirement account after bankruptcy is a big one.
First, some background:
When you owe the IRS money, it will record a notice of federal tax lien with the county recorder’s office depending on the size of the debt and what you are doing to resolve it.
This put’s everyone on notice that it is on the list of secured creditors you may have.
Most retirement accounts (401k, IRA, Pensions) are safe or exempt in bankruptcy from creditors and from the bankruptcy trustee.
But…if the underlying IRS debt is discharged in bankruptcy or wiped away and the IRS has properly recorded the lien notice prior to that bankruptcy filing, that lien notice gives the IRS the right to seize assets you owned on the date you filed the bankruptcy, after the bankruptcy is over, even retirement accounts potentially.
Without the tax lien notice recording, the IRS can’t touch the assets if the tax debt obligation was discharged in the bankruptcy.
Release of the recorded IRS lien post bankruptcy is discretionary with the IRS. If assets are minimal it will typically agree to release the lien. If they aren’t it typically won’t
Defenses to seizure of the exempt retirement account post bankruptcy
The IRS “stands in your shoes” defense
The IRS has the same right to your property that you do. If you can’t get to an asset… neither can the IRS. This is true pre-bankruptcy or post bankruptcy.
Many people don’t have access to their retirement account at work until they no longer have the job, are disabled, or they die. The IRS can have the lien on the account, but it just can’t enforce it unless you gain access to the account.
As a result, many people simply wait out the IRS after the bankruptcy discharge by staying at the job until the statute of limitations on collection runs out on the lien. (The IRS has 10 years to collect. Once that time runs out the lien has to be released)
The “IRS must consider other alternatives defense”
The IRS doesn’t like to take retirement accounts. It makes for bad publicity and it considers it to be bad public policy. It also doesn’t like to take retirement accounts where the conduct of the taxpayer wasn’t necessarily bad i.e. the retirement account was mostly funded prior to the tax debt’s existence.
The IRS is required to consider alternatives as a result. One alternative may be a payment plan, another may be a settlement of the original amount in exchange for the lien’s release.
The “I need the money to live defense”
Sometimes people are able to show the IRS that the money in the retirement account is or will be necessary for them to pay basic living expenses. As the IRS is reluctant as a matter of public policy to put people on the street, where some asset is necessary to pay basic/necessary expenses like reasonable housing, food, basic transportation and medical expenses, the IRS will usually leave the the asset alone.
IF you are facing a bankruptcy, or have finished one and are in this unique situation, keep the above in mind when speaking with the IRS revenue officer assigned to determine whether to seize your retirement account.
The most an Arizona creditor with a judgement can garnish from your paycheck is 25%. The IRS is a different animal and isn’t subject to Arizona’s exemption laws. As a result, it can garnish much more. In some cases, the majority of the paycheck can be taken. (See IRS wage levy page)
In 2015, a parent with two children filing as head of household was able to protect about $410.00 in pay every week. If they earn $1500.00 per week, the IRS would have taken $1090.00.
So, it is important if you have received a wage levy from the IRS that you take care of it.
You should do the following:
Make sure all required tax returns are filed
The IRS doesn’t have to stop the garnishment unless you are in what they call “compliance”. Compliance begins with making sure all required returns are filed. This doesn’t mean you have to file every return that is missing necessarily. Most un-filed returns older than 6 years don’t have to be filed for purposes of compliance.
Complete a financial statement
The IRS will reduce the amount that is being garnished or eliminate the garnishment altogether if you complete a financial statement. Some situations require a 433-f and some require a 433-a.
The IRS will use the financial statement along with it’s own budget to determine how much they think you can pay each month.
Knowledge about how the IRS calculates income and budget is good to have before you finalize the financial statement.
Contact the IRS to arrange a payment agreement or non-collectible status arrangement
What type/size of payment plan you end up with will depend on the facts of your case. There are different ways the IRS will calculate a payment plan, some based on time and some based on finances. You can call the IRS at 1-800-829-1010.
Certain tax debts are dischargeable in bankruptcy. Certain other debts are dischargeable in bankruptcy. Bankruptcy stops the IRS garnishment. Whether you use bankruptcy or not and whether you use a chapter 7 bankruptcy or a chapter 13 bankruptcy will depend on the facts of your case. Sometimes bankruptcy makes the most sense given your situation even if the tax debt isn’t going to be discharged.
The first step of many in determining whether bankruptcy will make sense is to get a copy of the IRS transcript(s) regarding the tax debt you owe. This transcript is usually called an IRS “account transcript”.
In order to obtain the transcripts quickly, you can call the IRS, or walk into the local IRS office and request them.
