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.

 

 

 

Tax Debt? You Have Options

little-boy-following-recipe-as-bakes-cake-reading-list-ingredients-to-be-added-to-eggs-his-mixing-bowl-42387048Tax Debt?  You Have Options

The following is a list of the most common legal ways to deal with large IRS tax debt. Some are obvious, some are difficult and require extensive planning and some only work best in combination with another option.

Despite the fact that a review of the list alone won’t solve the problem, it should provide you some additional knowledge about existing options and some hope that there may be a solution.

Here they are:

Pay the Debt

If the funds exist to pay the debt in full, it often makes sense to do so, paying the debt off at once or in a few payments, stops liens, levies and interest. Borrowing to pay it off at once or in a few payments, stops liens, levies and will often reduce interest.

However, if you are considering the use of retirement funds or home equity to pay the debt off or to borrow against in order to do so, some additional thought may be in order.

Use the Statute of Limitations to Your Advantage

Congress decided at some point, that it would make sense to limit the time the IRS has to figure out how to get paid. It does things right once in a while.

26 U.S.C Section 6502 provides the limit and as a result, the IRS has ten years to get it done.

This seems like a long time, but you would be surprised at how many people with serious tax debt are able to use this law to their advantage. In fact, the wise use of the Installment Agreement/Non-Collectible Status option combined with the statute is what I often call the “poor man’s”  offer in compromise. (see below for more about installment agreements and offers in compromise)

An example:

Imagine a tax debt of $100,000.00. Imagine that the IRS has let 7 years pass without attempting to collect the debt, but they are now at the doorstep. The debt has grown to $300,000.00 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 $300,000.00 would be paid before the debt disappeared.

Filing an offer in compromise, bankruptcy or pursuing some other legal remedy in an attempt to slow down the collection, would stop the statute from running. So some serious thought would be required before doing so.

There are other statutes that limit time periods in which the IRS may act:

  1. Assessment: The IRS has only three years to assess a tax from the date a return is filed in most circumstances.
  2. Liens: Liens have the same 10-year statute as debt collection. I.e. if the IRS has not reduced the debt to judgment, the lien is no good once the statute on collection runs out.
  3. Payroll Tax Assessment: Only three years again to assess payroll tax withholding amounts from the date of the filing of the return or the date the return was due whichever later.
  4. Trust Fund Recovery Penalty Assessment: The IRS has three years to assess personal responsibility for corporate payroll withholding amounts from the filing of the applicable return.

Challenge the Tax Debt

The IRS screwed up. They assessed a debt against you that you know isn’t correct. Typically, 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. They don’t use correct deductions when they do that by the way.

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

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.

In English…you can file the correct return and use it to try and replace the incorrect return.

The ability to do this isn’t guaranteed and doesn’t come with appeal rights. Also, failing to file your own return before the IRS files a return can cause another big problem. Namely, the potential inability to discharge the debt in bankruptcy if necessary.

There are other things the IRS does to assess a tax that can result in incorrect debt amounts, 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 used the money for advertising and rent payments instead of sending it in, the IRS can add the amount up and stick it as a penalty on the individual person who they consider to have been responsible for the diversion of the money.

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

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.

Installment Agreement

26 U.S.C. Section 6159 allows the taxpayer under various and specific circumstances to pay the debt over time. These types of agreements are commonly called installment  agreements or plans.

There are various types of IRS installment agreements including:

  1. A guaranteed 3 year plan if the debt is less than $10,000.00
  2. A streamlined plan for debts less than $100,000.00/$50,000.00/$25,000.00 that is typically paid over 6 to 7 years and doesn’t require the submission of detailed financial information.
  3. A full pay plan that allows the taxpayer to use his or her actual/reasonable budget to determine ability to pay if the debt is paid over 6 years and;
  4. A partial pay installment agreement.

The partial pay plan allows the taxpayer to pay only what he or she can afford each month even if the amount paid doesn’t pay the debt in full before the statute of limitations runs out on the collection of the debt. Again, a “poor man’s” offer in compromise. (see above)

Installment agreements stop levies as well, but they don’t necessarily prevent the recording of the notice of federal tax lien (unless the debt is less than $50,000 and the payment plan is set up in a certain way) or stop the assessment of penalties or accrual of interest. They also don’t prevent the IRS from demanding the use of assets to pay down the debt.