Dealing with a large IRS debt is difficult. The IRS doesn’t want to “settle” with most people because they don’t qualify under the IRS’ standards. The vast majority of people with tax debt end up in some form of IRS payment plan end up in a payment plan as a second choice. That payment plan is often difficult as well, as the IRS isn’t taking into account all of the budget items in determining how much a person can really afford. In certain circumstances, Chapter 13 Bankruptcy can be a good alternative to an IRS payment plan for a whole host of reasons.
The following is a list of the most common reasons we encounter.
Tax debt can be discharged in a Chapter 13 bankruptcy
Certain tax debts are dischargeable in bankruptcy….even a chapter 13 bankruptcy. So depending on your income and budget situation you may be able to get rid of your tax debt.
Tax penalties are dischargeable in a Chapter 13 Bankruptcy, even if the tax debt is new
Tax debt can be treated as dischargeable in chapter 7 or chapter 13 bankruptcy. This means that if the tax debt is not a trust fund tax like an employment tax or collected sales tax, and it meets certain date requirements, it’s possible to eliminate your entire obligation to the IRS and other taxing agencies. This is true both in a chapter 7 bankruptcy and in a chapter 13 bankruptcy.
But what if the tax debt is an income tax but doesn’t meet certain date requirements? In a chapter 7 bankruptcy, the penalty applied by the IRS to the tax for failure to file the return on time or failure to pay the tax debt on time would survive the bankruptcy. In chapter 13, these penalties are always treated as dischargeable and are paid the same amount that other creditors like credit cards and medical bills might get in the chapter 13 case…which may be a very small amount.
The IRS is forced to play by the U.S. Bankruptcy rules and not by own rules
The IRS has it’s own set of rules when it is dealing with you in relation to the tax debt you owe. These rules make it difficult to settle tax debt and eliminate penalties. Also, the rules provide a lot of leeway to the IRS in making decisions about settlement, collection, and payment plan amounts.
When you file a bankruptcy, the IRS has to follow the Bankruptcy Code not it’s own rules.
In a Chapter 13 case, the repayment terms can be very favorable to you and not the IRS under certain circumstances. The tax debt may be dischargeable debt and your plan may require that the IRS only be paid a fraction of the debt it is owed. Even if the debt isn’t dischargeable and is a “priority” debt that must be paid through the plan in full, interest stops and penalties are treated like unsecured, dischargeable debt making it much easier to pay the debt off.
IRS collection must stop once a chapter 13 bankruptcy is filed
The IRS is in the collection business and it issues levies and liens by the hundreds every day. Many of our clients are being levied or are about to have a Notice of Federal Tax Lien filed when they first visit. The Bankruptcy Code contains a provision that stops all IRS collection on the date the Chapter 13 Bankruptcy case is filed. The case is removed from IRS collection and into the hands of the Federal Bankruptcy Judge. If the IRS continues to collect after the bankruptcy is filed and it’s notified of it, the Judge can sanction the IRS.
The amount you pay the IRS (and sometimes all your creditors) in a chapter 13 plan is often less than the amount of your IRS payment alone
If you have a large IRS debt, aren’t a good candidate for an IRS offer in compromise…(most people aren’t) and have a long time period remaining until the IRS Collection Statute Expiration Date arrives, you may be left with just two options. An IRS payment plan or bankruptcy. The payment plan can be difficult to manage because the IRS can use a budget that is stricter than your actual living expenses in calculating how much you can afford to pay toward the debt. As a result, many people who are in large or full pay payment plans struggle to meet their living expenses.
A Chapter 13 budget can be a friendlier budget than the IRS budget…and because certain tax debts, penalties, and other debts can be treated as dischargeable in Chapter 13, the overall monthly outlay to creditors inside the plan is often much less than you are paying to all your creditors outside the plan.
A chapter 13 deals with all the debts at one time
Most people with tax debt also have other debt issues. A car may be upside down, credit card collectors may be calling, or they may be behind on the mortgage. Chapter 13 is a way to deal with all these debt problems and others with one plan.
A chapter 13 bankruptcy allows you to maintain control of your stuff
Your business, your paycheck, your retirement, your savings…all things the IRS is interested in seizing when you don’t pay your tax debt. A chapter 13 bankruptcy, when set up correctly, protects your assets. It’s not a liquidation case so the trustee isn’t trying to take and sell non-exempt assets like in a chapter 7 case.
Tax liens higher than asset value can be crammed down
At the end of the plan, liens related to dischargeable tax debts that haven’t been paid in full during the plan are eliminated.