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. This criterion is called the “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 with the IRS fail primarily because the RCP calculation is rigged a bit in the IRS’ favor. They are allowed to use as a starting point for calculation purposes or 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 is able to use the $1650.00 figure to determine the RCP, then the amount of extra income per month by 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

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

There are two other types of Offers. One is used to dispute the underlying debt typically called an Offer in Compromise based on a doubt as to the liability. The other is made when the taxpayer may be able to afford the tax debt payment but it would be unfair to make him or her do so.

Some side notes about the Offer Process:

a. It stops IRS levy and other seizures.

b. The taxpayer is on probation for 5 years following the acceptance of the Offer. He or she must file all returns timely and pay all the tax due or else the offer is revoked.

Currently Non-Collectible Status

If the IRS is levying or otherwise, and the collection is causing an actual hardship on the taxpayer, the collection activity is supposed to stop. If the taxpayer can convince the IRS of the hardship status, a code can be placed on the account to designate the account as non-collectible.

The main benefit is obvious. There is a secondary benefit that is less obvious and that is that the statute of limitations period on collections continues to run while the status is in place.

The downsides of non-collectible status are that interest continues to accrue and if the change in circumstance is to the taxpayer’s benefit, i.e. income goes up, the status can be revoked.

Innocent Spouse

If you filed a return jointly with your spouse or ex-spouse, and a large tax debt exists as a result, you need to be at least aware of your potential rights as an innocent spouse.

There are three types of relief:

a. Innocent Spouse Relief “ Where your spouse or former spouse filed to report income correctly or claimed improper credits or deductions.

b. Separation of Liability “ The additional tax that exists as a result of the spouse or ex-spouse’s decision to not report something properly on the return may be allocated to that spouse.

c. Equitable Relief “ If you do not qualify under one of the theories above, the IRS may agree to relieve you of the debt based on fairness and equity.

The basic requirements to file for innocent spouse relief are these:

a. The taxpayer filed a joint return which has an understatement of tax due to erroneous items.

b. The taxpayer can establish that at the time he or she signed the return he or she did not know and had no reason to know that there was an understatement of the tax.

c. Taking into account all of the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement of the tax.

Collection Due Process

When a tax debt is assessed or entered into the government’s records as a debt, the IRS doesn’t need a Judge’s permission to collect. They can simply start the collection process. However, there are some limits on this ability. The most important are that you are entitled to due process . Therefore, the IRS must send you a notice of it’s intent to levy and give you thirty days to appeal it and ask for some alternate arrangement.

This appeal  is called a collection due process appeal and using it stops the collection process. Although the statute of limitations on collections stops running while the appeal is pending, the appeal typically provides the taxpayer the time to find a solution to the tax debt.

An offer in compromise can be made via this process and judicial review attaches to the process as well.

Collection Appeals Process (CAP)

Collection activities can be appealed  at any time. These types of appeals have different names like equivalency  hearing, and can in less powerful ways forestall the collection process. They do not come with the right to seek judicial review.

Bankruptcy

Bankruptcy and it’s relation to tax debt is misunderstood. Many people including attorneys believe that bankruptcy can’t resolve tax debt. Nothing could be further from the truth.

In fact, unless the IRS is able to prove that a taxpayer attempted to evade a tax or filed a false return, the treatment of the tax debt is not up to them. It is governed by the Bankruptcy Code.

Filing a bankruptcy petition will stop all tax collection activity by the IRS and erase taxes that meet the Bankruptcy Code’s definition of dischargeability.

I have helped many taxpayers rid themselves of tax and other debt through bankruptcy especially where one of the other solutions in this article didn’t make complete sense.

Pay and Sue for Refund

The U.S. District Court and the Court of Federal Claims hear tax cases only after the taxpayer has paid the tax (or a portion of it in district court) and filed a claim for a refund.

A taxpayer can file a claim for a refund if he or she believes that the tax paid was incorrect. Once the claim is disallowed by the IRS, the taxpayer can bring the suit.

The suit must be brought within a certain time period after the rejection of the claim.

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. This removal often makes it easier for you to deal with the underlying debt.