The chapter 13 bankruptcy can fall off your credit report more quickly than a tax lien and a chapter 7 bankruptcy
A chapter 13 bankruptcy may be removed from your credit report 2 years after the case discharges. Plan length is typically 5 years. In chapter 7, it’s ten years. A tax lien stays on the report until the lien is released. If you’re in a partial payment plan with the IRS, or the debt is over $25,000.00 and the lien has already been recorded, the lien won’t be released until the debt is paid in full, settled in an offer in compromise, discharged in a Chapter 7 bankruptcy (and liened assets are turned over), or the 10 year statute runs out on collection. (CSED – Learn more about it here)
The IRS is in the business of collecting money and it has some advantages that other money collectors don’t have.
Your employer submits a report of your income each year to the IRS. If you are self employed, your vendors or others send the IRS a 1099 misc. form. The bank sends the IRS a 1099 INT form if your bank account draws interest.
The bank, your employer and those you do business don’t want to disclose your private info to the IRS, they are simply required to. As a result, the IRS knows where you work, what type of business you own, and where you bank.
Sometimes the IRS learns more about you because you have spoken to an IRS representative and provided your information either in writing or verbally. You may have even mailed the IRS a check at some point in the past that is now being used to locate where you bank.
Once in a while an IRS inquiry will appear on a credit report. The IRS is allowed to look at a credit report in order to search for sources of money. (See I.R.M 184.108.40.206.5)
Sometimes the IRS just doesn’t have any information. Maybe you don’t bank or your bank account doesn’t draw interest. Maybe people you do work for, don’t file 1099s or aren’t required to. In situations like this, the IRS may assign a local person to investigate the situation. This person is called a revenue officer and they will, if assigned to your case, find where you live and knock at the door in attempt to get this financial information from you.
So now we know how the IRS knows about you…the real question is, what does the IRS do with this information?
First, if you haven’t filed returns for a few years, the IRS will use the reported information to create tax returns for you called IRS substitute returns.
Second, it will use the information it gathers to garnish wages and levy accounts.
If self employed or working as a subcontractor, the IRS can only levy what the company you are doing work for owes you at the moment the levy is received. There is no continuing levy on pay that is based on a 1099 or subcontractor relationship.
But…if you are employed, paid wages, and have taxes withheld from your paycheck, the IRS can garnish your check continuously by submitting one levy notice to your employer. That garnishment won’t stop until certain conditions are met.
Disclosure of Information to the IRS can be a good thing.
Most IRS collection matters require you to fully disclose all of your assets, banking info, income etc. in exchange for a resolution of the problem and a hold on collection activity. However, if the IRS didn’t have the information you provided to it before, and you don’t reach a resolution, then you will have given it a roadmap making it much easier for them to collect.
When you have an IRS tax debt, you need to know what information the IRS already knows about you and what more you need to disclose if anything to get the result you desire. You may want to try to settle the debt in an offer in compromise, you may want to challenge the IRS’ substitute returns by filing correct returns, you may want to consider bankruptcy or other options.
Keith Fogg, at the terrific tax blog “Procedurally Taxing” has provided a short review of the Martin v. United States Case wherein the 9th Circuit Bankruptcy Panel (BAP) rejects the literal interpretation of Bankruptcy Code Section 523(a)(*). You can read his review here.
If you have tax debt, and have been following the issue of whether it can be discharged in bankruptcy… if the underlying return was filed late, or filed after the IRS files a “substitute return”, this BAP case will be of interest to you.
As you recall, there are three circuit courts, the 1st, 5th and the 10th that have ruled that a return filed even one day late can never meet the requirements of a return filing for bankruptcy discharge purposes. These Courts have primarily based their decisions on the literal reading of the language found in 523 (a)(*).
The 9th Circuit BAP rejects the literal interpretation regarding whether a return is still a return if it is filed late, and does a good job in explaining why courts that have ruled that timeliness is an issue, make little sense.
The 9th circuit hasn’t ruled on the issue of tardiness, and in 2015 we were able to help our clients discharge several hundred thousand dollars of tax debt as a result.
Right now in Arizona, a late filed return is still a return for purposes of calculating the discharge dates and a return filed after the IRS has filed a substitute return will still be considered “not-discharged” by the IRS.
I expect a 9th circuit ruling in a case similar to the Martin case, within a few months. That case is called Smith vs. United States. The 9th Circuit may come to some of the same conclusions as the 9th Circuit BAP, potentially setting the issue up for the Supreme Court. Or, it may side with the 1st, 5th, and 10th, and stick it to late-filers.
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